Article 35 of the Capital Requirements Regulation (CRR) states that institutions shall not make adjustments to remove from their own funds unrealised gains or losses on their assets or liabilities measured at fair value. Article 80(4) of the CRR requires the European Banking Authority (EBA) to provide technical advice to the European Commission on possible treatments of unrealised gains measured at fair value other than including them in common equity tier 1 (CET1).
The EBA published a Discussion Paper on 2 August 2013 in which it set out its preliminary views on possible treatments of unrealised gains and gathered stakeholders’ comments. The EBA has now published its technical advice to the Commission.
In its technical advice, the EBA discusses prudential concerns about unrealised gains which, in particular, include that they may not be immediately available to absorb losses as they can disappear as a result of negative movements in market prices. The technical advice also enumerates other criteria that should be considered when deciding on the appropriate policy option. Such criteria include the interaction of unrealised gains with the liquidity framework and capital requirements. The technical advice also takes into account the interaction between prudential requirements and accounting rules in developing policy options. In this regard, the EBA proposes to distinguish between the banking and the trading book in its analysis of the different policy options as this distinction will take into account the different capital requirements that apply for the banking book and the trading book. The technical advice also provides an analysis of the interaction of a prudential filter with the current IAS 39 requirements for hedge accounting and for the fair value option.