Having said that, the ECB would still like to see accounting standard setters take better account of financial stability implications when revising existing or creating new accounting standards, as for instance indicated by the IASB on the occasion of setting up the “enhanced technical dialogue” with prudential supervisors in 2009. One concrete and important area where the IASB can prove that it takes duly into account financial stability implications would be the on-going discussions on introducing more forward-looking provisioning. BIS Review 58/2010  3  In this sense, the ECB looks forward to continuing the close dialogue with the IASB on the accounting projects that lie ahead. More generally, please indicate two essential measures for financial regulation in the current debate. The ECB firmly believes that momentum should be maintained with regard to the global regulatory reform agenda. We need to ensure we put in place a regulatory framework that will enhance the resilience and stability of the global financial system. Under the aegis of the G20, the international community has agreed on a comprehensive set of measures that reflect a substantive revamp of the regulatory framework. Going forward, I would mention three key priority areas. First, the global community should commit to implementing the so-called Basel III proposals on capital and liquidity issued in December of last year. The ECB supports these proposals which are designed to put banks in the position to better withstand the effects of future crises.

Fair value measurement – by its nature – tends to introduce pro-cyclicality into the accounting framework. It requires the immediate reflection of marketrelated information in the financial accounts (thus providing a “snapshot” of the reporting entity’s economic condition). In doing so, all fluctuations in fair value (even if only temporary) are to be reflected, thereby increasing accounting volatility. Downward swings in fair valuations of assets cause entities to sell these assets; these “fire sales” may themselves add to further downward pressure on respective market prices. As a result, further adjustments to the fair values of these assets become necessary, thereby perpetuating the “downward dynamics”. 1 These dynamics may in the end have adverse implications for the “real economy”, e.g. banks may further curb their lending to the economy. In this context, the potential impact of fair value accounting on behaviour, asset price dynamics and subsequently on financial stability should not be underestimated. Pre-crisis provisioning practices delayed the recognition of credit losses inherent in loans. Accounting rules require a specific trigger event, such as a default in payment to take place before allowing an entity to create provisions for credit losses. As a result, major write-offs usually accumulate during severe downturns when the inherent credit losses actually materialise, adding further stress to the financial system. Hence, a more forward-looking provisioning methodology should be developed. This has also been a recommendation of the G20 Leaders. In this context, the ECB welcomes the recent IASB proposal for an expected cash flow approach.