s like having a well - filled granary built on soggy soil and knowing that the grain is leaking away through cracks in the foundation. this makes for a deadlock between investors and banks – one that can have adverse consequences for financial institutions, governments and national economies, as we have witnessed in recent years. in my view, it ’ s therefore highly advisable that we make the impairment requirements in the new accounting standard forward - looking. high - quality accounting standards should form the foundation on which these capital buffers are based. sound reporting will increase trust in the institution. there are those that think it unwise to estimate future losses, as these estimates are subjective and imprecise. i would disagree for two reasons : first, expected losses can be described in such concrete words that they can be properly reported by the reporting entity and subsequently verified by the auditor. and, second, i believe that the current incurred loss model is more subjective than people tend to think. to illustrate the subjective character of the current incurred loss model, i can draw from our experience at the dutch central bank. we are currently executing a so - called asset quality review. in this review we ’ re also evaluating the processes that lead to adequate levels of loan loss provisioning. bis central bankers ’ speeches what we are seeing is that different banks use different interpretations for similar loans. apparently, there ’ s already room for a certain degree of subjectivity. i ’ m not too worried about this subjectivity. preparing financial statements has always carried some measure of subjectivity and this will remain so. i agree with those who say that too much subjectivity will foster “ gaming of the system ”. in order to control this subjectivity, i would welcome that the new iasb standard, ifrs 9, clearly defines those relevant forward - looking elements. for me the proof of the pudding would be preparers and auditors saying that the new forward - looking requirements cannot be ignored when calculating the expected loss allowance accounts. so far, i concentrated on the impairment requirements to be included in ifrs 9. but ifrs 9 also contains other elements that are quite relevant to us. these are the classification and measurement sections. let me also say a few words about these. it ’ s generally accepted that a bank ’ s economic value is determined by its cash flows. accounting standards should reflect this. that ’ s why i am in favour of introducing the business model criterion. if the bank ’ s business is trading, then the

klaas knot : financial stability through transparent reporting speech by mr klaas knot, president of the netherlands bank, at the “ international financial reporting standards ” conference, amsterdam, 27 june 2013. * * * ladies and gentlemen, i would like to talk to you about the role accounting standards fulfil in micro - and macroprudential supervision of the financial sector. from experience i know that the accounting domain, the prudential domain and financial stability cannot be seen separately. the discussion about this subject has been going on for quite some time. but i ’ ve always contributed to this debate from a supervisory perspective. and so i will today. the main thread of the debate has always been “ unexpected losses versus expected losses ”. in other words : losses we cannot see coming versus the net present value of predictable future losses. the question for us is : how to translate the prudential notion of expected and unexpected losses to day - to - day accounting practises? i have two messages : the first : accounting standards should be designed to reflect expected losses, no more and no less than that. and own funds should be designed to absorb unexpected losses. the second : financial reporting and financial stability supplement one another. they are like a horse and carriage. i believe a combination of transparent capital requirements and accounting concepts based on expected losses, would boost trust in financial institutions and thus improve financial stability. now, it ’ s a known fact that the ancient egyptians were aware that every good seven - year period would be followed by a bad seven - year period. seven years of favourable weather conditions would be followed by seven years of either too little or too much rain. it ’ s why they saved grain during the seven good years. this old wisdom would serve the financial sector well too. stockpiling the metaphorical granary when harvests are good is sound financial policy. so, how does this translate to financial reporting and capital requirements? well, in the debate, prudential regulators are often accused of building in unexpected losses in loan loss provisions. i think, though, that the facts tell a different story. let ’ s look at the basel committee for instance. it distinguishes between expected and unexpected losses. it argues that capital requirements should be robust enough to cover unexpected losses. and the basel committee welcomes that the iasb is considering including the expected loss notion in their new financial instruments standard, ifrs 9. with a few hundred accounting experts here in the audience, i