The current rise in interest rates leads to significant losses in the value of banks’ own portfolios, especially for small and medium-sized banks. This paper considers how the application of the moderate lower of market principle may, in some circumstances, serve to reduce the negative impact of such an increase in interest rates. Accordingly, the valuation rules of the German Commercial Code in conjunction with the IDW statement on loss-free valuation in the banking book offer considerable scope of discretion for German institutions.
The paper first outlines the principles for the classification and valuation of securities in commercial accounting. In this context, the valuation rule of the mitigated lower of market principle is explained and its influence on the formation of a provision for contingent losses in the scenario of a temporary impairment is shown. Furthermore, the IDW's statement on the loss-free valuation of the banking book is presented, according to which the prerequisites and requirements for reclassifications are explained. The aim of the paper is to highlight and categorically present the resulting consequences for banks. These include tax, regulatory and accounting advantages for banks by making full use of the legal framework.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Principles of valuation of securities
- Classification and valuation of securities held as fixed and current assets
- Statement of the IDW on the loss-free valuation of the banking book
- Influence of the moderate lower of market principle on the creation of a provision for contingent losses in the scenario of changed market conditions
- Reclassification of securities in the HGB-balance sheet of credit institutions
- Reclassifications in the securities portfolio under current circumstances
- Advantages for banks
- Tax advantages
- Regulatory advantages
- Balance sheet advantages
- Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper aims to analyze the impact of the moderate lower of market principle on the creation of a provision for contingent losses in the context of rising interest rates and its advantages for German banks. Specifically, the paper focuses on the valuation rules of the German Commercial Code (HGB) and the IDW statement on loss-free valuation in the banking book.
- Valuation of securities in the German banking system
- The moderate lower of market principle and its application to securities
- The formation of a provision for contingent losses
- Reclassification of securities in the HGB balance sheet
- Tax, regulatory, and accounting advantages for banks
Zusammenfassung der Kapitel (Chapter Summaries)
The paper begins with an introduction highlighting the impact of rising interest rates on the German banking system and the potential use of the moderate lower of market principle to mitigate losses.
Chapter 2 delves into the principles of valuation of securities, specifically focusing on the classification and valuation of securities held as fixed and current assets. This chapter explores the application of the strict lower of cost or market principle for current assets and the moderate lower of market principle for fixed assets.
Chapter 3 examines the IDW statement on the loss-free valuation of the banking book, outlining the prerequisites and reasons for a potential reclassification of securities. It further discusses the tax, accounting, and regulatory advantages that reclassification can offer to credit institutions.
Schlüsselwörter (Keywords)
This paper focuses on the valuation of securities in the German banking system, particularly the application of the moderate lower of market principle, the formation of a provision for contingent losses, and the reclassification of securities under the German Commercial Code (HGB). The paper also examines the IDW statement on the loss-free valuation of the banking book and its impact on tax, regulatory, and accounting advantages for banks.
- Quote paper
- Anonym (Author), 2022, Impact of Interest Rate Increases on Bank Portfolios. Exploring the Mitigated Lower of Market Principle and Loss-Free Valuation in German Commercial Accounting, Munich, GRIN Verlag, https://www.grin.com/document/1498159
