Bank balance sheet valuation

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The evaluation of the asset and liability positions of the bank balance sheet has a number of special features in the context of bank accounting .

Relevant regulations and principles

The following valuation rules apply to banks:

Precautionary principle

In general, the principle of prudence applies , as banking transactions involve special risks and are of great economic importance.

Imparity principle

According to the imparity principle , unrealized gains (realization principle) and losses ( lowest value principle ) are treated differently.

Valuation of assets and liabilities

In the case of securities , the question of treatment as fixed assets or as current assets is . Bank accounting does not make this distinction, so there is a margin of discretion when allocating the securities.

Capital assets

How fixed assets are treated

Current assets

How working capital is treated

  • Receivables and securities positions: Receivables from banks, receivables from customers, bonds, shares and variable-yield securities.
  • Trading portfolio : The fair value principle applies here. The valuation rate on the balance sheet date is the rate on December 31, minus a risk discount.
    • Securities in the liquidity reserve are treated like current assets. The strict lower value principle applies in accordance with Section 253 (3) HGB: In the event of temporary impairment, there is an obligation to devalue.
    • Devaluation option in the event of expected fluctuations in value
    • Provision reserves in accordance with Section 340f of the German Commercial Code: The provision reserve represents a so-called hidden reserve, i.e. H. The reader of the balance sheet cannot see to what extent the assets listed on the balance sheet are undervalued.

In addition, there is the possibility for banks to open reserves in accordance with 340g HGB in the form of the fund for general banking risks. It is shown on the liabilities side of the balance sheet . It serves to protect against special risks in the banking industry. However, there is no reference to the assets. There is no upper limit, but should be chosen sensibly.

Provision reserve in accordance with Section 340f HGB

Expenses and income that are incurred in connection with the securities in the liquidity reserve and the lending business and do not represent any interest expense or interest income can be netted in accordance with Section 340f (3) HGB. In the case of the liquidity reserve and the lending business, there is an option to take precautions against general risks by applying a value that is up to 4% below the value permitted under commercial law.

Expenses and income from different lines of business are offset against each other, which is why the process is referred to as cross-compensation .

The creation and dissolution of hidden contingency reserves in accordance with Section 340f of the German Commercial Code (HGB) is no longer comprehensible for the users of the annual financial statements.

advantages

The possibility of smoothing the company's profit gives investors confidence in the security of their systems. A prerequisite for this, however, is a naive and ignorant investor as well as a bank management who acts in the interests of the investor.

disadvantage

By dissolving hidden reserves, incompetent bank management can be concealed over a longer period of time. Since hidden reserves are naturally not shown in the balance sheet, the naive investor can draw incorrect conclusions about the profitability of the bank. Overall, it can be said that the balance sheet information function is diluted by the cross compensation.

Reference to individual valuation allowances and general valuation allowances

The precautionary reserve can be set in addition to an EWB or PWB, as the precautionary reserve is created to protect against the special risks of the banking industry.

EWB (flat rate EWB) PWB Provision reserves
recognizable default risks latent default risks Risk provision
Country risks (p. EWB) (political, economic)

Risk provisions in the IFRS - Bank accounting

The loan loss provisions in IFRS applies only to the evaluation result in the lending business. As a net figure, it contains the balance of:

  • Depreciation
  • Value adjustments
  • accruals

for latent and discernible risks and the income from the liquidation of these items.

According to IFRS, there is no possibility of creating reserves , neither for securities nor for receivables. The IFRS also do not provide for cross-compensation. Risk provisioning is only possible in a similar way to Section 340g of the German Commercial Code (HGB) by showing open revenue reserves.

advantages

Here, too, creditor protection can be pursued through a low assessment of the distributable profit, but at the same time the pre-decision information function is secured, since the formation and dissolution of precautionary reserves is traceable.

Imbalances cannot be covered up by dissolving hidden reserves. The addressees of the financial statements receive more precise and therefore better information for the investor.

Valuation in the IFRS annual financial statements

  • Value (fair value)
  • Amortized cost: always applies to financial obligations, a change in value can only take place in the event of a sale and an increased credit risk.

Evaluation of claims

The receivables are reported net (after deduction of value adjustments) or gross: disclosure of value adjustments and provisions for creditworthiness and country risks as well as PWB for default risks under risk provisioning (shown as negative items).

In the explanatory notes ( notes ), risk provisioning is further broken down by creditworthiness, country and latent risks. Provision reserves may no longer be created silently. Instead, the special fund acts for general banking risks.

Evaluation of claims

There is extensive scope for assessment here. In the case of receivables, individual valuation allowances, general valuation allowances (derived from average loan defaults) and the formation of precautionary reserves play a role.

Individual value adjustment

An individual value adjustment (EWB) is a devaluation that is made when a loan is subject to default risks, but this has not yet been taken into account by correcting the valuation. There is a reduction in the balance sheet value.

nominal claim amount (book value)
- expected repayments of the CN
- expected deposits from the use of collateral
= Amount of EWB

General valuation allowance

Receivables that currently appear to be safe, but contain latent risks.

PWB = default rate * risky credit volume

Accounting for derivatives

Derivatives can be categorized into option rights , writer positions and futures . The critical point is the question of the valuation at the time of the conclusion of the contract, the balance sheet date or the date of performance or exercise.