Bank regulation implications for managing accounting quality risk: a Basel and IFRS perspective

This thesis examines whether accounting quality, measured as the difference between accounting and market price change, had an impact on the five primary UK banks that adopted IASB’s IFRS accounting standards in 2005. The findings reveal that the changes in accounting standards resulted in the banks experiencing decreased levels of accounting quality and increased levels of exposure to financial distress risk in the period 2005 to 2008, compared to the pre-adoption period of 1992 to 2004. These findings are corroborated when examining a secondary sample of banking related firms that also adopted the same standards in 2005. A control group that did not adopt these standards exhibited an opposite trend, recording a comparative increase in accounting quality from 2005 to 2008. For all firms tested, the 1-day market price Value-at-Risk (VaR) levels increased year-on-year from 2005 to 2009, with VaR breaches during March and May 2006. These firms, for the 2005 to 2009 period, also displayed increased levels of financial market volatility. Importantly, examining the banks’ Basel capital requirements, it is implied that their levels increased after 2005. These findings, in general, contribute to extending literature that focuses on the accounting standards change. One of the findings from this examination is that contrary to the European Commission’s 2002 (EC 2002) and IASB’s (IASB 2009) expectation to strengthen the efficient functioning of the European and global financial markets, in the UK the banking sector’s investor uncertainty increased significantly during 2005 to 2009. Another finding relates to the measurements applied in this research. Changes in accounting quality and the Basel minimum capital requirement are examined by applying two measures systemised as the relative delta and the regulatory relative delta respectively. Both function by quantifying differences between accounting totals and market price. It is discovered that these measures, accounting VaR, and the technology framework, as introduced in this study, have potential benefits and regulatory implications. These are aimed at facilitating the mitigation of risks that impact on accounting quality