Regulating the Off-balance Sheet Exposure of Banks: A Comparison Pre- and Post Crisis

This paper deals with the off-balance sheet exposures of banks, which as the recent crisis has shown have grown remarkably over the course of the last 30 years. It first explains the linkages of the banking system to the shadow banking system. Then, due to the complexity of the issues at hand and in order to reach analytical depth, it focuses on the accounting and prudential treatment of a very important part of the shadow banking sector, the market for short term asset backed commercial paper. It traces the impact national regulators in can have on the kind of engagements their banks have in these markets by analysing the differ-ent national regulations in Germany, France, Spain and the Netherlands and the respective engagement of banks from these countries in that market. The overall analysis demonstrates the large scope of action national regulators have in regulating the off-balance sheet en-gagements of their banks. National Regulators are much more than agents enforcing inter-national treaties, rather they are interpreters of international accords in the frame of na-tional law, which leaves much space for interpretation. This implies that national parliamen-tarians, which are interested in increasing the financial stability of their respective banking system, could and should engage in a close supervision of the actions of their national bank-ing regulators in this field in order to avoid regulatory capture. For this purpose they can use international comparisons by international organizations such as the OECD, international auditing firms and the rating agencies. The paper closes by showing the most recent changes in the treatment of off-balance sheet engagements of banks on the international level in order to sensitize the readers to potential issues of interpretation involved in their interpre-tation.Introduction The shadow banking sector and its links with the banking sector European Accounting Standards before the crisis and their impact on ABCP-conduits Basel 2: liquidity lines and treatment of securitization Accounting rule changes since 2009- The changes in US GAAP The amendments to the capital requirements directive in the EU framework The Basel 3 Accord The unresolved problem of reputation risk Conclusion