ABSTRACT
This chapter discusses and highlights the importance of accounting rules for banks. It also discusses asset and liability risk management strategies for banks. Bank risk management requires a sound understanding of the accounting for financial instruments, including hedge accounting, accounting for embedded derivatives, fair value accounting and accounting for loan losses. Disclosures include risk management information such as risk-weighted assets, credit risk exposures, securitization, operational risk, interest rate risk, liquidity risk and many others. The chapter explores the fair value accounting issues faced by financial institutions, the interdependency of bank risk and the value relevance of fair value gains/losses. It also explores dynamic loan loss provisioning, hedge accounting and embedded derivatives separation, as well as the need for regulatory disclosures that complement mandatory accounting rules such as International Financial Reporting Standard and US Generally Accepted Accounting Principles. The chapter provides examples on how financial institutions address the mandatory disclosures requirements of both standard-setters and bank regulators.
