The Impact of IFRS 9 on Banks Across the EU and

6 Victoria Krivogorsky self-interest (in the absence of paternalistic regulation) did not compel fi nancial institutions to adopt adequate risk controls. Mr. Greenspan went so far as to say that he “found a fl aw in the model that I perceived is the critical functioning structure that defi nes how the world works.” 12

Wherever the blame for the crisis might be, to restore the fi nancial industry to a sound fi nancial footing is vital, as the fi nancial soundness of any economy depends on the strength of the whole banking system, which in turn depends on whether the failure of one fi nancial institution can damage the entire industry. Thus, the government should limit the exposure of the whole banking industry to any single given fi nancial institution. In this regard, in the past, the Japanese banking industry experience gave rise to the conventional wisdom that no bank would be able to compete with their international rivals unless they morphed into enormously big and powerful entities. It is evident that this strategy failed as bigger banks take too much risk. Also, US banks, like their Japanese counterparts, became too big to fail, which has now become synonymous for too big to exist. I don’t vote for issuing a mandate to banks to break themselves up into smaller entities, but I think that creating the incentives that encourage them from becoming too big in the fi rst place might be of consequence.

Overall, accounting rules are created to provide the interested parties with relevant and reliable to the decision-making information on the fi nancial position of the entity. Accounting helps to identify the problematic business entities and helps users of the fi nancial information recognize the areas of the most signifi cant concern, assisting them in diagnosing the problem. Blaming accounting for economic failure is like blaming an X-ray for showing the tumor.

The Change in the IFRS After the Crisis

As a response to the widespread criticism of fair value accounting, in July 2009 the International Accounting Standards Board (IASB) proposed a new approach to the accounting for fi nancial instruments by making changes to the fi nancial instrument classifi cation and their measurement. Since that point, IASB has been making amendments to the IAS 39 (Financial Instruments), and the change was fi nalized in the issuance of IFRS 9 that superseded all previous amendments to IAS 39. The IASB’s main goal while working on IFRS 9 was to combine in one standard the classifi cation, measurement, and impairment of the fi nancial instruments, and hedge accounting to replace IAS 39. 13 Under the new approach, according to the IASB, the primary determinant of whether a fi nancial instrument meets the test is the actual operation of a fi rm’s business model, and not management’s intention to trade or hold to maturity used in the past. In other words, the IASB’s intent was to build IFRS 9 on one consistent classifi cation and measurement methodology for fi nancial assets that refl ects the business model in which they are managed and their cash fl ow