Bank of Israel seeks to exempt banks from accounting standard
The Bank of Israel has asked the Israel Accounting Standards Board to exempt the investment of one bank in another from a recent regulation dealing with the value of investments in financial reports. The exemption will allow Israel Discount Bank, which holds 26 percent of the capital shares in First International Bank, not to write down its investment.
The controversial Standard 15 requires publicly-traded companies to match the value of investments in their financial reports to the values reflected by the Tel Aviv Stock Exchange. In the event publicly-traded consolidated companies' market caps have fallen significantly from the values at which they are reported by investors, those investors will now have to write down the substantive differences.
First International's equity amounts to NIS 3.2 billion, while it is trading at a market value of only NIS 1.1 billion. Discount Bank currently records its investment in First International according to its relative portion of the bank's equity. The banking sector's sharp drop in value on the stock exchange this year has created a gap of hundreds of millions of shekels between the value of the investment in Discount's books and the market value of the shares. If forced to make the write down stipulated by the recently enacted Standard 15, Discount's capital adequacy would be substantially damaged and could fall below the minimum required - 9 percent.
The IASB's professional practice committee approved a softened version of Standard 15 about a month ago, following pressure from the banking sector. The banks' main concern was that a more serious version of the standard would force them to harshen credit conditions to clients and even vastly increase provisions for doubtful debt.
Regarding their own investments, the standard was relevant primarily to Discount Bank, with its First International investment classified as a "consolidated company" according to banking regulations.
Deputy Supervisor of Banks Motti Spiegel supports the exemption from Standard 15 for bank investments in banks. According to Spiegel, there is no reason why a bank that controls another bank shouldn't write down the value of its investment in the subsidiary bank, while a bank that only holds a stake in another bank would be forced to do so. Despite the fact that several members of the professional practice committee accepted Spiegel's viewpoint, the reservations regarding the banking sector were not handled in the original standard and the Bank of Israel now seeks a extra-regulatory clarification.