BCL Circular 2007/212 of 29 October 2007 — Update of BCL Statistical Collection Instructions

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Luxembourg, 29 October 2007
To all credit institutions
BCL CIRCULAR 2007/212
Update of BCL Statistical Collection Instructions

Dear Sirs, Madams,

We refer to the circular letter of the Central Bank of Luxembourg (BCL) of 23 January 2006 regarding ECB Regulation 2004/21 of 16 December 2004 concerning the reporting of credits and deposits and the introduction of IAS/IFRS accounting standards into the accounting reporting of the Commission de Surveillance du Secteur Financier (CSSF) as of 1 January 2008.

The introduction of IAS/IFRS accounting standards significantly affects balance sheet items, is characterized notably by the valuation of certain assets and liabilities at their fair value, and thus differs from the currently applicable valuation principles. However, IAS/IFRS accounting standards also concern certain off-balance sheet items since they provide, in the future, for the reporting of financial derivative instruments on the asset and liability side of the balance sheet.

In this context, we wish to draw the attention of credit institutions to the fact that BCL statistical reporting will be subject to a more substantial modification in 2010; this will follow the revisions of ECB Regulations 2001/13, concerning the balance sheet of monetary financial institutions, and 2001/18, concerning the interest rates applied by credit institutions to credit and deposit operations vis-à-vis households and non-financial corporations.

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Thus, the BCL has decided not to adapt, at this time, the layout of statistical reports, notably in order to avoid imposing two updates on credit institutions within 24 months.

The purpose of this circular is therefore to provide credit institutions with the necessary clarifications for the preparation of BCL statistical reports following the new prudential reporting of the CSSF applicable from 1 January 2008. Indeed, through its circulars 07/279 and 07/316, the CSSF has clarified the new prudential reporting provisions applicable from 1 January 2008, in particular the fact that the new prudential monitoring reports will now be prepared in application of IAS/IFRS accounting standards.

In this context, it is important to mention that this circular provides a number of explanations on specific points that were brought to the attention of the BCL during the preceding months. However, only the implementation of the new accounting standards within credit institutions will reveal the full range of problems that will be raised by credit institutions in the coming months.

Thus, the BCL will publish, on its Internet site, a specific document that will include on the one hand the explanatory elements already provided in this circular and on the other hand the position of the BCL regarding the problems that will be raised by credit institutions in the coming months.

The clarifications of the instructions that are required immediately are as follows:

1 Accounting Standards

The BCL wishes, as far as possible, to continue to align with the accounting principles implemented by the CSSF. Thus, the elements of assets and liabilities will be evaluated according to the standards recognized by the CSSF.

However, two special cases must be taken into account.

As specified in our circular letter of 23 January 2006, Regulation ECB/2004/21 stipulates that, regardless of the incorporation of the international accounting standard IAS 39 regarding financial instruments into EU legislation, monetary financial institutions (MFIs) continue to declare, for statistical purposes, their credit and deposit balances at their nominal value.

Thus, regardless of the standards applicable for prudential reporting, the elements of assets and liabilities contained in the following lines will be reported at their nominal value in all monthly and quarterly statistical reports:

• Assets
  • Item 1-020 "Credits"
  • Item 1-021 "Consumer Credits"
  • Item 1-022 "Real Estate Credits"
  • Item 1-023 "Other Credits"
• Liabilities
  • Item 2-021 "Liabilities / Demand Deposits"
  • Item 2-022 "Liabilities / Time Deposits"
  • Item 2-023 "Liabilities / Notice Deposits"
  • Item 2-024 "Firm Sale and Repurchase Operations"

2 Securities Lending

Securities lending operations will follow the same accounting treatment as firm sale and repurchase operations.

Thus, the instruction regarding the reporting of "Securities transferred to third parties in the context of a securities lending" at item 1-020 "Credits" will be repealed.

3 Financial Derivative Instruments

Following the introduction of IAS/IFRS standards, financial derivative instruments will be reported at their fair value (corresponding to an unrealized gain or an unrealized loss) on the asset and liability side of the balance sheet (derivatives with a positive fair value are classified as financial assets and derivatives with a negative fair value are classified as financial liabilities, without offsetting between them).

Given that the current statistical reports do not provide for a specific item for the reporting of financial derivative instruments, these will

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be included in the items 1-080 "Other assets" and 2-110 "Other liabilities".

During the aforementioned/announced revision of the statistical reports of credit institutions, the reporting of financial derivative instruments will be subject to a more in-depth analysis.

4 Report S 1.4 "Adjustments related to valuation effects"

The new accounting standards impose the reporting of financial instruments at fair value and/or at amortized cost net of any impairment loss. All valuation effects affecting items provided for in report S 1.4 must be reported in S 1.4 and will find their counterparts in the "Results" item of S 1.4.

5 Report S 2.5 Off-balance sheet items

Notwithstanding the fact that financial derivative instruments will be reported at "fair value" on the asset and liability side of the balance sheet, their reporting in items 3-040 "Operations related to exchange rates", 3-050 "Operations related to interest rates" and 3-060 "Operations related to other market rates" of statistical report S 2.5 "Quarterly statistical balance sheet" will continue to be based on their notional amount.

6 Schedule of conditions

The relationships between table S 1.1 and table B 1.1 in its current version (which will be used until 31 December 2007) as defined in the "Schedule of conditions" will be repealed.

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Please accept, Sirs, Madams, the assurance of our very distinguished sentiments.

CENTRAL BANK OF LUXEMBOURG
The Management

Serge KOLB Andrée BILLON Yves MERSCH