Global regulators are seeking to curb banks’ (SX7P) use of an accounting rule allowing lenders to boost their profits and capital by writing down the value of their own debt and derivatives when market prices fall. The rule, known as debt or debit-valuation adjustment, says that banks can book financial gains when the value of their own bonds and derivatives falls, under the theory that a profit would be realized if the liabilities were repurchased at a discount. Banks shouldn’t be able to count such gains toward their capital reserves, the Basel Committee on Banking Supervision said in a statement published on its website. The committee is seeking “full deduction” of debit-valuation adjustments from lenders’ core reserves, including that arising from derivatives.
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