JPM and Accumulated Other Comprehensive Income – a neat example of regulatory capture.

It should not come as a surprise that the discussion on the in/exclusion of Accumulated Other Comprehensive Income from Regulatory Capital continues.

JPM highlighted one reason for keeping the discussion on AOCI going, as most of it evaporated – with consequences.


In the spring of 2008, just days apart from the collapse of Bear Stearns, the IASB called for simpler bank accounting.

The proposed simplification manifested itself in IFRS 9’s elimination of the AFS asset category, an important driver of  Accumulated Other Comprehensive Income.

Fast forward to 2009. The publication of IFRS 9 in November of that year coincided with the publication of Basel’s resilience document on capital, a month later. The resilience document, the preview of Basel III, suggests the elimination of unrealised gains from regulatory capital. This would not hurt much – provided that IFRS 9 would come into force. IFRS 9 at that time had abolished the AFS category.

Europe decided not to adopt IFRS 9, a decision expected by at least by some Basel committee members: the resilience document contains a footnote that signals some dissent within the committee on unrealised gains. Footnote 17 keeps the option of excluding AOCI from capital open, that is only the unrealised gains: “The treatment of unrealised gains will be reviewed by the Basel Committee during 2010.”

Come 2010, most US bank were sufficiently confident again, and the Basel III rules exclude AOCI from regulatory capital – but again with a footnote that anticipates future accounting developments.

By November 2012 the IASB caved in to US pressure and proposed limited changes to IFRS 9 classification and measurement requirements. One of these limited changes is the introduction of a fair value through other comprehensive income (FVOCI) measurement category for debt instruments that would be based on an entity’s business model.

In short, the IFRS is basically back where it started in the spring of 2008. AFS debt and AOCI are back.