Banks to capitalize profit on financial engineering

Banks and financial institutions are now allowed to record immediate profits on financial engineering operations carried out with the Central Bank (BDL) provided the funds they used in these operations result from their foreign exchange operations, according to a new BDL circular .

They are also allowed to record immediate profits if the proceeds used in these operations are not derived from funds deposited with BDL.

If these conditions are not met, banks and financial institutions must continue to apply an earlier decision requiring them to record the profits resulting from swap operations, or sale and purchase operations of financial instruments performed with BDL, over the life of the exchanged instruments.

The new amendment applies to operations executed starting from January 1, 2019.

The surplus (profit) resulting from these operations must be recorded in the income statements of the banks and financial institutions. The profit must be transferred at the end of the fiscal year to their non-distribuatable general reserves. This means that the banks and financial institutions will not be able to distribute these profits as dividends, which will help bolster their equity and capital adequacy. These reserves could also be used to help them meet any new requirements .

The move is part of the implementation of the International Financial Reporting Standard 9 (IFRS 9) which was published by the International Accounting Standards Board (IASB) and which addresses accounting procedures relating to financial instruments.

The new decision will also help boost BDL’s foreign currency reserves.

BDL’s Banking Control Commission is to oversee the sound implementation of the new decision, according to the circular.