Are firms applying inflation to historic losses?

With inflation rates reaching historic highs in many jurisdictions, financial firms are questioning how they should approach inflation when it comes to historic losses.

The topic has been discussed at recent ORX Analytics Working Group (AWG) and Definitions Working Group (DWG) meetings, and it's clear that approaches to the application of inflation vary.

What do the regulators say?

Regulations on the Advanced Measurement Approach (AMA) state that “A bank should consider applying appropriate adjustment rates on data when inflation or deflation effects are material”. At the local level, some regulators, such as the bank of Italy have recommended the use of inflation, while others expect firms to justify their decision.