* Proposed reform could prompt EU to end rule exemption
* Discussion paper suggests ground-breaking change
LONDON, April 17 (Reuters) - Investors would be able to make a more accurate assessment of how well banks manage risks on their books under proposals published by the International Accounting Standards Board (IASB) on Thursday.
Risk management has risen to the top of the regulatory agenda for banks after the 2007-09 financial crisis left taxpayers having to bail out lenders who failed to disclose potential problems on their balance sheets.
Banks hold large amounts of loans, derivatives and other assets and liabilities that are at the mercy of unexpected shifts in interest rates, requiring constant hedging or insurance to maintain profitability.
Banks in Europe, Canada and parts of Asia and Latin America have to use standards written by the IASB and are required to account for hedging on an item by item basis, a complex undertaking.
The rule restricts banks' ability to offset positions in portfolios, which leads to accounting discrepancies, prompting the European Union to introduce an exemption in 2005 so that lenders don't have to report such discrepancies in hedging.
The IASB discussion paper published on Thursday outlines how the rule could be reformed to reflect the way banks hedge risks on a broader portfolio and continuous basis, rather than a point in time view of item-by-item hedging.
The current rule is often difficult to apply in a situation where risk is managed on a continuous basis, the IASB said.
The plans break new ground in trying to combine the snapshot element of traditional accounting with how banks' management of risk is a continuous process.
The aim is to inject more simplicity into hedge accounting by adopting a broader portfolio-based approach and to help investors understand how effective banks are in managing risk.
The IASB has not set itself any deadline for approving a new rule and wants to test the water first in what is likely to be a contentious issue because of its departure from traditional accounting methods.
IASB rules are used in more than 100 countries, but not in the United States, which follows its own accounting standards.
Reform, however, could persuade the EU to end its exemption from the hedging rule and boost the IASB's efforts to persude the United States to switch to IASB rules.
U.S. critics of IASB say there is a lack of consistency among countries that use the international rules, citing the EU exemption as an example.
(Editing by David Goodman)