UK banks respond to Cebs criticism

The British Bankers' Association says its members should be able to speed up disclosure and supervisory reporting, after European regulators criticised the delayed and obscure reports issued by many European banks.

The Committee of European Banking Supervisors (Cebs) assessed the 2008 annual reports of 17 major banks, three of which were US firms. Cebs concluded that for many banks Pillar III disclosures were either published months after their annual reports or were hidden by an elaborate web of cross-references from one financial document to another.

Adam Cull, director of financial policy and operations at the British Bankers' Association, said some of the delays were unavoidable, but banks should be able to speed up as they become used to Basel II's requirements.

"Obviously, banks need a certain amount of flexibility because much of the Pillar III data is based on what is in a firm's annual reports and accounts, and it is often the same group of people which prepare both documents. It follows that the Pillar III disclosure should be published after the annual report but I suspect that, over time, as market practice develops and firms become more experienced at preparing Pillar III disclosures, we will see a narrowing of the timeframe for publication."

Pillar III of Basel II focuses on market discipline as a means of reinforcing the minimum capital standards and the supervisory review process warranted under Pillars I and II.

Under Basel II, market discipline is to be encouraged by "developing a set of disclosure requirements which will allow market participants to assess key pieces of information on the scope of application, capital, risk exposures, risk assessment processes, and hence the capital adequacy of the institution". Disclosures should be made on a semi-annual basis, while qualitative disclosures of a bank's broader risk management objectives and policies, reporting system and definitions may be published on an annual basis.

However, this is only a recommended time frame. Basel II concludes that a bank should publish information "as soon as practicable", something that caused concern among Cebs panellists.

Speaking on the Cebs panel on May 28 in a public hearing in London, Shiva Iyer, an associate on the UK Financial Services Authority's accounting, and audit sector and policy team, noted that a lack of enforcement gives banks too much leeway to disclose Pillar III reports in a less than timely fashion - potentially up to 10 months after the year's end.

In response to Iyer's comments, a representative of HSBC, Masa Pajkovic, said that for a bank to publish its Pillar III disclosures 10 months after the reporting season had finished is "not acceptable", and would dramatically reduce the usefulness of such information to the market. However, she contended that a firm's ability to publish information on a timely basis will depend on the size and complexity of the organisation. "Our annual reports are large enough as it is without adding Pillar III to it," she said.

A further source of concern for the Cebs panel was that the location of Pillar III disclosures varied from bank to bank. Nathalie Beaudemoulin, head of accounting affairs at the Banque de France's Commission Bancaire, who chaired the panel, admitted that, for some banks, Cebs had "struggled" to ascertain a clear picture of their Pillar III position.

Bemoaning the "huge heterogeneity" in presentation, she said that some banks have published Pillar III information within their end-of-year reports with cross-references to the financial statement, while others have issued a specific Pillar III report.

In many cases, the relevant information was difficult to trace due to a net of cross-references, Beaudemoulin added. However, according to Basel II, institutions should "provide all related information in one location to the degree feasible". In addition, if information is not provided with the accounting disclosure, institutions should indicate where the additional information can be found.

In some cases, after trailing through an elaborate web of cross-references, Cebs found banks had failed to provide all the information required under the EU Capital Requirements Directive. For example, insufficient information was provided regarding the granularity of impaired credit assets by geography and the quantitative assumptions behind credit mitigation techniques.

See also: CEBS: bank disclosures lack detail