Banks turn to transparency during turmoil

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LONDON – Banks have improved transparency since the credit crunch struck, according to a study by PricewaterhouseCoopers (PwC). Resisting temptation to plunge their heads into the sand, firms have improved disclosures on fair value, structured finance and risk management – areas particularly suffering from shaken market confidence over the past year.

The report Accounting for change: transparency in the midst of turmoil looked at the annual reports of 22 global banks and discerned improvements in fair value disclosures, and the range and depth of structured finance disclosures. However, PwC says the disclosures still do not go far enough on structured finance risk appetites and exposures to satisfy market participants’ concerns.

Edmund Hodgeon, of PwC’s capital markets group, says: “Faced with a difficult environment, banks have coped well with a number of issues. However, with the market challenges racing ahead of regulation, boilerplate compliance is no longer going to crack the problem. Banks have reached a fork in the road – they need to provide quality disclosures that tell the full story. Otherwise, we could be looking at the voluntary disclosure framework giving way to more prescriptive disclosure from regulators.”

Disclosures relating to valuations could also go further. Despite additions of new disclosures since the 2006 survey, with certain banks providing detailed, tailored quantitative information, other banks provided only brief qualitative information on one activity, or in some cases, no information at all.

“Disclosure of valuation methodologies could be more comprehensive and provide more detailed discussion of underlying assumptions used and how these could change under different market conditions. The provision of a more detailed sensitivity analysis, or a range of estimates, would greatly assist users of the financial statements to understand how banks have addressed subjective areas of valuation,” says Hodgeon.

The study says the implementation of IFRS7 – Financial Instruments: Disclosures, and SFAS 157 – Fair Value Measurements, should have provided banks with further impetus towards transparency.

“It will be interesting to see how banks deal with their reports one year on from the credit crunch,” says Hodgeon. “We would recommend that the introduction of additional guidance, aimed at improving transparency, focuses on a framework of disclosure rather than prescribing a detailed set of information requirements.”