Who’s (not) afraid of the Basel III disclosure requirements?
The answer is: Australia’s Commonwealth bank. As I will demonstrate, this bank is unique in going the extra mile. It shows that the Basel III disclosure requirements are not something to be afraid of. In fact, they are doable.
But first, this entry explains the Basel III disclosure requirements. Though they are part and parcel of Basel III, discussions on Basel III capital almost never cover disclosure.They are a bit of a wallflower in discussions on capital.
The disclosure requirements are important, this cannot be stressed enough. They deter banks from using capital definitions that are not defined by regulation, such as the bogus term “Core Tier 1.” ING, for example, includes €2.25B Government-held debt-like securities in its Core Tier 1 definition; see ING’s 2012 annual reports. These Core Tier 1 securities will not absorb loses without political consequences, fail to comply with basic Tier 1 requirements for loss absorption, and thus overstate ING’s Tier 1 ratio by 80bp. A uniform definition, such as Basel III’s Common Equity Tier 1, should prevent such mishaps.
The disclosure requirements are also comprehensive and detailed. Importantly, they are in force, though enforcement may be patchy for now – regulators seem to hesitate. But for individual banks that should not be a reason to procrastinate. Basel issued the consultation version of the requirements back in 2011.
It is 2013 now – time to pay attention and learn from banks that show the disclosure requirements are doable.
The Basel III disclosure requirements mainly entail the publication of two templates:
- The Disclosure Template. This template requires a full reconciliation from accounting information to capital ratios. Reconciliation requires disclosure of all securities contributing to the ratios: equity, hybrid instruments, and subordinated debt instruments.
It also requires the disclosure of all regulatory adjustments, e.g. the deductions of goodwill, defined-benefit pension fund net assets, and holdings in other financials.
- The Main Features Template. This template discloses all key features of all regulatory capital instruments. This information is particularly useful for assessing the loss-absorbing quality of securities that count towards Additional Tier 1 and Tier 2 capital. Again, the template requires the disclosure of detailed and comprehensive information.
So, how do banks conform to the Basel III disclosure requirements? Probably the best country to look at is Australia. Thanks to its regulator APRA, this country is at the Basel III implementation forefront.
The APRA disclosure requirements (APS 330) are in force since 30 June 2013. But, because APRA only recently implemented these disclosure requirements, it allows banks to disclose on a ‘best endeavours’ basis for the June 2013 reporting date only.
Strikingly, the variation is significant. Take the four largest Australian banks by assets and deposits from seeking alpha and notice the variation in disclosure quality.
1) Truly impressive is the Commonwealth bank, their disclosures follow the Basel III disclosure templates accurately, presenting two measures of the Common Equity Tier One ratio: 8.2% according to APRA’s definition, and 11.0% according to the international definition; click here to see for yourself. In addition, the Commonwealth bank reports footnote tables supporting the disclosure template.
Regarding the main features template, here the Commonwealth bank also shows strength; click here to see for yourself.
This bank shows the disclosure requirements can be implemented con amore.
2) Westpac made a good effort. It has a separate section on regulatory disclosures, which for now mentions capital instruments and their features. Unfortunately, Westpac does not offer a disclosure template in its June 30 Pillar III report.
3) National Australia Bank is not ready for Basel III disclosures yet. Its third quarter risk and capital report, presents an old-style, condensed, Pillar III report, even though the cover of this report refers to the APRA APS 330 standard.
It is encouraging to see one bank making a solid effort, may others quickly follow suit.
P.S. an excellent paper on banks disclosures is the one by Holger Daske and Jannis Bishof: Mandatory Disclosure, Voluntary Disclosure, and Stock Market Liquidity: Evidence from the EU Bank Stress Tests.