EBA’s ongoing struggle with bank disclosures

Will EBA will ever get it right when it comes to banks disclosures? After last week’s publication of proposed disclosure guidelines for banks, I am afraid that European bank disclosures will remain the wallflower of bank regulation … for some time at least.

In the year of the AQR and the stress test, one would expect the EBA to present a set of audacious disclosure guidelines. Unfortunately, these expectations will likely be crushed by guidelines that show the hallmarks of fear and a lack of zeitgeist.

Fear is probably an important reason why the proposed disclosure guidelines appear compromised. The fear does not necessarily originate from banks. Banks have no problems with disclosures, see, for example my post on the Commonwealth Bank. In addition, look at BNP Baribas over the last weeks: a record $10bn fine does not prompt a run.

The fear most likely originates from national supervisors. They feel obliged to clean up the mess once unfavourable news about banks enters the public domain. The supervisors determine for a large part the outcomes of EBA’s policies, in particular when it concerns subjects that are deemed to be not very complex, e.g. disclosure.* As a result of this, the guidelines offer banks much flexibility. Banks that want to disclose the bare minimum can get away by just doing that.

The fear of supervisors is irrational of course, moreover, it is too reminiscent of the old days.

The proposed guidelines reflect the thinking of the pre-crisis era, when banks were poorly capitalised. Today, this thinking is hardly descriptive. Banks have improved their solvency significantly over the last five years. The implication is that EBA’s disclosure guidelines shall be much more brave and audacious. They shall, because they should assume the full Basel III implementation, not the regulatory regime pre-Lehman.

So what’s next?

This is bad, because the guidelines, once published by the EBA or by the EC, will not go away soon. Therefore, the best thing to do is to submit your comments.

I decided to comment on the following points:

  • The convoluted definition of materiality: why would an item that is considered as material for annual reporting purposes be immaterial for banks to disclose? (See Title III of the guidelines.)
  • The suggestion that only global systemically important banks shall disclose more often than once a year. This is a serious weakness: the guidelines discourage smaller banks to disclose more frequently. (See Title V of the guidelines.)
  • The guidelines still do not prompt a bank to separately disclose which items that bank chooses not to disclose for reasons of i) confidentiality, ii) the proprietary nature of the information. The guidelines allow banks to hide information if it is confidential or if the nature of the information gives away the tricks of the trade. Fair enough. But, banks do not have to inform which items are hidden for one reason or the other. (See Title VI of the guidelines.)
  • The language of the guidelines is verbose, it looks as if it does not meet EU’s legal language requirements. For example, the CRD IV – in Article 433 – says: “Institutions shall publish the disclosures required by this Part at least on an annual basis.” Compare this to the guidelines, with some of my corrections: “Institutions shall should especially assess their need to publish information more frequently than annually when one any of the following indicators conditions applyies to them: … ” (para 18, p 21).
  • The guidelines shall require banks to post their disclosures on a dedicated web-site or repository. This is the case in the U.S., and being able to download bank information in bulk is a blessing.
  • In addition, the guidelines shall require banks to keep a permanent archive of disclosures. Current CRD IV rules, if my mind serves me right, allow banks to disclose the information for two seconds on a web-site and then take it away.

Before you comment

… please bear in mind that the consultation is mainly about these topics:

  1. How institutions have to apply materiality in relation to the disclosure requirements (Article 432(1), see copy below),
  2. How institutions have to apply proprietary and confidentiality in relation to the disclosure requirements (Article 432(2), see copy below),
  3. Institutions assessing more frequent disclosures (Article 433, see copy below).

 The deadline for your comments is 13/09/2014.

Complex topics, like bank capital, are generally left to the best specialists around, and thus are not affected by detrimental tinkering of those higher up the chain of command. Note also that disclosure is not well understood. There is academic literature on disclosure, starting from Greorge Akerlof, with contributions from Christine Botosan, Russel LundholmChristian Leuz, and Roe Verrecchia.


Appendix, excerpt from CRD IV


Article 431

Scope of disclosure requirements

1.   Institutions shall publicly disclose the information laid down in Title II, subject to the provisions laid down in Article 432.

2.   Permission granted by the competent authorities under Part Three for the instruments and methodologies referred to in Title III shall be subject to the public disclosure by institutions of the information laid down therein.

3.   Institutions shall adopt a formal policy to comply with the disclosure requirements laid down in this Part, and have policies for assessing the appropriateness of their disclosures, including their verification and frequency. Institutions shall also have policies for assessing whether their disclosures convey their risk profile comprehensively to market participants.

Where those disclosures do not convey the risk profile comprehensively to market participants, institutions shall publicly disclose the information necessary in addition to that required in accordance with paragraph 1. However, they shall only be required to disclose information which is material and not proprietary or confidential in accordance with Article 432.

4.   Institutions shall, if requested, explain their rating decisions to SMEs and other corporate applicants for loans, providing an explanation in writing when asked. The administrative costs of the explanation shall be proportionate to the size of the loan.

Article 432

Non-material, proprietary or confidential information

1.   Institutions may omit one or more of the disclosures listed in Title II if the information provided by such disclosures is not regarded as material, except for the disclosures laid down in Article 435(2)(c), Article 437 and Article 450.

Information in disclosures shall be regarded as material if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making economic decisions.

EBA shall, in accordance with Article 16 of Regulation (EU) No 1093/2010, issue guidelines by 31 December 2014 on how institutions have to apply materiality in relation to the disclosure requirements of Title II.

2.   Institutions may also omit one or more items of information included in the disclosures listed in Titles II and III if those items include information which is regarded as proprietary or confidential in accordance with the second and third subparagraphs, except for the disclosures laid down in Articles 437 and 450.

Information shall be regarded as proprietary to an institution if disclosing it publicly would undermine its competitive position. It may include information on products or systems which, if shared with competitors, would render an institution’s investments therein less valuable.

Information shall be regarded as confidential if there are obligations to customers or other counterparty relationships binding an institution to confidentiality.

EBA shall, in accordance with Article 16 of Regulation (EU) No 1093/2010, issue guidelines by 31 December 2014 on how institutions have to apply proprietary and confidentiality in relation to the disclosure requirements of Titles II and III.

3.   In the exceptional cases referred to in paragraph 2, the institution concerned shall state in its disclosures the fact that the specific items of information are not disclosed, the reason for non-disclosure, and publish more general information about the subject matter of the disclosure requirement, except where these are to be classified as proprietary or confidential.

4.   Paragraphs 1, 2 and 3 are without prejudice to the scope of liability for failure to disclose material information.

Article 433

Frequency of disclosure

Institutions shall publish the disclosures required by this Part at least on an annual basis.

Annual disclosures shall be published in conjunction with the date of publication of the financial statements.

Institutions shall assess the need to publish some or all disclosures more frequently than annually in the light of the relevant characteristics of their business such as scale of operations, range of activities, presence in different countries, involvement in different financial sectors, and participation in international financial markets and payment, settlement and clearing systems. That assessment shall pay particular attention to the possible need for more frequent disclosure of items of information laid down in Article 437, and points (c) to (f) of Article 438, and information on risk exposure and other items prone to rapid change.

EBA shall, in accordance with Article 16 of Regulation (EU) No 1093/2010, issue guidelines by 31 December 2014 on institutions assessing more frequent disclosures of Titles II and III.

Article 434

Means of disclosures

1.   Institutions may determine the appropriate medium, location and means of verification to comply effectively with the disclosure requirements laid down in this Part. To the degree feasible, all disclosures shall be provided in one medium or location. If a similar piece of information is disclosed in two or more media, a reference to the synonymous information in the other media shall be included within each medium.

2.   Equivalent disclosures made by institutions under accounting, listing or other requirements may be deemed to constitute compliance with this Part. If disclosures are not included in the financial statements, institutions shall unambiguously indicate in the financial statements where they can be found.