Better reporting of risk, timely loan write-downs on balance sheets, and investor access to comparable reporting of information across jurisdictions will improve transparency and reduce investor risk aversion towards the banking sector, according to a new study.
The part one of the 'Financial Crisis Insights on Bank Performance Reporting,' entitled 'Assessing the Key Factors Influencing Price to Book Ratios' was released recently by the
It evaluated loan impairments which have an effect on price-to-book (
The study, based on data from 51 major global banks, evaluated
The study makes three policy recommendations for accounting standard setters, regulators and financial statement preparers.
The report suggests that fair value recognition presents the most up-to-date information and allows for a timely reflection of changes to the economic value of loans, contending that in the long run it is desirable to have both fair value and amortised cost for loans included in financial statement.
It also recommended that there is a need for comparable measures of total assets for banks across jurisdictions to allow for a comparison of accounting leverage (assets/equity) which in turn will enable a better understanding of risk signals.
"This report focuses on the relationship between market-based indicators of value and risk and bank financial statement information, to reveal fault lines within the reporting framework. When signals from the economic environment do not correspond with signals from bank financial reports, investors' ability to discern the economic reality from financial statements is limited."
"In this study, we consider the reforms by accounting standard setters and regulators, and bank performance reporting before, during and since the pinnacle of the financial crisis, in order to identify where continued efforts to improve bank transparency are required," he added.
The part two of the report, 'Relationship between Disclosed Loan Fair Values, Impairments and the Risk Profile of
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