News Column

Transparency urged in bank reporting

July 16, 2014

MANAMA: A new study suggests that 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.

The first part of a CFA Institute report titled "Assessing the Key Factors Influencing Price to Book Ratios" released yesterday, evaluates loan impairments which have an effect on price to book (P/B) ratios, a key valuation measure of the financial soundness of banks.

The study, based on data from 51 major global banks, evaluates P/B trends from 2003 to last year and assesses how loan impairments measures, profitability measures and risk measures have affected P/B throughout this reporting period.

"A vibrant, well-functioning banking sector is crucial for overcoming the ongoing economic malaise that continues to affect developed world economies," CFA Institute director of financial reporting policy and author of the report Vincent Papa said.

"The 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.

"Banks are opaque to many external stakeholders, including the investors upon whom they rely for both equity and debt capital, and the financial crisis presented a clear opportunity for enhancing bank transparency.

"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 study makes three policy recommendations for accounting standard setters, regulators and financial statement preparers.

Accounting for loans - fair value recognition and measurement: 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 statements.

Support for enhanced risk reporting: This is necessary to reduce investor risk aversion towards banks as they grapple with bank business models and underlying risk exposures.

This recommendation was also put forward by the FSB-Enhanced Disclosure Task Force.

Improved leverage reporting: 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.

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Source: Gulf Daily News (Bahrain)

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