1. This report, issued by the Basle Committee on Banking Supervision ¹, discusses the role of transparency and disclosure of information in effective market discipline and effective banking supervision. Moreover, it identifies six broad categories of information elements that are needed to provide a basic understanding of a bank's activities and the risks it faces. The paper recommends that banks publicly disclose such information to foster market discipline and strengthen financial stability by promoting transparency of banks' activities and risk exposures. Further, the paper encourages supervisors to have access to this and other information of supervisory interest.

2. The goal of achieving transparency has become more challenging in recent years as banks' activities have become more complex and dynamic. Many banks now have large-scale international operations and significant participation in securities and/or insurance businesses in addition to traditional banking activities. Their product lines change rapidly and include highly sophisticated transactions, and they have complex legal and managerial structures. These banks present formidable challenges to market participants and supervisors who need to formulate ongoing assessments of banks' activities and risks. At the same time as transparency has become more challenging, the potential benefits of disclosure for supervisors have grown as the scope of banks' market activities has expanded, thereby increasing the potential for market discipline to function as a complement to supervision. There have been calls for better transparency by G-7 leaders and finance ministers, regulators and market bodies, especially in the aftermath of financial disturbances and with respect to emerging markets.

3. The publication of this paper is a component of the Basle Committee's long-standing work to promote effective banking supervision and safe and sound banking systems. In the Core Principles ², the Committee defines minimum requirements that need to be fulfilled in effective banking supervisory systems and discusses arrangements that are needed to promote stability in financial markets. This paper provides an elaboration of certain of the Core Principles, which require banking supervisors to:
   • have a means of collecting, reviewing and analysing prudential reports and statistical returns from banks on a solo and consolidated basis (Principle 18);
   • be satisfied that each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices that enable supervisors to obtain a true and fair view of the financial condition of the bank and the profitability of its business (Principle 21, 1st clause);
   • be satisfied that each bank publishes on a regular basis financial statements that fairly reflect its condition (Principle 21, 2nd clause).

4. Banking supervisors' interest in bank transparency is based on the recognition that markets contain disciplinary mechanisms that, under appropriate conditions, reinforce supervisory efforts by rewarding banks that manage risk effectively and penalising those whose risk management is weak or ineffective. Market discipline can only work if market participants have access to timely and reliable information that enables them to assess a bank's activities and the risks inherent in those activities. The role of public disclosure in promoting safety and soundness is discussed in section 2 of this paper, while section 3 elaborates on the role of supervisors in improving transparency.

5. Moreover, supervisors need information about banks for their own use. Effective banking supervision requires collection and analysis of information to assess the condition of individual banks and banking systems as a whole. Supervisors must obtain information that enables them to detect potential problems at an early stage and identify trends not only for particular institutions, but also for entire banking systems. Supervisory information needs are discussed in section 4.

6. In this paper, transparency is defined as public disclosure of reliable and timely information that enables users of that information to make an accurate assessment of a bank's financial condition and performance, business activities, risk profile and risk management practices. This definition recognises that disclosure alone does not necessarily result in transparency. To achieve transparency, a bank must provide timely, accurate, relevant and sufficient disclosures of qualitative and quantitative information that enables users to make proper assessment of the institution's activities and risk profile. It is also crucial that the information disclosed is based on sound measurement principles and that the principles are properly applied. In section 5, qualitative characteristics of information that contributes to bank transparency are further elaborated. Specific recommendations for enhancing bank transparency are discussed in section 6.

7. The document provides general guidance that should be helpful to banking supervisors, legislators and other standard-setters as they formulate and improve regulatory frameworks for public disclosure and supervisory reporting, and to the banking industry on core disclosures that should be provided to the public. It also provides an overall framework against which supervisors can review public disclosure and supervisory reporting standards and practices in their respective jurisdictions, e.g., when implementing the Core Principles for Effective Banking Supervision.

8. The Basle Committee considers transparency to be a key element of an effectively supervised, safe and sound banking system. It recognises that minimum standards or guidelines for public disclosure do not necessarily assure a sufficient level of transparency in the markets for all institutions. Therefore, banks are encouraged to go beyond the guidelines in this paper to ensure that sufficient and meaningful information is provided to the markets, taking account of market developments and the complexity of their own operations.

Footnote(s):

1. The Basle Committee on Banking Supervision is a committee of banking supervisory authorities which was established by the central bank Governors of the Group of Ten countries in 1975. It consists of senior representatives of bank supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States. It usually meets at the Bank for International Settlements in Basle, where its permanent Secretariat is located.

2. The Core Principles for Effective Banking Supervision were issued by the Basle Committee in September 1997 after consultation with banking supervisors worldwide.