Risk Library
   Documents by Author
     Committees at the Bank for International...
       Enhancing Bank Transparency
         
         3. The Role of Supervisors in improving ...
         










 

Enhancing Bank Transparency

3. The Role of Supervisors in improving Transparency

  1. The Basle Committee believes that there are significant benefits of transparency from a supervisory point of view as well as from a financial stability perspective. Consequently, it encourages legislators, banking supervisors and other standard-setters to focus their efforts on promoting ongoing, high-quality public disclosure at reasonable cost. There are various ways in which supervisors can help strengthen transparency by promoting improved public disclosure.

      (a) Supervisors' role in setting and influencing disclosure standards and practices

  2. To achieve the maximum benefit of public disclosure, it is in the interest of supervisors and other public policy makers to pursue policies that promote comparability, relevance, reliability and timeliness of the information disclosed. Ongoing, high-quality disclosure improves market participants' ability to distinguish banks with high risk from those that are fundamentally safe and sound, and enables market discipline to work earlier and more effectively.

  3. Regulators and other standard-setters, including banking supervisors in some countries, issue disclosure standards and guidelines to promote a satisfactory level of transparency and comparability. Even in the absence of competence to set standards, banking supervisors can play an important role by contributing to, and influencing, the debate on improvement in disclosure principles and practices. This has been demonstrated in the Basle Committee's own work in promoting enhancements in trading and derivatives disclosures 4.

  4. In particular, supervisory authorities can take a leading role by encouraging the use of supervisory definitions and reporting classifications for public disclosure purposes. Supervisory reporting systems typically contain harmonised banking information and employ a uniform technical language, facilitating comparison of data. For instance, and as recommended in the joint Basle Committee/IOSCO report on trading and derivatives disclosure, banks can use the joint Basle Committee/IOSCO supervisory information framework as a baseline for the types of information about derivatives that can be provided for public disclosure purposes 5. Supervisory guidance can also facilitate industry agreement on harmonised disclosure standards and practices by alleviating co-ordination problems that banks face in agreeing privately on common standards. The contribution of supervisory authorities to improved disclosure would help minimise the cost of transparency for the banking system and speed up the process of disclosure convergence, which, in the absence of external stimulus, may be lengthy.

  5. Due to the need to strike a balance between the general interest and the costs borne by firms, supervisory authorities should consult with representatives of the banking industry and accounting profession in developing disclosure standards and guidance. Such co-operation is crucial for the definition of standards that are satisfactory, generally accepted and likely to minimise the risk of exaggerated reaction that could cause confidence crises in periods of stress.

      (b) Supervisory authorities' disclosure of information on banks

  6. In many regulatory frameworks, banks transmit to supervisory authorities, on the basis of a relationship covered by professional secrecy laws and rules, a larger amount of accounting data and other information than they are legally required to make public (e.g., annual reports) or that they publish voluntarily (e.g., in the press).

  7. Supervisory authorities can use this important stock of information not only to perform the tasks entrusted to them by law, but also to enrich the information available to the public. Confidentiality obligations mean that information usually has to be released in aggregate form 6. The way in which supervisory authorities make the data available to the public can be chosen from a range of options. For example, they can release an aggregation of the data banks transmit, taking account of the different transaction categories (classified by currency, maturity and customers' geographical location and sector, etc.). They can use more sophisticated treatments involving balance sheet indicators and statistical parameters that reflect the principal aspects of banks' operations (balance sheet structure, capital ratios, income earning capacity, risk profiles, etc.).

  8. The importance of improving the operation of markets through greater transparency raises the question of whether supervisory authorities should also make information available on individual banks and/or make public their assessment of the balance sheet and profitability of the banks they supervise. Making public all information that supervisory authorities obtain or produce on individual banks does not appear advisable, for reasons connected with the stability of the banking system, efficiency and materiality, and on grounds of confidentiality. Further, it may be prohibited by law. Supervisory authorities' tasks are not only to know and assess banks' performance, but also to prevent and cope with difficult situations in compliance with the mandate to safeguard the stability of the banking system. It would appear contrary to this mandate to release all information on supervisory assessments of individual banks and their plans for the resolution of individual banks' problems. Potential market overreactions and contagion effects could frustrate efforts of the authorities to restore conditions of sound and prudent management in a bank with problems. Further, it could undermine the ability of supervisory authorities to make independent judgements because of concerns about the effects of their decisions on the market. Finally, it could become more difficult for supervisory authorities to obtain confidential information from banks owing to the latter's fear of its possible subsequent publication.

  9. However, the need for information can, in part, be met if banks make certain supervisory-related information available in response to legal or other requirements or as a result of decisions taken voluntarily by management.

      (c) Supervisors' review of compliance with disclosure standards

  10. Another way in which supervisors can strengthen transparency is by instituting effective review and enforcement mechanisms designed to ensure compliance with disclosure standards. The credibility of public disclosure suffers if a bank concealing negative information or providing misleading information is not effectively sanctioned. In some countries, supervisors, securities regulators, and other regulatory authorities already conduct regular reviews of the quality of public disclosure of banks and take action against banks that provide insufficient or misleading disclosures, e.g., by initiating discussions with these banks, by informing the public, or by imposing monetary fines on the bank.

  11. A key means of ensuring reliable information within banks is sound and comprehensive internal control and risk management systems, complemented by effective internal audit activities. In addition, assurance about the reliability of disclosed information can be enhanced through audit by independent external auditors. Therefore, supervisors should, in addition to measures to promote strong internal controls and risk management practices within banks, encourage ongoing improvement in auditing standards, ethics and practices.

Footnote(s):

4. "Public Disclosure of the Trading and Derivatives Activities of Banks and Securities Firms" (November 1995) and "Survey of Disclosures about Trading and Derivatives Activities of Banks and Securities Firms" (November 1996 and November 1997). These reports include recommendations for further improvements in disclosure practices of large banks and securities firms. They were prepared in collaboration with the Technical Committee of the International Organisation of Securities Commissions (IOSCO).

5. "Framework for Supervisory Information about Derivatives and Trading Activities" (first issued in May 1995, updated in September 1998). The paper presents a catalogue of data on derivatives activities and risks that supervisors can use to enhance the information reported to them, and a common minimum framework of data elements on exchange-traded and OTC derivatives to which supervisors should have access. It was prepared in collaboration with the Technical Committee of the International Organisation of Securities Commissions (IOSCO).

6. In some countries, supervisors release some information they have on individual institutions, such as periodic regulatory financial statements and off-balance-sheet exposures.

Contact us * Risk Library * Documents by Author * Committees at the Bank for International Settlement (BIS) * Enhancing Bank Transparency