Disclosure and Transparency

Most of the data requirements outlined above are already available either from the published accounts or the supervisory authorities. However, these practices differ widely from country to country. Disclosure practices are not yet harmonised in the G-10 countries and the variation at the global level is even greater. There are efforts underway for the harmonisation of standards both in the accounting field through the work of the

114 Applying Basle Standards in Developing and Transition Economies, Frederic C Musch, in Banking Soundness and Monetary Policy, IMF, 1997.

115 As of March 1999, links to 71 central banks/supervisory agencies are available through the BIS web site http://www.bis.org

116See, for example, Global Survey 1998, Institute of International Bankers, New York, September 1998.

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IASC on international accounting standards see section 2.2.2 above and in the field of supervisory practices through the work of the BCBS.

4.3.1 Accounting Standards: Disclosure Practices

Despite efforts of harmonisation by the IASC, which has 128 member bodies from 91 countries, there are still differences in accounting standards and policies across the member countries. A recent survey on disclosure practices in eight industrially advanced countries¹¹⁷ (USA, UK, Australia, Japan, Switzerland, Germany, Luxembourg, Hong Kong and Singapore) showed that three countries were in full compliance, two in partial compliance while three deviated considerably from the International Accounting Standard IAS 30 on Disclosure in the Financial Statements of Banks and Similar Financial Institutions introduced in 1990. Disclosure is then not an issue confined only to emerging and transition economies or the debtor nations alone but cuts across all nations.

At the same time, countries like New Zealand have moved to a system of enhanced disclosure and now require banks every quarter to make public two types of disclosure statements:

(i) A Key Information Summary, which is aimed at the ordinary depositor, which contains a short summary covering the bank’s credit rating, capital ratios, information on peak exposure concentration peak related lending, asset quality and profitability; and

(ii) A General Disclosure Statement, aimed at the more informed analyst, is more exhaustive and contains information on parent banks, comprehensive financial statements with a five year series, credit rating information with changes in the last two years, detailed information on capital adequacy, asset quality, peak and end-period market risk exposure.

117Report of the Committee on Banking Disclosure, Monetary Authority of Singapore, May 1998.

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Transparency and Disclosure in the Published Accounts of Banks in India

The issue of greater transparency and disclosure in the published accounts of banks has been highlighted by the recent crisis in some Asian economies. In particular, there was a lack of timely and reliable data to enable market participants to judge the soundness of banks and distinguish the healthy from the weak. The recent reports of the G22 Working Group reports on Strengthening Financial Systems and on Transparency and Accountability have also reinforced the need for transparency in a world of increasing international capital flows. Transparency and disclosure are seen as an important adjunct to the supervisory process as they facilitate market discipline. The Core Principles for Effective Banking Supervision drawn up by the Basle Committee of Banking Supervisors calls upon bank supervisors to be satisfied that 'each bank maintains adequate records drawn up in accordance with consistent accounting policies and practices that enable the Supervisor to obtain a true and fair view of the financial condition of the bank and the profitability of its business; and that the bank publishes on a regular basis Financial Statements that fairly reflect its condition'.

Transparency and disclosure are issues in which substantial progress has been made in many countries. In India, the responsibility of regulation and supervision of the banking system rests with the Reserve Bank of India (RBI), which has always been concerned with the question of providing an element of transparency in the Financial Statements of banks. The formats for preparing these Statements and Final Accounts (Balance Sheet and Profit & Loss Account) have been prescribed in the Banking Regulation Act, 1949, and banks have to strictly comply with this. These balance sheets are required to be duly audited by Statutory Auditors appointed by the Reserve Bank. The Statutory Audit mechanism is also used to certify that the banks’ Financial Statements present a true and fair picture. While international accounting standards are broadly followed, specific valuation standards have been prescribed in respect of investments and foreign exchange positions. Guidelines have been issued to ensure that the valuation of securities reflects market prices and that the income recognition, asset classification and provisioning norms regarding advances portfolio reflect realistic values of the loan assets.

The task of moving towards greater disclosure in India was taken up in 1982 when the formats of the financial statements were revised and enlarged. Since the liberalisation measures introduced in the beginning of this decade, the extent of disclosure has increased, gradually with the process accelerating in the last couple of years. In 1991, banks were advised to disclose the accounting policies regarding key areas of operations along with the notes on accounts in their financial statements 'in order to bring the true financial positions of banks to focus and enable the users of the financial statements to (make) a meaningful comparison of their positions.' In 1996, banks were advised to include their assessment of the capital adequacy ratio in the notes on account attached to their balance sheet to enable the statutory auditors to authenticate publicly the ratio. From 1997, banks were required to disclose the percentage of share holding of the Government of India in the nationalised banks; the percentage of net non-performing advances (NPAs) to net advances; the amount of provisions made towards NPAs and those made towards depreciation in value of investments; the amount of subordinated debt raised as Tier II capital and the gross and net value of investments inside and outside India separately. Since last year, banks have been asked to disclose Tier I and Tier II capital separately; operating ratios like interest, non-interest income and operating profit to working funds; return on assets; and productivity indicators like business and profit per employee. And, from next year, banks will have to disclose the following additional information; the maturity pattern of loans & advances, investments, deposits and borrowings; foreign currency assets and liabilities; movements in NPAs and associated provisions and lending exposure to such sectors as may be announced from time to time. In order to provide easy access to the disclosed capital, asset quality and performance indicators, data for individual bank, group and the banking system as a whole are published by the Reserve Bank of India in its annual ‘Report on Trend and Progress of Banking in India’. This is available at the internet website of the RBI at http://www.rbi.org.in

4.3.2 Supervisory Standards: Disclosure Practices

In a recent document Enhancing Bank Transparency, the BCBS has suggested six broad categories on which supervisors should require banks to disclose information:

financial performance, financial position (including capital, solvency and liquidity), risk management practices, risk exposures, accounting policies and basic management/

business/governance information. The document is in the nature of suggested broad guidelines only to be kept in mind by supervisory authorities. It recognises the role of market discipline in reinforcing the efforts of supervisors and sees timely and reliable data disclosure as the mechanism for this. It also recognises the potential drawbacks of disclosure in that markets may react more harshly to weakened institutions than desired by supervisors who are protecting both depositor’s interests and managing systemic risk and may cause a crisis of liquidity to lead to failure of otherwise solvent banks. It is this fear of overreaction that is the root of supervisory hesitation towards disclosure.