TEXT-S&P: banks should enhance funding and liquidity disclosure

Tue May 29, 2012 9:56am EDT

May 29 - New regulations on banks' funding and liquidity positions due to be
introduced by Basel III over the next few years will only be fully effective if
accompanied by ample and globally consistent published reporting, says Standard
& Poor's Ratings Services today in the report: "How Enhanced Funding And
Liquidity Disclosure Could Improve Confidence In The World's Banks."	
	
"We are broadly supportive of the new Basel III framework that the Basel 	
Committee on Banking Supervision has developed," said Standard & Poor's credit 	
analyst Stefan Best. "But we believe that ample disclosure that adheres to 	
cross-border coordination is necessary to this effort. Public disclosure ought 	
to be relevant, sufficiently detailed, understandable, reliable, globally 	
consistent, and readily available on a regular basis."	
	
At present, banks' internal metrics and published reporting practices 	
regarding funding and liquidity vary considerably, even among those in the 	
same country, and there are significant disclosure gaps, the report says. 	
	
The report lists quantitative and qualitative disclosure items that Standard & 	
Poor's believes would help market participants improve the analytical tools 	
they need to assess funding and liquidity risk. These include monitoring the 	
development of companies' funding and liquidity profiles over time, making 	
comparisons among companies, and tracking sector-wide trends. 	
	
Standard & Poor's considers it necessary that banks provide regular and 	
detailed disclosure on the composition of the new metrics proposed by the 	
Basel committee and related areas, as well as narrative explanations. However, 	
even if disclosed in full, we note that information may be deficient to help 	
readers assess funding and liquidity over time periods other than 30 days or 	
over a one-year period.	
	
Therefore, and considering that the new framework has not yet been finalized 	
and will only become effective in a few years' time, we believe that banks 	
should now start disclosing a set of data that readers can use for their own 	
analytical purposes to supplement disclosure under Basel III once it takes 	
effect.	
	
Contrary to regulations on capital, which demand more detailed disclosure of 	
banks' exposures and a transition path to higher and better quality capital 	
ratios, there are no similar milestones or reporting requirements that would 	
allow market participants to monitor progress toward healthier funding and 	
liquidity positions, the report adds. This gives the appearance that 	
authorities are placing less emphasis on funding and liquidity than capital. 	
This is surprising, in our view, considering that insolvency and illiquidity 	
can equally trigger default. 	
	
"We acknowledge that the banking industry is more confidence-sensitive than 	
others," said Mr. Best. "Yet, we do not believe that limited disclosure and 	
transparency is an appropriate response to restore confidence. "Reluctance to 	
openly share information with market participants has the potential to create 	
more uncertainty, which in turn could deepen and lengthen a crisis, in our 	
view. The confidence crisis in the European Economic and Monetary Union 	
(eurozone) demonstrates how failure to address investors' concerns has 	
contributed to protracting the restoration process and eliminating or severely 	
hampering market access for banks in several member countries. 	
	
On the contrary, a tightening of the regulatory environment for financial 	
institutions, combined with ample disclosure standards, could help strengthen 	
market discipline and enhance management prudence and, in turn, the stability 	
of the global financial markets, the report concludes.	
	
	
The report is available to subscribers of RatingsDirect on the Global Credit 	
Portal at www.globalcreditportal.com.  If you are not a RatingsDirect 	
subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 	
or sending an e-mail to research_request@standardandpoors.com. Ratings 	
information can also be found on Standard & Poor's public Web site by using 	
the Ratings search box located in the left column at www.standardandpoors.com.
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