Banks' book-keeping leaves investors in the dark: watchdog

LONDON Mon Nov 18, 2013 7:07am EST

A man paints a sign of an empty currency exchange office in Prague November 14, 2013. REUTERS/David W Cerny

A man paints a sign of an empty currency exchange office in Prague November 14, 2013.

Credit: Reuters/David W Cerny

LONDON (Reuters) - Big variations in how major European Union banks do their accounts can leave investors guessing over their financial health and could also undermine financial stability, a top regulator said on Monday.

Banks' accounting practices have come under regulatory scrutiny following the financial crisis when a number of banks, whose accounts showed they were healthy, had to be rescued by taxpayers.

Policymakers are now trying to restore confidence in banks after the crisis so they can obtain more funding from investors rather than having to rely on central bank money.

Steven Maijoor, chairman of the European Securities and Markets Authority (ESMA), said a review of 39 unnamed major banks showed some improvements in accounting but that accompanying disclosures sometimes contradicted the main figures.

"Our general line is there should be more tailor-made disclosures to increase investor confidence in these banks," Maijoor told reporters.

Too often there was insufficient information on how a bank uses derivatives, instruments blamed for compounding the crisis, the ESMA study said.

Banks and their accountants are about to start preparing annual statements for 2013 according to mandatory book-keeping rules known as IFRS.

These statements can already run into hundreds of pages, a trend accounting regulators are trying to reverse by cracking down on "clutter" and "boilerplate" disclosures.

The 2013 annual statements will coincide with a review by regulators of bank balance sheets and stress tests of banks across the EU, which is likely to reveal capital shortfalls. Most of the banks in the ESMA review will be supervised directly by the European Central Bank from late 2014.

ESMA's study makes several recommendations, including improvements in how banks report the impact of not declaring a loan in default even though interest payments have been missed - known as forbearance.

This practice continues even though ESMA has asked for improvements in reporting forbearance.

More transparency is also needed on a bank's liquidity or how it can withstand short-term market shocks, and to what extent its assets could be used immediately to bolster the bank's liquidity.

The watchdog expects enhanced disclosures in banks' 2013 annual statements on exposures to credit risk and how it is being mitigated, such as by holding collateral.

ESMA has no power to directly enforce accounting rules and relies on national regulators.

But big differences in how national regulators approach these issues - particularly for bank capital requirements - makes it hard to compare one bank's accounts with another's.

ESMA is taking steps to introduce more consistent application of book-keeping rules to try to tackle this problem, Maijoor said.

Greater transparency in bank book-keeping could also pave the way for investors and markets to put pressure on European banks to improve their financial stability and close the valuation gap with U.S. rivals, Maijoor said.

Some EU banks are valued at less than their assets are worth due to uncertainty over hidden problems while U.S. banks are valued at a premium to their assets.

(Reporting by Huw Jones. Editing by Jane Merriman)

A couple walks along the rough surf during sunset at Oahu's North Shore, December 26, 2013. REUTERS/Kevin Lamarque

Find your dream retirement town

Florida? Hawaii? Reuters has teamed up with Zillow to give you the power to customize a list of your best places to retire.  Video | Full Article