5 Min Read
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 email@example.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.