30 October 2012

Fitch: Better disclosure would aid bank comparisons, raise trust

Enhanced risk disclosure by banks is needed to assist comparison and restore investors' confidence, Fitch Ratings says, after the FSB published a report compiled by the EDTF on Monday.

"The volume and form of public data that banks provide on many areas of risk varies significantly between institutions, making meaningful peer comparisons difficult. While we receive additional data on a confidential basis, public disclosure would also make this more consistent. Disclosure around funding and liquidity is particularly poor. For example, the lack of transparency over which of a bank's assets have been pledged as collateral, or encumbered, is a key issue both for us and for investors concerned about the impact on unsecured debt (87 per cent of investors in a Fitch survey last year expressed worries about structural subordination).

Banks do not disclose these details on a consistent basis, and estimating them from other sources can be difficult. The recommendations in the report address this by proposing a simple table providing a breakdown of encumbered and unencumbered assets by asset type, and also by whether unencumbered assets are likely to be readily available as collateral.

Another area where improved disclosure is especially important to aid investor confidence is capital adequacy - and, in particular, the risk-weightings that banks assign to their assets. Differences between the risk-weightings that different banks assign to apparently similar assets have created scepticism among some market participants about the risk models that banks use. Better disclosure of the size of a bank's exposures, and its estimates of their probability of default and loss-given default, should help banks combat this scepticism.

The recommendations provide comprehensive guidance for good risk disclosure. In addition to the above, they cover other key areas including the bank's risk management strategy around its business model, market risk and credit risk. The task force included senior representatives from major banks, audit firms and the analyst community, including Fitch."

Press release

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