The Basle Committee Issues Guidance on Bank Transparency
The Basle Committee on Banking Supervision today issued guidelines to banks and bank supervisors on public disclosures in bank financial reports. The recommendations are contained in a paper prepared by the Committee's Transparency Sub-group, which is chaired by Ms. Susan Krause, Senior Deputy Comptroller for International Affairs at the US Office of the Comptroller of the Currency and a member of the Basle Committee. The Committee's paper recommends that supervisors proactively encourage improvements in public disclosure standards.
Specifically, the paper recommends that banks make meaningful disclosure in six broad areas: financial performance; financial position (including capital, solvency and liquidity); risk management strategies and practices; risk exposures (including credit risk, market risk, liquidity risk, and operationa l, legal and other risks); accounting policies; and basic business, management and corporate governance information.
The Basle Committee strongly recommends that banks address these categories in their financial reports and other disclosures to the public. Within each broad area, significant detail in disclosures may be required, depending in part on the institution's activities. However, the paper also notes that supervisors' first priority in countries with less developed financial markets must be to establish a comprehensive supervisory reporting system. All supervisors are encouraged to have access to information discussed in the report and other information of supervisory interest.
Mr. William J. McDonough, Chairman of the Basle Committee and President of the Federal Reserve Bank of New York, stated that "the Basle Committee considers transparency to be a key element of an effectively supervised, safe and sound banking system. Financial market players can reinforce the efforts of bank supervisors as long as they have information that is current, reliable and understandable."
Ms. Krause, while emphasising the importance of enhancing bank transparency, stated that "these recommendations do not reduce the necessity of effective bank supervision. On the contrary, strong supervision and adequate transparency work hand in hand to promote stable banking systems."
The publication of this paper forms part of the Basle Committee's long-standing work to promote effective banking supervision and safe and sound banking systems. These recommendations complement the Basle Core Principles and will also be helpful to other international working groups.
According to Mr. McDonough, "this paper is an important first step in enhancing bank transparency. I am extremely interested in receiving the public's views on these recommendations. The Basle Committee intends to build on the recommendations in this paper by following up with more detailed guidance on these topics in the future."
22nd September 1998
Notes for editors
The Basle Committee on Banking Supervision
The Basle Committee on Banking Supervision is a Committee of banking supervisory authorities which was established by the central bank Governors of the Group of Ten countries in 1975. It consists of senior representatives of bank supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States. Its current chairman is Mr. W. J. McDonough, President of the Federal Reserve Bank of New York. The Committee usually meets at the Bank for International Settlements (BIS) in Basle, where its permanent Secretariat is located.
The Transparency Sub-group
The Transparency Sub-group was set up by the Basle Committee on Banking Supervision in 1996, with the mission to enhance market discipline, promote stable and efficient markets, and improve effective and comprehensive supervision of banking institutions. The Sub-group carries out this task by identifying issues and developing guidance on the information needed by supervisors and by market participants to assess risk. It consists of supervisory experts on disclosure and reporting from the member institutions of the Basle Committee. The Sub-group is chaired by Ms. Susan Krause, Senior Deputy Comptroller for International Affairs at the US Office of the Comptroller of the Currency and a member of the Basle Committee.
Transparency
In the report, transparency is defined as public disclosure of reliable and timely information that enables users of that information to make an accurate assessment of a bank's financial condition and performance, business activities, risk profile and risk management practices. This definition recognises that disclosure alone does not necessarily result in transparency. The paper discusses qualitative characteristics of transparent information, such as reliability, relevance, timeliness and comparability, and includes guidance about disclosure that enhances bank transparency.
Market discipline
A central notion in the report is market discipline. It is founded on the observation that a sound and well-managed bank is able to attain better terms and conditions in transactions with informed market counterparties. In other words, markets contain disciplinary mechanisms that, under appropriate conditions, reinforce supervisory efforts by rewarding banks that manage risk effectively and penalising those whose risk management is weak or ineffective. Market discipline, however, can only work effectively if market participants have access to timely and reliable information that enables them to adequately assess a bank's activities and the risks inherent in those activities.
The role of public disclosure
One of the key topics addressed in the report is the role of public disclosure in promoting the safety and soundness of banks. A special section elaborates on the benefits of effective disclosure and ways to achieve transparency and market discipline. The report also indicates that supervisors can play an important role in setting and influencing disclosure standards and practices and in reviewing banks' compliance with disclosure standards.
Disclosure recommendations
The disclosure recommendations included in the report are at a general level. The Basle Committee, jointly with the Technical Committee of IOSCO, has earlier issued more detailed disclosure recommendations for the trading and derivatives activities of large banks and securities firms.
To whom is the report useful?
The report should be useful to banks as an indication of what banking supervisors believe they should disclose to the public. Banking supervisors, legislators and other standard-setters can use the guidance as a baseline against which national public disclosure and supervisory reporting standards and practices can be assessed and improved, e.g. in the implementation of the Basle Committee's Core Principles for Effective Banking Supervision. Other international groups discussing transparency issues may also find the report useful.
Where can I obtain the full report?
The text of the report, "Enhancing Bank Transparency", can be obtained from the BIS Web site on the Internet at http://www.bis.org as from 12.00 (BST) on 22nd September 1998. It is also available from the Basle Committee's Secretariat at the BIS and from Basle Committee member bank supervisory authorities and central banks.