WASHINGTON - The Basel Committee on Banking Supervision on Monday urged international banking companies to improve public disclosure of financial information, particularly their internal processes for setting capital levels and the structure of assets held as capital.
The recommendation was based on a 1999 survey of 57 banking companies that operate worldwide. The survey's timing was significant because that year the Basel committee proposed changes in the capital standards that have been on the books since 1987. The updated standards recommend better disclosure as one of three "pillars" on which the rules would be based.
The 1999 survey may serve as a benchmark for measuring improvement as elements of the new standards are applied during the next several years.
Answers to the questions were supplied by the banking companies' primary national regulators, who relied only on publicly available information. Eight U.S. banking companies were covered - Bank of America Corp., Bank of New York Co., Bank One Corp., the former J.P. Morgan & Co., Citigroup Inc., First Union Corp., FleetBoston Financial Corp., and the former Chase Manhattan Corp. (which has since bought J.P. Morgan and renamed itself J.P. Morgan Chase & Co.).
Though the survey found that nearly all the companies reveal the key elements of their capital, only 75% of those that use "innovative or complex" capital instruments disclose that they use them.
Fewer still explain the structure of such instruments sufficiently, the survey found. For example, 36% of the respondents reported on the "trigger" events that could cause capital instruments to gain or lose value.
Most companies disclosed their risk-based capital ratios, as calculated by the methods laid out in the original Basel Accord. However, among those that use more sophisticated internal risk-rating methodologies, 42% summarized them, 21% described how they are used in the internal capital allocation process, and 11% revealed what their internal ratings systems indicated about the institution's credit quality.
A commentary released with the survey results said that "these disclosure areas are likely to be of increased importance in the future" because they would be obligatory for banking companies that want to use the most favorable methods of measuring capital under the proposed new accord.
"This is an important area where disclosure practices could be improved," it said.
The survey also said that more banking companies need to disclose the amount and type of derivative instruments they hold. Fewer than half the companies that report information about other derivatives reveal information about credit derivatives, the survey found.
"We would like to see enhanced disclosure in credit risk," said Sarah Dahlgren, a senior vice president at the Federal Reserve Bank of New York, who helped draft the document. "We have not seen as much improvement in credit risk disclosure as we have in the market risk area. Given the new Basel Accord's emphasis on disclosure, this is an area where banks will be greatly challenged in coming years."
The Basel committee's most recent draft of the new capital accord was released in January and was open for comment until March 31. Regulators have said that they expect to issue a final rule by yearend.
From Our Archive
- Regulators Plan Another Capital Rule Reform - January 12, 2001
- Praise, Questions for Basel Plan - January 17, 2001
- Regulators Question Basel Plan's Burden - January 24, 2001
- Public disclosures by banks: results of the 1999 disclosure survey (PDF File)
Related Content Online