New disclosure requirements should give a more in-depth look at lending but not necessarily a clearer picture, as banks file annual reports in coming weeks.
A handful of updated accounting standards that took effect in December require banks to supply more details on credit quality in an effort to improve consistency and comparability across the industry. Though more information is a step in the right direction, analysts said, the discretion given banks in satisfying the rules may undermine attempts at transparency.
"There is no real standardized approach," said John Pancari, an analyst at Evercore Partners. "The banks certainly have some leeway, and therefore you're not always guaranteed to have a clear picture for each and every bank. The disclosure is a double-edged sword."
Many companies have voluntarily improved disclosures since the start of the economic downturn. In 2009, the Financial Accounting Standards Board proposed rules to require every bank to report more granular data on commercial loans' credit quality, the bank's internal risk ratings and the movement of problem assets.
Banks have argued that there is a fine line between too much information and not enough, and they questioned how much data was really needed to improve the understanding of credit quality.
"One of the balancing acts that you have to do with these disclosures is, you don't want to provide so much detail that it's overwhelming," said Sydney Garmong, a partner at Crowe Horwath LLP who works largely with community banks. "You've got to provide enough detail that it provides insights and ultimately will end up portraying what the overall credit quality of the portfolio looks like."
Some of the new standards add detail to existing disclosures, but others require banks to disclose data for the first time, Garmong said.
For example, rather than simply disclosing how many loans are 90 days past due, banks must break down their past-due loans by portfolio segments, such as commercial, real estate and consumer credits. Instead of just disclosing the level of criticized assets, they must display it by category: pass, special mention and substandard loans.
Among the new disclosures are requirements that banks reveal the allocations of allowances for loan losses by specific category. Perhaps the biggest change is that banks must disclose internal credit risk ratings for loans in their consumer and commercial portfolios, by category.
"To take your entire loan portfolio and to provide a snapshot based on what management's view of the credit quality is, I think is very significant," Garmong said. "What we've not had before that we have now is a quantitative table that kind of lays out the various buckets."
The problem is that each bank has a different way of evaluating risk. One may use credit scores to evaluate risk; another may use letter designations such as AAA, B or CC, and another may use the regulatory terminology "substandard," "doubtful" or "pass."
A handful of banks have filed their annual reports, including Cullen/Frost Bankers Inc. in San Antonio, Bank of Hawaii Corp. in Honolulu and New York Community Bancorp Inc. in Westbury.
So far, little consistency has appeared in the way that disclosures were presented, said Brian Kleinhanzl, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. "There's more information definitely that's required," he said, "but it looks like what everyone has reported has been just along the tables that FASB recommended, and no one's gone above and beyond that."
For now, bankers said, they are relying on their auditors to walk them through the initial series of disclosures.
Though the new rules have required more work — and cost more to comply with — most bankers said the detail is information they had already collected.
"Compiling the data hasn't been the issue," said Michael Harrington, the chief financial officer at First Niagara Financial Group in Buffalo, N.Y.
"It's just, how do you present it? That took some time … just to add tables, [and] we've had to add some dialogue to explain what the tables are. That's been the work," he said.
Philip Green, Cullen/Frost's chief financial officer, said the new disclosures added about five pages to its annual report, roughly doubling the number of pages devoted to credit disclosure in the past.
"We are very open in terms of our disclosures," Green said. "So I think the good thing about it is … there was no additional conclusion or message that resulted from the additional detail [beyond] what we've been saying in a more summary way, and so we felt good about that."
Industry observers said banks may continue to tweak the way they present the data as they watch how their peers report it throughout the year. This would also supply a road map for private banks, which must start including the new disclosures in their own annual reports to shareholders starting in early 2012.
With the economy improving, said Pancari, the Evercore analyst, he doubts that investors will see more fine-tuning. "The changes are coming out at a time when credit quality is becoming somewhat less of a focus," he said, "and therefore it's not under the microscope as much."
