Dubai: Banking industrys’ financial reporting requires greater transparency, according to a new study ‘Financial Crisis Insights on Bank Performance Reporting’ by the CFA Institute, the global association of investment professionals that sets the standard for professional excellence and credentials.
“Better reporting of risk, timely loan write-downs on balance sheets and investor access to comparable reporting of information across jurisdictions, will improve transparency and reduce investor risk aversion towards the banking sector,” the study said.
The report evaluates loan impairments which have an effect on Price to Book (P/B) ratios, a key valuation measure of the financial soundness of banks. The study, based on data from 51 major global banks, evaluates P/B trends from 2003 to 2013 and assesses how loan impairments measures, profitability measures, and risk measures, have affected P/B throughout this reporting period.
“This report focuses on the relationship between market-based indicators of value and risk and bank financial statement information, to reveal fault lines within the reporting framework. When signals from the economic environment do not correspond with signals from bank financial reports, investors’ ability to discern the economic reality from financial statements is limited,” said Vincent Papa, CFA, director of financial reporting policy at CFA Institute.
The CFA study has observed that banks are opaque to many external stakeholders, including the investors upon whom they rely for both equity and debt capital, and the financial crisis presented a clear opportunity for enhancing bank transparency. “In this study, we consider the reforms by accounting standard setters and regulators, and bank performance reporting before, during and since the pinnacle of the financial crisis, in order to identify where continued efforts to improve bank transparency are required,” said Papa.
As policy recommendation, the study has suggested fair value recognition and measurement of loans. The report suggests that fair value recognition presents the most up to date information and allows for a timely reflection of changes to the economic value of loans, contending that in the long run it is desirable to have both fair value and amortised cost for loans included in financial statements.
In addition, the study has also recommended enhanced risk reporting and improved leverage reporting. The enhanced risk reporting calls for additional reporting on bank business models and underlying risk exposures. In leverage reporting, CFA has calls for a comparison of accounting leverage (assets/equity) which in turn will enable a better understanding of risk signals.
“The findings align strongly with the purpose of our Future of Finance initiative, which advocates greater transparency and fairness in pursuit of a stronger financial system,” said Kurt Schacht, CFA, Managing Director, CFA Institute.
