This is not coming out of retirement. I wrote this piece for Banking Day
(an excellent way to keep abreast of banking in Australia) and I
thought it may also be of more widespread interest. There will be one
more piece tomorrow before I go quiet again.
Quarterly disclosure of assets, credit quality and capital is
supposed to be one of the “pillars” of the modern regulatory model
governing Australia’s banking industry. Yet the mandated disclosure of
this data is uneven, sometimes unavailable and, by and large, poorly
Basel II Pillar 3 is the part of the international bank capital
Accords that was intended to improve the discipline that the market
imposes on banking institutions. It was meant to do this through
increasing the amount and nature of disclosures that the banks (and
other deposit takers) make on a routine basis, using the idea that more
disclosure means there is more data and therefore better pricing.
There are, of course, two problems here. If the markets themselves
are not pricing risk correctly (for whatever reason) then all the
disclosures possible are not going to do the trick. The other problem is
around whether anyone actually reads the disclosures.
The recent experience in Europe gives real pause on the first point.
The Basel Accords themselves may be at least partially at fault here.
The Accords effectively tell the banks that lending to their own
government is so safe that they do not have to hold any capital at all
against it. Most countries’ regulators also mandate that the bonds they
receive for this lending are also always able to be sold instantly, and
so count as being as liquid as cash.
Both of these now look, at best, overly optimistic.
What about the second, though? Does anyone actually read the
disclosures and use them? If we turn to smaller Australian banks,
building societies and credit unions, the answer seems to be a strong
Over the last few months these disclosures by all of the 123 banks
(including the big four), building societies and credit unions operating
in Australia have been collected as part of a research project.
According to APS 330 all of them should have been reporting these every
quarter since September 2008, making (so far) 12 reports in total.
There are also two differing types of disclosures – for listed banks
or building societies extra disclosures must be made semi-annually and
for unlisted institutions the extra disclosures are made annually.
There are still several faults in the process, with a couple not reporting at all and others not reporting fully or properly.
Both of the institutions not reporting were very small, but several
of the other problems were more wide-spread. Of the 121 actually
publishing, eight seemed to want to hide the results, making them
virtually impossible to find on their websites, while six institutions
had missed important data off the disclosures, including core numbers
such as assets and impairments.
Three of the disclosures had clearly not been formatted for any sort of use.
Other problems were more widespread. For the June quarter end 14% (17
in total) of the disclosures were not out on time (40 business days
after the relevant quarter end) – and this included three of the 12
The widespread issue, though, is that nearly 70% of the institutions
are only making their most recent disclosure statement available –
meaning that there is often no history or context, but, more
importantly, for most of these the annual or semi-annual long disclosure
is not on their website for at least half the year.
The other major problem is the sheer difficulty in harvesting the
statements. The way that APS 330 mandates the disclosures is that they
shall be put up on an institution’s website in a clear location.
Formatting is meant to broadly follow the formatting in APS 330 –
consisting of a variety of tables.
This was set up with the idea that an individual depositor could go
to their institution’s website or offices and get a copy and then read
it and understand their institution, and their risks, better. The
problem here is that the basic format, and target audience, has not been
thought through. There are not many depositors in the smaller
institutions that would know the meaning of “Risk Weighted Assets”,
“Tier One Capital” and the difference between 90 days past due or
specifically impaired. Judging by many of the disclosures, not many of
the preparers do either.
For your normal depositors, then, the disclosures are nearly useless.
For professionals, the situation is not much better.
Four ADIs do not have websites, making getting the data from them a
process of calling or emailing them to ask for the data. For the others,
it’s a matter of trying to find their website either by guesswork or
using a search engine. If you are trying to get them all together and
put them into a database it is a very time-consuming job.
The only people who may actually be able to use them, the wholesale
providers of funds to the smaller institutions, would be able to get
much better and timelier data direct from management.
There seems to be at least a few people reading, and using, the
disclosure statements of the Big Four and Macquarie. This includes Banking Day
readers, as the APS 330s for the majors are regularly reported there.
However, it has not been noticed, least of all by APRA, that some
institutions are not reporting at all, others are missing important
data, several are late and most are not disclosing all of the data on a
It’s clear that the APS 330 process, at least as it applies to the
smaller institutions, needs to be re-thought. If we want to keep this
form of market disclosure, then it needs to be made useful to at least
one group of investors – or analysts. If they are not being used, then
perhaps they should be dropped.