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 read.
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 “No”.
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 banks.
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 consistent basis.
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.