As discussed below, 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.
It was not meant to be this way. Theoretically, depositors and other investors in all banks were meant to take this information into account before making investment decisions. The fact that this is not happening means one of three things – it should be dropped as it is useless, it should be fixed or it just needs more time as people catch on.
The third possibility can be ignored, as the sheer difficulty of getting the data means that it is not probable that it will be done on a regular basis.
If we look at the second, then improvements clearly need to be made. Firstly, the target market for these disclosures needs to be determined – something that probably was not done before APS 330 was issued. In short – who is going to use this data? If it is the retail depositors, the mums & dads, then the data on the reports needs to be turned into something they can read and understand.
Some of the issuers of these reports are already doing this. Seventeen of the 121 issued reports feature explanatory information that may be accessible to the (relatively) unsophisticated user. Of the Big Four this includes CBA, the NAB and Westpac, with the standout being the Commonwealth. Their risk report seems to attempt to explain the whole 333 page Accord in each disclosure statement, the most recent of which was 87 pages long and includes a mass of detail.
Most of the disclosures, though, would have been meaningless to most mums & dads. To do as the Commonwealth does would also be a virtual impossibility for the small credit unions. Even to match, say, Westpac would be difficult.
Most of the disclosures simply take the bare compliance route – APS 330 mandates the tables to be included, so the data is in tabular format will either little or nothing by way of additional information. This is pretty difficult to read at the best of times.
Worse, and as is true of most disclosures, they really only are very useful when you can compare them to a competitor or to the institution itself, something that even the most sophisticated mum or dad would find difficult and time consuming.
If the target for the data is the wholesale market and credit risk analysts, the way that it is presented is also a problem. Given most institutions do not preserve a history on their websites, to get a meaningful data history means that an analyst would need to visit the websites of most of the 119 institutions that have one at least once every three months to get a full picture. For the four that don’t have a website an email or phone request would be needed.
The data would then need to be extracted from every report and then manually input into an analysis package.
This is clearly a lot of effort and, given it has not yet happened other than for this study, seemingly not a popular idea.
A possible technical solution to this would be for every ADI with a website to publish the data in a consistent way – possibly using XML or a similar method – to format the data for easy import into an analysis package.
Of course, this would mean than the 17 that are providing more and better information would have to be “dumbed down” to re-join the pack. Either that or they continue to produce the APS 330 formatted for general consumption as well as this other method.
A third possibility is that APRA itself publishes the report every quarter using data from its existing returns from each of the reporting institutions. This would have the benefit of a standard format and ease of finding. However, if APRA were to publish these reports then it would be difficult to avoid the impression that APRA has in some way endorsed the contents.
Perhaps they should be cancelled then – but this may be a breach of the Accord itself. There are two reasons why it may not be. The Accords were always meant to apply to “internationally active” banks, not to institutions with less than $1m in total capital. For the non-internationally active banks compliance with the Accord was a policy decision by APRA, not a requirement of the Accord.
Additionally, the Pillar 3 on which APS 330 is based speaks clearly about the concept of materiality – how it is the users that matter to this concept. The fact that there are so few, if any, users of these reports from the smaller financial institutions may well mean that the information is not actually material.
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 the statements are not being used, then, perhaps, they should be dropped.