CFA study calls for enhancement of loan disclosure standards
According to a recent study conducted by London-based investment industry association CFA, there are systematic differences in bank disclosures of loans and bad debt reporting across countries.
The study, called Financial Crisis Insights on Bank Performance Reporting, was conducted among 51 global banks across 16 countries including EU countries, the US, Japan, Canada and Australia. Key author is Vincent Papa (pictured), CFA and director of financial reporting policy at CFA Institute. It is divided in two parts, with the first focussing on price book ratio’s and the second, recently launched, on loan disclosures.
The loan disclosure study highlights negative valuation gaps among banks in France, Spain, Italy, Switzerland and the Netherland, whilst it observes positive valuation gaps in German and British banks. Valuation gaps are particularly pronounced in Spain, where it ranged from -30% on a six year average.
“What is striking in our findings is that the valuation gaps (differences between disclosed fair values in the notes and what is reported on balance sheet) cannot be readily explained by the prevailing economic environment in different countries. This suggests that inconsistently determined and incomparable information is reported by banks” comments Papa.
Moreover, the study highlights that loan impairment analysis across countries contrasts with a similar analysis of CDS spreads, reflecting in part the credit risk of assets held. According to the authors, this suggests an inconsistent application of impairments accounting standards.
The study makes three recommendations for accounting standard setters, regulators, and financial statement preparers in order to improve the level of comparability across countries.
First, in order to help investors to make appropriate analytical adjustments, it recommends enhanced loan fair value disclosures. This could include explaining why disclosed fair values that are determined from internal models differ from the amounts reported on balance sheet.
Second, the study recommends enhanced loan impairment disclosures in order to enable investors to have a greater understanding of sources of differences in the impairments reported on financial statements.
Finally, the study highlights the need to strengthen regulatory enforcement in order to ensure consistency and comparability of financial statements.
The results of the study allign with CFA’s Institute Future of Finance initiative, which advocates greater transparency and fairness in pursuit of a stronger financial system. “A sound banking system should be the bedrock of economic recovery and continued efforts to enhance bank transparency are vital to restore investor trust and confidence in the finance sector” Papa concludes.