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Bank of England report recommends major banks and building societies implement EDTF recommendations in their 2013 annual reports

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  • FSB (Financial Stability Board) (lt green) Image

26 Jun 2013

The Bank of England has issued its Financial Stability Report covering the Financial Policy Committee’s (FPC’s) view of the current stability of the UK financial system, an assessment of the strengths and weaknesses of the system and risks to stability of the UK banking system. The report makes a number of recommendations to improve the stability in the UK financial system, some of which it expects to be implemented in the 2013 annual reports of all major banks and building societies.

The Financial Stability Report (link to Bank of England website) discusses “developments in the Global financial environment since the November 2012 Financial Stability Report, short-term and medium-term risks to the UK financial system, the activity of the FPC and progress on previous recommendations and the policies and actions that the FPC advises to reduce risks to the financial system”. 

Among a number of recommendations aimed at “enhancing capital adequacy of the banking system”, the report also recommends improvements to disclosures by banks in their 2013 annual reports.  The report highlights: 

The PRA should ensure that all major UK banks and building societies comply fully with the October 2012 recommendations of the Enhanced Disclosure Task Force (EDTF) upon publication of their 2013 annual reports

The EDTF was formed in May 2012 at the initiative of the FSB and had wide geographic representation with participants from asset management firms, investors and analysts, global banks, credit rating agencies and external auditors.  The task force also liaised with regulators and standard setters in undertaking its work.

The 32 recommendations of the Financial Stability Board’s Enhanced Disclosure Task Force (EDTF), published in October 2012 in their report ‘Enhancing the Risk Disclosures of banks’ (link to Financial Stability Board website) were aimed at improving the risk disclosures by banks to their shareholders.  The EDTF report identifies seven fundamental principles for enhanced disclosure each of which has its own separate disclosure recommendations: 

1. Disclosures should be clear, balanced and understandable.

2. Disclosures should be comprehensive and include all of the bank’s key activities and risks.

3. Disclosures should present relevant information.

4. Disclosures should reflect how the bank manages its risks.

5. Disclosures should be consistent over time.

6. Disclosures should be comparable among banks.

7. Disclosures should be provided on a timely basis.  

The recommendations capture existing good practices from banks around the world and include proforma tables illustrating the EDTF recommendations.  The objective of the Enhanced Disclosure Task Force recommendations is to enable users to better understand: 

A bank’s business models, the key risks that arise from them and how those risks are measured;

A bank’s liquidity position, its sources of funding and the extent to which its assets are not available for potential funding needs;

The calculation of a bank’s risk-weighted assets (RWAs) and the drivers of changes in both RWAs and the bank’s regulatory capital;

The relationship between a bank’s market risk measures and its balance sheet, as well as risks that may be outside those measures; and

The nature and extent of a bank’s loan forbearance and modification practices and how they may affect the reported level of impaired or non-performing loans     

The Parliamentary Commission on Banking Standards has also commented on disclosure, wanting to see more information provided to regulators on “the true extent of expected credit and other losses and how they are derived, the quality of a bank’s earnings and the extent and nature of accounting uncertainty (including the use of prudent valuations)”. 

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