Ebook Why do we need mandated rules of public disclosure for banks?
The two conflicting opinions quoted above refer to a recent suggestion by the Basel Committee on Banking Supervision (BCBS). In 2001, the Committee proposed to introduce public disclosure requirements for banking organizations as an integral part of a new capital adequacy framework.
The suggestion came as a part of the general shift of financial disclosure requirements from the disclosure of economic earnings and other information about present results to wider disclosure of information useful in assessing the amount, timing, and uncertainty of prospective earnings. In banking, an emphasis on enhanced bank transparency was brought about by the growing complexity of financial environment and increased diversity of information needs. Hence, the Committee, facing the challenge, envisioned the mandatory disclosure rules for banks as a core component necessary to assure the market’s monitoring of the capital adequacy of banks.
The disclosure recommendations of the Basel Committee relied on a number of its studies conducted in 1994-2000 (ECSC 1994; BCBS 1998, 1999, 2000). The research generally reflected the prevailing views of disclosure in the financial industry, as it was based on fact-finding surveys of disclosure practices in various countries and the information needs of market analysts and other information users.
Nevertheless, the recommendations sparked much debate, when the second version of the New Accord was released for public comments in January 2001. Public responses to the proposed Accord revealed a deep division of opinion between the market participants and banking community on the necessity and extent of bank disclosure regulations. Acting on the responses, the BCBS tried to accommodate the expressed concerns and introduced important simplifications to the disclosure requirement section (“Pillar 3”) in the final version of the new Accord. The banking community, however, remained unconvinced.
Despite the ensuing disagreement, the regulators’ view of desirable disclosures in banking has finally prevailed, and in June 2004 the Basel Committee endorsed the official publication of the New Accord. The BCBS recommends that its members should develop and implement their national versions of the regulation by year-end 2006. Thus, there will be new discussions and debates.
Certainly, the past experience of the Basel initiative implementation suggests that the choice in favor of explicit disclosure requirements for banks will ultimately prevail on the national level as well. But it is equally obvious that a successful attempt to fit the disclosure recommendations of the Committee to the specific legal, accounting, and regulatory environment of a nation will require constructive participation by the banks. Hence, the process will remain influenced by the disagreement in the financial community over the appropriateness of mandatory bank disclosures, and developing an understanding of the issue still commands considerable interest.
In this study we shall review theoretical and empirical studies related to the problem of public disclosure in banking. Our primary objective is to determine economic underpinnings for the suggested enhancement of mandatory disclosure rules. Gaining an understanding of the issue can help to explain why the financial community is so divided in its attitude to the proposal.
The rest of the paper is organized as follows. The next section looks at general results about the desirability of public information disclosure by firms. Section III analyzes the issue, given the specific environment of the banking industry. Section IV gives discussion of the literature’s results and Section V concludes.
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