New measures set to lift veil on banks camouflaging capital ratios
By Laura Noonan,ReutersLONDON--The game may soon be up for banks that have made themselves look healthier by understating how risky their businesses are, which should help pension funds, savers and companies to decide which institutions to invest in.
February 5, 2013, 12:14 am TWN
Bowing to pressure from regulators and investors, some of the world's biggest banks will soon implement a landmark initiative that promises to reveal far more detail on how banks calculate how much capital they need to guard against potential future losses.
It's designed to restore faith in the capital ratios that are the global benchmark for banks' financial health, ratios that are highly sensitive to banks' risk judgments since they are determined as a percentage of banks' own measure of assets as weighted by risk.
“We're expecting a lot of good disclosure from the banks, and where it's not happening we're expecting institutional investors to challenge management on why they're not doing so,” said Russell Picot, chief accounting officer at bank HSBC and co-chair of the industry taskforce that came up with the new standards for what banks should tell investors.
The initiative was instigated by global financial rules setter the Financial Stability Board (FSB).
A study by the Basel Committee last week showed precisely why it is necessary, revealing that the most aggressive banks assign just one eighth of the risk weighting applied by their most conservative competitors, making their capital position appear far more robust.
Deutsche Bank came under fire on Thursday when it told investors that it managed a better-than-expected improvement to its capital ratio in the fourth quarter, despite losing 2.5 billion euros (US$3.4 billion), largely by changing its approach to risk-weighted assets (RWAs).