The Institute of International Finance (IIF) on February 14th submitted a response to the Basel Committee on Banking Supervision Consultative Document on Voluntary Disclosure of Sovereign Exposures.
The IIF strongly endorses the importance of transparency and would be pleased to contribute to the development of a more simple, effective and meaningful disclosure framework. However, the regulatory treatment of sovereign exposures is quite sensitive and involves economic, fiscal, monetary, and even political matters that are well known by all participants in this discussion and on which there are wide ranges of opinions, both within the private and public sectors. As pointed out in the Consultative Document, “the Committee has not reached a consensus to make any changes to the regulatory treatment of sovereign exposures at this stage”, and thus the proposed disclosure templates are voluntary in nature and are mandatory only when required by national supervisors.
The IIF believes that disclosed information can become more effective and meaningful when it is comparable and that inconsistent information across banks may mislead users of information. For this reason, we are concerned about setting an international standard of voluntary disclosure of sovereign exposures at this stage without any consensus at the global level. Such voluntary requirements may also result in unintended consequences, including inconsistent disclosures across banks in different jurisdictions, confusing users of information and hampering the utility of disclosures. In addition, it is quite important to avoid any unnecessary regulatory fragmentation . Regulatory requirements that are mandatory only when required by national supervisors will exacerbate the issue of market fragmentation.
The treatment of sovereign exposures is a delicate and complex topic that needs thoughtful discussion and analysis. Although the Consultative Document says that the Committee evaluated the merits and demerits of the disclosure measures, these merits and demerits as well as the expected value to end users of each disclosure item in the templates has not been explained in the Consultative Document. Moreover, no ex ante cost-benefit analysis has been done.
The need for hastening to set an international standard is highly questionable when it is left at national discretion and when there is still a room for discussions and analyses. The preparation and compliance around such disclosures could also require significant operational and system improvements at banks that do not have the required currency breakdowns, reconciliation to the accounting classifications and identification of indirect exposures in place. Given the challenges around market fragmentation, the disproportionate impact on banks and the inconsistent disclosure to investors, the IIF would support not introducing voluntary disclosures of sovereign exposures until there is a clear consensus among the authorities themselves.
The IIF response also includes more detailed comments across a number of areas: Complexity and the risk of misinterpretation; Comparability of disclosed information; Usefulness and utility; Competitive and proprietary information; Clarity on treatment of exposures on Internal Ratings Based approaches; Accounting classification; and, Administrative and operational costs.