Basel Seeks Tighter Rules Regarding Banks’ Disclosure of Capital Positions

The world’s banks will be forced to disclose their regulatory capital positions in a common template that would make it easier for investors to compare institutions under a proposal put forward Monday by the Basel Committee on Banking Supervision.

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Banks are currently required to announce their core tier one ratios, but are not required to explain how they were calculated, or how they relate to the figures in their published financial statements — a loophole that has made it hard for investors to gauge the banks’ strength. Regulators fear some banks are suing the process to improve their reported results.

The Basel committee expects the problem to get worse over the next seven years as banks are forced to transition into the tougher “Basel III” capital requirements. The switch will see preference shares and other debt instruments, once counted towards the numerator of the capital ratio, gradually phased out of the calculation.

“To enable market participants to compare the capital adequacy of banks across jurisdictions, it is essential that banks disclose the full list of capital items and regulatory adjustments,” the committee said in its report.

Regulators have proposed that banks not only be required to disclose their capital, but also to make it clear how much of said capital will be phased out between now and 2018.

The Basel group wants to ban banks from using terminology similar to that of the Basel III system unless they calculate the ratios in accordance with standard rules.

However, Basel’s template proposal does not address the denominator of the capital ratio, which is made up of risk-weighted assets and has been an issue of controversy as institutions and some countries have been accused of “fudging” their risk calculations to make themselves look stronger.

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