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EGFI: Assessment of Annual Reports and Pillar 3 Disclosures as at 31/12/2009

Core Content Overview

This document outlines the findings of the CEBS (Committee of European Banking Supervisors) regarding the transparency of annual reports and Pillar 3 disclosures by European banks as of 31 December 2009. The assessment was conducted in the context of the financial crisis, with a focus on improving disclosure quality, consistency, and comparability.

Main Findings on Annual Reports' Disclosures

General Observations

• Good quality of overall disclosures.
• Heterogeneity in the level and nature of information provided.
• Room for improvement in several areas.

Key Areas for Improvement

Sub-prime Activities

• Overview of total exposures and their impact on results should be more detailed.
• Reconciliation tables for movements in the period are needed.
• Quality of underlying assets for instruments covered by low-rating insurers is unclear.

Activities Under Stress

• More emphasis should be placed on these areas.
• Information should be more focused and granular.

Business Model

• Adequate description of the business model.
• Educational approach used to explain it.
• Limited focus on activities directly affected by the crisis.

Risk and Risk Management

• Adequate description of risk management practices.
• Information on practices introduced or modified due to the crisis is present.
• Executive summaries should highlight key risk areas more clearly.

Fair Valuation

• Improvements noted, but further enhancement is required.
• Fair value hierarchy: Need for clearer explanations of the criteria used to classify instruments (especially L2 and L3), and significant transfers between levels.
• Level 3 disclosures: Better explanation of significant movements in L3 instruments.
• Sensitivity analysis: More detailed information on assumptions and impacts for each type of instrument.
• Valuation techniques: More specific information on methods, inputs, and valuation adjustments.

Day-One Profit

• General information on the approach used.
• Detailed reconciliation of changes is needed.

Own Credit Risk

• Information on own credit risk is not always prominent.
• Methodology for calculating OCR impact is generic.

Impairment

• Credit impairment: Heterogeneity in methods and quantitative information on collateral.
• AFS impairment: Missing quantitative triggers and breakdown of unrealised gains and losses by asset category.
• Goodwill impairment: Need for more detailed information on CGU determination and assumptions.

Consolidation of SPEs

• Need for more in-depth information on the "risks and rewards" test.
• Visual aids could help in understanding the process.

Liquidity

• Disclosures have been enhanced.
• Qualitative and quantitative information is more comprehensive.
• Breakdown by contractual maturity is useful.

Remuneration

• Qualitative information on remuneration schemes is provided.
• Quantitative data on executive management remuneration is available.
• Limited information on traders' remuneration.

Main Findings on Pillar 3 Disclosures

General Observations

• Second year of implementation of Pillar 3.
• Efforts to improve disclosures have been maintained.
• Some improvements compared to 2008.
• A shift towards separate all-inclusive Pillar 3 reports.

Key Areas for Improvement

Compliance with CRD

• Scope of consolidation: Sometimes too generic; reconciliation tables are useful.
• Own funds: Need for better aggregation of positive items and deductions.
• Difference between provisions and expected losses is not always disclosed.

Credit Risk

• Back-testing information is insufficient.
• Valuation methodology and quantitative information on derivatives are lacking.
• Overall view on credit risk mitigation effects is needed.

Securitisation

• Disclosures have been enhanced, but some information is missing.
• Few banks have applied good practice guidelines, resulting in more comprehensive information.
• Comprehensive securitisation disclosures are provided by some banks (e.g., Deutsche Bank).

Market Risk

• Generally in line with CRD requirements.
• Valuation controls and back-testing need enhancement.
• VaR measures are well explained by some banks (e.g., Société Générale, Intesa).

Operational Risk

• Satisfactory overall.
• Operational loss breakdown by B2 event type is well presented (e.g., Santander, BNPP).

Equity Risk

• Realised and unrealised gains/losses sometimes fall outside the accounting scope.
• Quantitative breakdown of exposures by objective is useful (e.g., HSBC).

Interest Rate Risk

• Assumptions for sensitivity analyses should be better explained.
• Interest rate gap by maturity is presented clearly (e.g., Nordea).
• Main drivers of interest rate risk by business are outlined (e.g., ING).

Conclusion

The assessment highlights progress in transparency and disclosure practices, particularly in annual reports and Pillar 3 disclosures, but also identifies persistent challenges. Banks are encouraged to adopt standardised formats, improve comparability, and provide more detailed and focused information on areas affected by the crisis, such as sub-prime activities, fair valuation, impairment, and interest rate risk. The CEBS recommends further educational efforts and fine-tuning of disclosure practices to ensure comprehensiveness and clarity for stakeholders.