Banks worldwide would be forced to disclose their regulatory capital positions in a common template to make it easier for investors to compare institutions under a proposal put forward Monday by the Basel Committee on Banking Supervision, which writes global rules for the industry.
Currently banks announce their core tier one ratios – a key measure of bank safety – but are not required to explain how they are calculated and how they relate to the figures in their published financial statements.
This loophole has made it hard for investors to gauge how strong banks are and regulators fear that some institutions are using the process to improve their reported results.
The problem is expected to get worse over the next seven years as banks are forced to make the transition into the tougher “Basel III” requirements.
During the switch, preference shares and other debt instruments that previously counted towards the numerator of the capital ratio will be gradually phased out.
“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.
A standardised disclosure form would take some of the pressure off the European Banking Authority, which has had to battle national regulators over different definitions of capital while conducting its pan-European Union stress tests.
The regulators proposed that banks not only be required to disclose their capital but also make clear how much of it will be gradually phased out between now and 2018.
The body said it wants to ban banks from using terminology similar to the Basel III system unless they calculate the ratios in accordance with the standard rules.
However, the template proposal does not address the denominator of the capital ratio, made up of risk-weighted assets, which has been a matter of controversy.
Bankers and some regulators have accused some institutions and some countries of “fudging” their risk calculations to make themselves look stronger.