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PIMCO

Investors almost universally prefer more granular disclosure. The Enhanced Disclosure Task Force, of which PIMCO is a member, has recommended a more granular breakout of encumbered and unencumbered assets by balance sheet category, including breakouts for cash and equivalents, sovereigns, other investment securities, derivatives, loans and other assets. In terms of disclosure about the quality of encumbered and unencumbered assets, investors would find it useful to distinguish between “investment grade” and “below investment grade” debt securities. This information is crucial for investors considering unsecured investments in a bank because the encumbrance of the balance sheet directly impacts recovery rates in the event of a default and there are marked differences in the liquidity and secondary marketability of each of the balance sheet categories requested.
As noted in the response to Question 1, investors would find it useful at a minimum to distinguish between “investment grade” and “below investment grade” debt securities.
Please see attached response
Please see attached response
Please see attached response
Template C presents valuable information on sources of encumbrance that is critical to analysts’ understanding of the institution’s business model and the funding choices that affect its balance sheet. An open narrative as proposed in Template D would not only reduce comparability over time and across institutions, but could be less comprehensive if institutions were to emphasize certain forms of encumbrance at the expense of others.
Reconciliation to balance sheet statements is important for debt and equity investors and reporting of median values is unlikely to tie to quarter-end financial statements. As a result, we would suggest that banks report both median and end-of-period balances for asset encumbrance disclosures
The proposal states that “in public disclosures assets and matching liabilities encumbered to central banks via ELA shall be reported as unencumbered.” While we support the ESRB recommendation that the amount of (emergency) liquidity assistance given by central banks should not be reported, the proposed misrepresentation is factually incorrect and could be subject to legal and accounting challenges, particularly from international investors and/or regulators (e.g., SEC for banks issuing in the US), and it would represent a reduction in the level of transparency currently available to investors. In the extreme, such an approach could result in public disclosures that show available collateral levels increasing at stressed banks as they lose market access because the assets pledged for ELA would be shown as unencumbered, while those pledged to market counterparties remain encumbered (i.e., the more a bank relies on ELA, the more “liquid” its balance sheet will appear in public disclosures). Rather than requiring banks to misrepresent encumbered assets as unencumbered, we would recommend that banks provide no information at all about the encumbrance levels of certain assets, namely those assets that private investors would not normally accept as collateral (e.g., whole loans / fixed assets). At a minimum, it is critical for investors to have an accurate understanding of the amount of available collateral in banks’ securities portfolios. Debt and equity securities pledged for ELA funding in Template B should be reported as encumbered and unavailable in public disclosures, even if the source of that encumbrance is not disclosed in Template C.
The Enhanced Disclosure Task Force recommends disclosure of all relevant financial information at the same time. Disclosures on asset encumbrance should be no exception. Toward that end, we would encourage banks to provide information on asset encumbrance in conjunction with regular financial reporting, ideally on a quarterly basis, and there should be clear criteria that define when a time delay of up to six months is appropriate. In periods without significant systemic distress, complete disclosure of asset encumbrance information should be provided immediately, even if that provides a means for the market to identify institutions that are experiencing specific idiosyncratic challenges. For example, the EBA, ESRB or national regulators could designate whether there are systemic risks in a particular country on a quarterly basis and banks operating in that country would be allowed to delay asset encumbrance reporting that quarter for up to six months; however, if no such systemic risks are present then all banks should be required to provide their asset encumbrance disclosures in conjunction with regular financial reporting.
Christian Stracke
+ (949) 720-6278