Response to consultation on guidelines on disclosure of encumbered and unencumbered assets
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It should also be noted that median values are more onerous for firms to calculate. Not only will the process involve significant extra costs, but it will provide data that is actually less reliable. Median values are not as practical as period end, which gives a more accurate indication of what is an encumbered and unencumbered asset.
Furthermore we believe that it is more operational to provide point-in-time disclosures and would therefore reduce the cost of implementation
It is also very important that local regulators have discretion with regards to the restrictions on disclosures. It could also lead to practical issues tool we understand that in the UK some of the emergency schemes that banks have access to have confidentiality clauses attached. It would therefore not be possible to disclose schemes without breaking these clauses, which would lead to a potentially difficult conflict. It demonstrates why it would be preferable to leave it to the discretion of local regulators.
We are very concerned by the requirement to remove all central bank facilities from the encumbrance disclosures as this could lead to inaccurate reporting. It would, for example, overstate contingent funding capacity and collateral availability, and in a period of market stress when central bank facilities may be used most extensively. In such situations, presenting assets as unencumbered could result in financial statements which could result in regulators acting on inaccurate information. As a result, the CP’s requirement has the potential to conflict with the UK Corporate Governance Code as issued by the Financial Reporting Council (FRC), which requires boards to present a fair, balanced and understandable assessment of their company’s position. In certain circumstances, directors would not be able to comply with both the FRC and the proposed CP requirements.
It also could conflict with the IAS 1 requirement for fair presentation in financial statements and the EC IAS Regulation from 2002 (Regulation (EC) No 1606/2002 of the European Parliament and of the Council on the application of international accounting standards) which requires the financial statements to present a true and fair view. We strongly believe that this conflict should be resolved before the CP is finalised and would be happy to participate in related industry discussions.
Should the disclosure information on encumbered and unencumbered assets, in particular on debt securities, be more granular and include information on, for example, sovereigns and covered bonds? Please explain how sensitive the disclosure of this information is.
The EBA requirements should align with the EDTF recommendations, with those recommendations identified as minimum disclosure requirements. Banks will then have the ability to tailor the disclosure to fit it to their risk and asset profile. Such disclosures will result in information which is more useful for the reader rather than the prescriptive disclosures proposed by the CP. This should be taken as the general standard, with further requests for information being made to firms where necessary as individual circumstances require.Should the disclosure information on encumbered and unencumbered assets also include information on the quality of these assets? What would be a suitable indicator of asset quality? Please explain how sensitive the disclosure of this information is.
We believe paragraphs 14 to 15 and paragraph 31 onwards in IFRS 7 Financial Instruments: Disclosures require comprehensive details on encumbered and unencumbered assets, and it is not necessary to go beyond these requirements. The EBA should align its rules as closely to IFRS 7 as is possible.Do you think that the disclosure required in Template A could lead to detection of the level and evolution of assets of an institution encumbered with a central bank, given that the information should be disclosed based on median values (see paragraph 7 of Title II) and the lag for disclosure is 6 months (see paragraph 10 of Title II)?
It would be far preferable to use period end data rather than median values. COREP uses period ends, and as recommended throughout this response, the EBA should be looking to align encumbrance reporting to the COREP framework as closely as possible. Thus, it is logical to use period end data to ensure consistency.It should also be noted that median values are more onerous for firms to calculate. Not only will the process involve significant extra costs, but it will provide data that is actually less reliable. Median values are not as practical as period end, which gives a more accurate indication of what is an encumbered and unencumbered asset.
Should the disclosure of information relating to the ‘nominal amount of collateral received or own debt issued not available for encumbrance’ on unencumbered collateral be requested? Please explain the relevance of this information for market participants and the sensitivity of the disclosure of this information.
The BBA has no view on this question.Do you agree with the proposed granularity of Template B given that collateral swaps with central banks will not be disclosed? Please explain how sensitive the disclosure of this information is.
We are satisfied with the current format of Table B.Do you think that the information on the sources of encumbrance in Template C is too sensitive to be disclosed? Should this information be disclosed in Template D instead (as narrative information)? Please explain the relevance of this information for market participants and the sensitivity of the disclosure of this information.
The BBA has no view on this question.Should the information be disclosed as a point in time (e.g. as of 31 December 2014) instead of median values? Please explain why.
We believe it would be better to use more time periods going back a number of years. Users of financial statements should be able to reconcile the disclosed information back to the financial statements to provide a clear and transparent picture. Median values would be difficult for users to understand as there is no link between published information and the median values.Furthermore we believe that it is more operational to provide point-in-time disclosures and would therefore reduce the cost of implementation
Do you agree with the proposed list of disclosures under narrative information in Template D? Should the guidelines explicitly state that emergency liquidity assistance by central banks (ELA) should not be disclosed?
Rather than introducing another template, it would be preferable to include the annual report as part of the funding disclosure and key risks. This will provide more detailed information the appropriate context.It is also very important that local regulators have discretion with regards to the restrictions on disclosures. It could also lead to practical issues tool we understand that in the UK some of the emergency schemes that banks have access to have confidentiality clauses attached. It would therefore not be possible to disclose schemes without breaking these clauses, which would lead to a potentially difficult conflict. It demonstrates why it would be preferable to leave it to the discretion of local regulators.
We are very concerned by the requirement to remove all central bank facilities from the encumbrance disclosures as this could lead to inaccurate reporting. It would, for example, overstate contingent funding capacity and collateral availability, and in a period of market stress when central bank facilities may be used most extensively. In such situations, presenting assets as unencumbered could result in financial statements which could result in regulators acting on inaccurate information. As a result, the CP’s requirement has the potential to conflict with the UK Corporate Governance Code as issued by the Financial Reporting Council (FRC), which requires boards to present a fair, balanced and understandable assessment of their company’s position. In certain circumstances, directors would not be able to comply with both the FRC and the proposed CP requirements.
It also could conflict with the IAS 1 requirement for fair presentation in financial statements and the EC IAS Regulation from 2002 (Regulation (EC) No 1606/2002 of the European Parliament and of the Council on the application of international accounting standards) which requires the financial statements to present a true and fair view. We strongly believe that this conflict should be resolved before the CP is finalised and would be happy to participate in related industry discussions.