EBA Disagrees with Banks’ Definition of ‘Immaterial’ Grounds for not Disclosing Assets

23 Jun

 

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The European Banking Association (EBA) has issued guidelines, and invites feedback, on what should constitute ‘materiality’ when banks neglect to disclose certain capital assets on the ground they are ‘immaterial’.

The EBA recognises that an institution’s revealing its full roster of assets and securities positions, in declaring its capital adequacy under the CRD, could give its rivals a competitive advantage. For this reason it is possible to waive a declaration of specific assets.

But, it states, “this divergence in information… can, when combined with a lack of transparency, turn out to be sub-optimal and create uncertainty for stakeholders regarding the comprehensiveness of provided information.”

Under the proposed guidelines, European credit institutions and investment firms must state that the specific items of information are not provided, as well as explaining their decision to keep these assets’ properties a secret. This must be justified on one of three grounds: their immateriality, their proprietary nature or their confidentiality.

Currently, many companies “provide few details about how they use the waivers, making if difficult for users of information to know whether a missing piece of information is due to its immaterial, proprietary or confidential nature.”

The three concepts are defined in Article 432(1) and (2), with materiality delineated as being regarded as such “if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making economic decisions.”

The new directions also address the regularity at which disclosures should be made: more systemically important financial institutions will have to make more frequent declarations. At present, the EBA states the majority of companies make quarterly declarations, though this is not required, but provide widely divergent levels of detail on aspects like instance capital, solvency and risk-weighted assets (RWAs).

In fact, one of the problems the EBA is suffering is “declaration overload,” and that there was “no transparency” behind the reasons for reporting some capital assets or risks, and not others.

For these reasons, it will now require institutions falling within certain defined groups to make more frequent declarations on items comprising capital structure, capital adequacy and ratios, leverage ratio and parameters of the Internal Ratings-Based models used to assess RWAs.

Those firms which have been targeted as needing to improve their capital reporting are those meeting one of the following criteria: being one of the three biggest institutions in a jurisdiction, having €30 billion consolidated total assets, having the four-year average of their total assets amounting to 20% of the four-year average GDP of their home member state, or having ‘consolidated exposures’ as defined in Article 429 of Regulation 575/2013 in excess of €200 billion.

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