Yesterday, an international forum of bank managers, directors, auditors and regulators discussed, at UNCTAD, the adequacy of national rules for bank accounting and disclosure and found them wanting. Accounting rules drive disclosure and disclosure stimulates better management and the information to deal with risk. The panellists unanimously agreed that the starting point for containing systemic risk for the global banking system has to be the accounting rules.
Such risk has increased as financial disclosure practices have not kept pace with the growth and innovation of new financial instruments used by commercial banks on global capital markets. The discussion on disclosure by commercial banks is therefore very timely, the UNCTAD Secretary-General, Rubens Ricupero, stated. UNCTAD was reaching out to the civil society and was seeking to integrate the private sector into the organisation. Also having attended the G-7 Summit at Lyon, Mr. Ricupero reported that the Managing Director of the IMF, Michel Camdessus, had expressed the fear that the world economy could face a grave crisis in the banking sector.
All the panellists insisted on the need for global rules versus national accounting rules. Even "regional" rules such as the EU bank directives lack the detail necessary for this rapidly evolving sector. Therefore, all advocated the use of international accounting standards (IASs) developed by the International Accounting Standards Committee. However, they thought that the banking industry needed to play a more direct role in the development of international accounting standards and that UNCTAD must assist developing countries and countries in transition to modify their national rules to comply with them.
Mr. Jurgen Krumnow, a member of the Board of Managing directors at Deutsche Bank, explained why Deutsche Bank was drawing up its consolidated financial statements in accordance with IASs. Simply put, "If you want to raise international capital , you must play by international rules." He also stated that it was time to give up certain national practices such as hidden reserves since we live in an information society. When asked if Deutsche Bank would be moving its operations to London, he replied that the London financial market was attractive because of its size and diversity of financial products--and that deregulation was an important factor contributing to its dynamism.
Mr. Hugo Lavados, Chief Executive Officer Banco BHIF in Chile, stated that disclosure for depositors, shareholders and creditors is not assured by "tons of paper". It would be better to use simple indicators based on publicly available information. Banks should be rewarded for providing such information and penalized if they do not. Whether the rules for disclosure work, ultimately depends on the quality of the regulators.
Mr. David Darbyshire, partner of Arthur Andersen in Moscow, described the problems in the nascent Russian banking industry. A shake-out of the weaker banks is occurring since it was now more difficult to make profits. The job of bank auditor is very risky given the lack of information and it is almost impossible to attest that the financial statements give a true and fair view. Currently, audit reports are not published in the Russian Federation. Public confidence in banks is based on their ability to control risks and this requires good information. When Russian banks raise international capital they are required to use international accounting standards.
According to a member of its Secretariat, the Basle Committee on Banking Supervision had addressed the issue of capital adequacy standards but accounting standards for banks were a "black hole". There are multiple users of accounting information: regulators, managers and investors/depositors. He suggested that investors and depositors be given access to a subset of the information given to regulators.
Mr. Osamu Takemoto, Chief of Data Analysis Group in Bank Supervision, Bank of Japan, believed that the need for disclosure has increased because the risks for investors/depositors have increased. The banking sector was becoming more volatile worldwide because of the increased use of derivatives and the fact that banks do not adequately monitor and control their risks. In Japan the risk of defaults had increased due to the recession and non-performing housing loans. This has caused the banking industry to change its policy from concealing problems to disclosing more information to the public in an understandable form. In Japan the Government had failed to gain the support from the public to use budget funds to bail out the housing loan companies because people were not previously convinced that there was a banking crisis.
Mr. Geoffrey Mitchell, Group Financial Services Director, Barclays Bank PLC, tackled the tough question of the disclosure of related party transactions. He asserted that a distinction had to be made between transactions with clients and transactions by banks as businesses. Confidentiality is needed for the former and more adequate disclosure for the latter. Other panellists supported more disclosure particularly in Russia where banks only do business with their friends. In Chile related party transactions by banks are outlawed.
This International Forum was organized on the occasion of the annual session UNCTAD´s Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR) (see TAD/INF/PR/9621). It was chaired by the President of ISAR, Mr. Herbert Biener (Germany).