Canadian banks will be enhancing disclosure in the months ahead says a senior federal banking regulator and he called for better disclosure from banks in other jurisdictions, too.
In a speech Tuesday to an industry conference, Mark Zelmer, assistant superintendent with the Office of the Superintendent of Financial Institutions Canada (OSFI), argued that the capital ratios of the Canadian banks are stronger than they may appear, as the don’t rely on any transitional arrangements, which other banks may be using before fully adopting the new Basel III capital adequacy rules.
That is not necessarily the case in other jurisdictions and, he said that OSFI would like to see more disclosure of reporting differences between jurisdictions. “We would welcome more light being shone on the differences in reported capital ratios across jurisdictions,” he said.
Here at home, OSFI’s anticipating better disclosure of banks’ liquidity and risk management practices in the months ahead, he noted. In particular, he said that OSFI believes that Canadian banks that are designated as domestically systemically important “should have public information disclosure practices covering their financial condition and risk management activities that are among the best of their international peers.”
Indeed, he said that it expects that the six major Canadian banks will adopt the recommendations of the Financial Stability Board’s enhanced disclosure task force (EDTF), as well as future disclosure recommendations that are endorsed by international standard setters and the FSB, as well as evolving best practices for risk disclosure.
“Many of the recommendations are already in place here in Canada given the strong disclosure practices of the six major Canadian banks. And, I am pleased to report that they have agreed to implement the remainder over the course of this year and next,” he said.
Specifically, he said that the banks will be enhancing their risk-weighted asset disclosures “to help users understand how bank risk models are influenced by data inputs, modelling assumptions, mathematical formulations, manual overrides and point-in-time versus through-the-cycle assumptions.”
“We should also see more explanations as to how banks assess model performance, including how credit risk models perform relative to actual default and loss experience,” he said.
Zelmer also noted that work is underway to more information on the funding and liquidity profiles of the big six banks, and that within the next 12 months it expects to see more disclosure of banks’ trading risks, including a more detailed analysis of their counterparty credit risk exposure from derivatives transactions.
Finally, he addressed measures designed to ensure that banks can be resolved in the event that they fail, through the use of features such as non-viability contingent capital (NVCC) conversion triggers in certain securities, and bail-in debt. Zelmer said that OSFI believes that all of the terms and conditions surrounding the conversion process must be clearly spelled out ahead of time, so that NVCC investors will know when they buy the instruments how their claims will be converted into common equity in the event of a conversion.
“Some might argue that this results in more complex instruments that would be more susceptible to market manipulation and death spirals,” he noted. However, he said that the banks have made good progress in thinking about these issues, and that it is confident that they can design NVCC instruments that will meet OSFI requirements and not become a source of instability if and when banks come under stress. It’s also looking forward to well-designed bail-in instruments, he suggested, although that’s happening under Finance’s guidance.