Investors and regulators faced a near impossible challenge during the financial crisis trying to compare the health of banks in one country to their counterparts in another – a problem global regulators are now attempting to fix.
The Basel Committee on Banking Supervision, which is responsible for drawing up new rules that will affect the world's largest financial institutions, is proposing a set of standards that would create a universal method for reporting capital levels at banks around the globe.
When the financial crisis hit in 2007-2008, a multitude of different reporting standards made it hard for the market to judge which banks had adequate capital to backstop their lending and trading operations, the Switzerland-based committee said in documents released Tuesday.
That meant investors and regulars couldn't easily compare the capital situations of banks in Europe with those in Canada or the United States.
"During the financial crisis, many market participants and supervisors have attempted to undertake detailed assessments of the capital positions of banks and comparisons of their capital positions," the Basel Committee document says.
"The level of detail of the disclosure and the lack of consistency in the way that [capital]was reported typically made this task difficult and often made it impossible to do with any accuracy. It is often suggested that lack of clarity on the quality of capital contributed to uncertainty during the financial crisis."
It also hindered regulators from acting quickly, the report says: "The interventions carried out by the authorities may have been more effective if capital positions of the banks were more transparent."
The report is a consultative document in which the Basel Committee proposes new templates, which banks would have to follow regardless of where they are based. Banks would be required to go into detail on their capital positions, including how much of the various forms of tier-one capital they hold, which is the most liquid asset in times of a crisis. Banks around the world would be required to break down what assets are being used to calculate their capital ratios, and disclose the "full terms and conditions" on their websites.
These common templates are designed to "mitigate the risk of inconsistent formats," the document says. Banks are required to respond by Feb. 17. Feedback is also sought from investors, analysts, auditors, and rating agencies.
A spokesman at the Office of the Superintendent of Financial Institutions said Canada's banking regulator plans to take part in the process. "Since we are a member of the Basel Committee, we will be reviewing the various submissions and will have a say in the final outcome," OSFI spokesman Rod Giles said.
Some countries already have mandatory reporting standards in place for their banks. Mr. Giles said OSFI has criteria for reporting capital, and gathers that information quarterly. However, there is no set template in Canada for what data should be provided. Canadian banks, which are considered well-capitalized in relation to those in other countries, generally provide OSFI with the data it needs to satisfy its reports, the regulator said.
The changes are part of the five-year period in which new capital standards are being introduced for the global banking sector. The period begins in 2013, and all banks around the world are expected to be in compliance by 2018.