Bankföreningen says EBA encumbrance reporting plan risks credibility on central bank omission

The Swedish Bankers’ Association has called for liquidity assistance by central banks to be included in reporting of encumbered and unencumbered assets in a response to a European Banking Authority (EBA) consultation that finished last Thursday (20 March).

The consultation was on draft guidelines released by the EBA on 20 December on disclosure of encumbered and unencumbered assets aimed at providing transparent and harmonised reporting.

As noted by Fitch in a commentary last Thursday, the EBA proposals include specific dispensation such that emergency liquidity assistance (ELA) given by central banks would not be disclosed.

In its response, the Swedish Bankers’ Association (Svenska Bankföreningen) says that liquidity assistance by central banks must be disclosed and that, as proposed, the guidelines mean any reporting will lose all credibility.

“The argument that financial stability is achieved by concealing that information is unreasonable, and instructions from authorities not to disclose facts will undeniably result in greater market uncertainty,” says the association. “In particular, this proposal will seem irrational in the context of increased regulation on liquidity disclosure and requirements in liquidity buffers.

“The objective of the EBA guidelines is ‘to enable the market participants to compare with institutions in a clear and consistent manner’ since ‘disclosure by institutions about encumbrance is of vital importance for market participants to better understand and analyse the liquidity and solvency profiles of institutions’. This objective is completely contradicted by the explicit proposal to conceal information regarding encumbrance related to central bank funding.”

Fitch echoed this, saying that the absence of disclosure on emergency liquidity assistance is likely to encourage investors to withdraw funds sooner than they would do if transparency was provided at a time of crisis because they would be forced to make conservative assumptions.

“The proposals also allow for timing delays and do not require frequent reporting,” said the rating agency. “It would help to boost confidence in bank disclosure if additional reporting could be reconciled to reported financial statements. But this is not part of the EBA’s proposal.

“In addition, information disclosed may not be sufficiently granular to answer all of the questions that investors might have.”

The Swedish association also commented on the reporting of unencumbered assets, saying that information on the quality of these is crucial information for senior bondholders.

It said that there are problems with using ratings to categorise unencumbered securities, and said that with regard to covered bonds securities could be divided into “labelled and not labelled”.

A final version of the guidelines is expected by June, noted Fitch.