By Gareth Vaughan
New Zealand banks have come out strongly against their regulator's plans to enforce its proposed dashboard quarterly disclosure regime on them.
In a submission on the Reserve Bank's Dashboard Approach, bank lobby group the New Zealand Bankers' Association (NZBA) says it cannot support the proposal due to a number of significant concerns. NZBA goes as far as saying if some of the information the Reserve Bank wants included in the Dashboard bank comparison table on its website is included, there's a risk "uninformed users could make inaccurate assessments of a bank’s financial stability thereby introducing the risk of a run on a bank."
"NZBA submits the Dashboard Approach presents a number of new, complex and potentially irresolvable issues. On this basis, NZBA does not support the Dashboard Approach," NZBA says.
Rather NZBA says it supports the Option B put forward in the Reserve Bank's consultation paper, the so-called Pillar 3 approach. The bank lobby group points to the fact the Pillar 3 approach aligns closely with Australian disclosure rules, the country where the parents of NZBA's four biggest members are based. (The Reserve Bank's preferred option is the Dashboard Approach).
NZBA even says retaining the status quo of the existing quarterly general disclosure statement regime is "palatable" to its members. And the bank lobby group also asks that the Reserve Bank undertakes further consultation about the detail of the proposed disclosure, whatever option it settles upon.
'Simpler & more accessible'
Toby Fiennes, the Reserve Bank's head of prudential supervision, says the Reserve Bank is trying to design a disclosure regime simpler and more accessible to retail investors than the existing one. The Dashboard Approach, Fiennes says, is aimed at boosting market discipline, stimulating more interest from depositors and their advisers in the banks, and ultimately boosting financial stability.
"If banks know they're more under scrutiny from the market, they're going to be keener to be safe and show that they're safe," Fiennes recently told journalists.
Among its concerns with the Dashboard Approach NZBA argues the proposed side-by-side comparison of banks’ key financial metrics could lead to inaccurate conclusions about comparability, given the banks’ different sizes and differing accounting policies.
"NZBA submits that few retail investors will understand and appreciate the differences between the structures of the various locally incorporated banks and will therefore be unlikely to properly interpret the Dashboard’s information in light of its wider context. In this respect, the Dashboard Approach is unlikely to achieve one of RBNZ’s key aims of promoting the comparison of financial information published by, and therefore the relative positions of, the banks."
It also suggests the Reserve Bank could make changes to the G1 tables on its website, that provide summary financial information about locally incorporated banks, to make them more accessible. This, NZBA argues, would be a "more pragmatic approach than a complete overhaul of existing processes and disclosures in an attempt to deliver the same or similar outcome."
RBNZ 'publishing information on behalf of banks'
Another concern NZBA raises is that the Reserve Bank proposes to populate the Dashboard, which will appear on the regulator's website, with information received from banks as part of their private reporting to the regulator. Essentially, NZBA says, this means the Reserve Bank would publish information on behalf of banks.
A problem with this is the IAS 34 interim financial reporting standard and director attestations that currently appear in disclosure statements, provide some investors and other users of bank disclosure information "with a certain level of comfort as to the accuracy and credibility of the information published, and that this comfort would likely not be derived from a third party publishing the information," NZBA says.
Another gripe is that the Dashboard Approach wouldn't let banks provide context for the figures and information, with NZBA suggesting a lack of meaningful context or explanatory information could lead to the "misuse and misinterpretation" of data.
NZBA also suggests shifting to the Dashboard approach wouldn't reduce its members' compliance costs.
"The main reason for this is that for banks that seek offshore funding, some investors, analysts and [credit] ratings agencies will require additional financial information to be prepared rather than relying solely on the Dashboard. In part this will be to provide context and explain the information in the Dashboard, but also to incorporate other information relevant to and relied upon by those parties that will not be included. This will effectively result in banks needing to continue to undertake a process similar to the current disclosure statement regime to prepare and provide the relevant information to these parties, as well as embedding a governance framework to provide comfort/assurance in relation to the information to be published in the Dashboard," says NZBA.
"Therefore, the result that the proposed Dashboard Approach seeks to achieve, providing stakeholders with relevant comparable information while reducing the compliance burden on banks, is not likely to eventuate as a duplicate process will be required."
"Additionally, running this process to complement the Dashboard creates the risk of errors in duplicated information in another format, and leads to the potential for disparity in information available to different types of debt investors (for example wholesale v retail)," NZBA adds.
"Finally, NZBA considers that legal issues may arise as to issuer liability under international legislative requirements (e.g. USA or UKLA [UK Listing Authority]) from incorporating an external web address (the RBNZ Dashboard website) into offer documents."
'Retail investors' average financial literacy needs to be significantly lifted'
Other concerns NZBA raises include that the release of information on the Dashboard before approval by directors would raise the question of compliance with director duties and/or other statutory obligations. On top of this there are sharemarket disclosure concerns.
"A key issue with the proposed Dashboard Approach is the timing of its release. Some, or all, of the information contained in the Dashboard could be considered ‘price sensitive’ under registered exchange continuous disclosure requirements (for banks with listed debt or equity instruments)."
"The proposed timing for release of the Dashboard information by RBNZ is ahead of formal bank results announcements and could breach its continuous disclosure requirements unless it simultaneously releases an announcement on the relevant exchange," says NZBA.
For NZBA members with sharemarket listed parents, such as ANZ, ASB, BNZ and Westpac, this would mean simultaneous sharemarket releases would be required by the Australian parents too, which would "make little contextual sense."
And ultimately, NZBA argues, the Dashboard Approach won't result in a significant increase in the number and types of users of the disclosure information.
"In particular, for the typical retail investor average financial literacy, particularly accounting skills, needs to be significantly lifted for this to eventuate. NZBA does not consider that the Dashboard Approach will of itself encourage retail depositors to view, or fully understand, the data published by the RBNZ."
Noting the Dashboard Approach takes a "very different approach" from equivalent jurisdictions such as Australia, NZBA argues it would be preferable for New Zealand's disclosure approach to be "in alignment" with Australia.
"As such NZBA prefers the Pillar 3 Approach, which is more akin to the Pillar III disclosures made under the Australian regime."
"Additionally, the director attestations included in Pillar 3 provides certainty to parties like investors who rely on the attendant director/management sign-off, responsibility and liability."
NZBA notes the Pillar 3 option retains the ability for banks to provide additional information or context about disclosure information. This, the lobby group says, is critical. In contrast the Dashboard, by removing this ability, carries a "risk of over-simplification which could be potentially misleading."
'Introducing the risk of a run on a bank'
Meanwhile banks, NZBA says, are especially concerned about the Reserve Bank's proposal to publish core funding and mismatch ratio liquidity metrics in either the Dashboard or Pillar 3 approaches.
"In the absence of prescriptive guidelines, consistent methodologies and/or RBNZ accreditation on the calculation of core funding and mismatch ratios, this data has the potential to be misleading. The mismatch ratios in particular are a highly technical area and their calculations are not suited to comparability across different sized organisations. In our view, there is a risk that uninformed users could make inaccurate assessments of a bank’s financial stability thereby introducing the risk of a run on a bank, itself precipitating the risk that RBNZ seeks to mitigate through market discipline," NZBA says.
Additionally NZBA wants an eight week, as opposed to the four week, publishing deadline suggested by the Reserve Bank.
Consultation on the Reserve Bank's Dashboard Approach closed yesterday (Thursday). The Reserve Bank has said it's aiming to unveil its final decisions in the first quarter of 2017.
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