Corporate Governance for Banks in Southeast Europe: Policy - IFC

D. Disclosure and transparency 60
Disclosure is a tool used by regulators in the most developed markets to hold banks to account to the public,
shareholders, supervisors, and the markets. So-called disclosure-based regulation is often used as a less
intrusive and more effective alternative to merit-based regulation, which requires companies to comply with
substantive rules. Disclosure and transparency are widely considered fundamental to the effective governance
of any enterprise and are a key feature of best practice.
Disclosure requirements usually apply to exchange-listed companies, but, in some countries, even private
companies of a certain size and banks, irrespective of their size, are expected to make information available to
the public. The justification for such requirements is that the operations of banks and large enterprises have
a significant impact on economies, and that the public interest is served by greater transparency. This is the
case with unlisted banks whose activities can pose risks to the financial system and whose financial health is
of fundamental interest to creditors and consumers.
In principle, banks should disclose to the public any and all “material” 61 information on their operations.
Disclosure should focus on areas that are most likely to affect the users of information, and it should be
presented clearly, so it can be understood by nontechnical people. For banks, special attention needs to be
paid to disclosing the process of risk management and the results of risk assessments.
Smaller banks and banking subsidiaries should adapt their level of disclosure to their size, complexity, and
risk profile, to provide the information that is truly needed, without incurring excessive costs. At a minimum,
banks can be expected to disclose their audited financial statements as well as a statement on their corporate
governance. 62
Such governance disclosure should cover issues such as the following: board composition; board-member
backgrounds; governance structures such as committees; bank, board, and committee charters; governance
and ethics policies; remuneration; and information regarding risk exposure, capital exposure, and structures
designed to ensure a sound control environment at the bank. 63 Furthermore, disclosure should be made on
significant events between regular reporting periods.
Appropriate accounting and disclosure standards need to be followed. IFRS is increasingly becoming the
global standard and is required for listed companies in the EU. Subsidiaries of listed EU home-country banks
will inevitably be required to use IFRS to comply with consolidation requirements. In some SEE countries, the
central bank requires all licensed banks to use IFRS. To the extent possible, local banks should be required to
use IFRS to remain on the same footing with foreign banks.
Banking is possibly the most transparent sector in SEE, and banks tend to comply well with disclosure
requirements. On the other hand, gaps can be observed. Some banks appear to be missing the systems
necessary to produce financial statements to an acceptable standard. Resolving reporting problems poses
a complex challenge, because it involves having adequate accounting and audit standards, proper systems
within the bank, and, perhaps most important, sufficient trained staff to produce reliable statements on a
timely basis.
60 2010 BIS Principles, Section III.F, p. 29.
61 Definitions of what constitutes material information can be found in such international guidance as the OECD Principles for Corporate Governance.
62 Specific disclosure requirements are not listed in this Policy Brief. A large number of pronouncements exist that outline specific disclosure
requirements. Of particular interest are those of the BCBS, which are tailored to the banking sector as well as to the EC. Governance-related
disclosure requirements have been compiled by UNCTAD (United Nations Conference on Trade and Development), and a more principles-based
overview is provided by the OECD. Numerous national requirements may also serve as guidance.
63 For more detailed guidance on corporate governance disclosures, see UNCTAD’s Guidance on Good Practice in Corporate Governance Disclosure at
www.unctad.org/en/docs/iteteb20063_en.pdf.
Corporate Governance for Banks in Southeast Europe Policy Brief 43