Corporate Governance for Banks in Southeast Europe: Policy - IFC

D. Disclosure and transparency 60Disclosure 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 lessintrusive and more effective alternative to merit-based regulation, which requires companies to comply withsubstantive rules. Disclosure and transparency are widely considered fundamental to the effective governanceof any enterprise and are a key feature of best practice.Disclosure requirements usually apply to exchange-listed companies, but, in some countries, even privatecompanies of a certain size and banks, irrespective of their size, are expected to make information available tothe public. The justification for such requirements is that the operations of banks and large enterprises havea significant impact on economies, and that the public interest is served by greater transparency. This is thecase with unlisted banks whose activities can pose risks to the financial system and whose financial health isof 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 bepresented clearly, so it can be understood by nontechnical people. For banks, special attention needs to bepaid 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, andrisk 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 corporategovernance. 62Such governance disclosure should cover issues such as the following: board composition; board-memberbackgrounds; governance structures such as committees; bank, board, and committee charters; governanceand ethics policies; remuneration; and information regarding risk exposure, capital exposure, and structuresdesigned to ensure a sound control environment at the bank. 63 Furthermore, disclosure should be made onsignificant events between regular reporting periods.Appropriate accounting and disclosure standards need to be followed. IFRS is increasingly becoming theglobal standard and is required for listed companies in the EU. Subsidiaries of listed EU home-country bankswill inevitably be required to use IFRS to comply with consolidation requirements. In some SEE countries, thecentral bank requires all licensed banks to use IFRS. To the extent possible, local banks should be required touse 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 disclosurerequirements. On the other hand, gaps can be observed. Some banks appear to be missing the systemsnecessary to produce financial statements to an acceptable standard. Resolving reporting problems posesa complex challenge, because it involves having adequate accounting and audit standards, proper systemswithin the bank, and, perhaps most important, sufficient trained staff to produce reliable statements on atimely 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 disclosurerequirements. Of particular interest are those of the BCBS, which are tailored to the banking sector as well as to the EC. Governance-relateddisclosure requirements have been compiled by UNCTAD (United Nations Conference on Trade and Development), and a more principles-basedoverview 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 atwww.unctad.org/en/docs/iteteb20063_en.pdf.Corporate Governance for Banks in Southeast Europe Policy Brief 43