Wednesday, August 03, 2016

Piwowar calls for better disclosure by SEC-registered banks

By Jacquelyn Lumb

Commissioner Michael Piwowar, in remarks before the quadrilateral meeting of the Financial Markets Law Committee, the Financial Markets Lawyers Group, the Financial Law Board, and the European Financial Markets Legal Group, in London, explained his opposition to calls for prudential market regulation of the capital markets and suggested instead applying market-based prudential regulation to banks. Capital market entities are not shadow banks, he advised, and prudential market regulation of the capital markets will not work. A better approach, in his view, is to require banks to comply with the disclosure-oriented focus of market-based regulation to bring public disclosure and market discipline to the banking sector.

Piwowar said he recognizes that prudential regulators have the experience to determine the best methods to ensure that banks operate in a safe and sound manner to protect depositors, and he hopes that prudential regulators recognize that capital markets regulators have the experience to determine the best methods to protect investors, maintain fair and orderly markets, and facilitate capital formation. He opposes the calls by some prudential regulators to apply prudential market regulation to capital market entities.

Areas for additional disclosure. Piwowar noted that many investors see large banks as black boxes because of the lack of information about their assets and associated risks. He outlined five areas in which banks should provide better disclosure, beginning with their investment portfolios, but also information about the impact of their comprehensive capital analysis and review process; their resolution plans, known as living wills; their material regulatory costs; and their loan portfolios.

SEC-registered banks provide information about their loan portfolios in their financial statements, Piwowar observed, but the information is not reliable. The values are based on the initial loan amount with a reserve set aside that reflects assumptions about how likely the loans are to be repaid, rather than fair value. Investors need to know the current market value of a bank’s loans based on fair value, he said.

He also suggested applying a portfolio holdings disclosure regime to banks similar to that for investment companies. The disclosure would help investors and creditors make informed decisions and also assist the SEC in its oversight and monitoring of banks. The SEC is continuously evaluating its investment company and investment adviser disclosure requirements to reflect changes in the industry, he advised, and has proposed a comprehensive set of data reporting requirements to keep up with the development of new products and strategies in the asset management industry.

Industry Guide 3. SEC-registered bank holding companies provide much more limited information than investment companies. Piwowar called for an update to the staff’s Industry Guide 3 which assists bank holding companies in preparing their disclosure documents. The guide has not been updated in almost three decades, while the scope and nature of banking has undergone dramatic changes. Piwowar would like to see the guide broadened to include transparency about the material effects of prudential regulation since it can affect a bank’s capital structure, dividend policy, and treatment in bankruptcy.

Piwowar also noted that banking regulators have issued a rule for the living will process, in which banks must describe their strategy for a timely resolution in the event of material financial distress or failure, but the rule does not include standards for determining the will’s credibility. Since there are no standards, the market is unable to assess whether the biggest banking institutions can go through bankruptcy, he explained. The disclosure of standards for living wills would enable the market to properly assess a bank’s prospects in bankruptcy, he explained.

Piwowar concluded that by requiring banks to disclose more information, investors would have more confidence that the markets can judge a bank’s financial health, and the SEC and the bank regulators could more effectively oversee and monitor banks.

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