Bank Disclosure Rethink in Europe Follows Precedent Set by Danes

Denmark’s bank regulator boasts Europe’s most rigorous capital disclosure rules to help investors work out exactly what risks they’re taking on.

The European Banking Authority is now wondering whether the rest of the region should follow Denmark’s lead.

“Investors do want to know if they will be affected at various points in the capital structure,” Piers Haben, director of oversight at the EBA, said in an interview at the London-based agency. “We will have to review what information is appropriate in this regard.”

Unlike most other countries, Denmark publishes individual capital requirements for its banks. These can give a very different picture of an institution’s financial health than is obtained by comparing reported capital with minimum industry standards. A handful of nations have already been inspired by the approach, including Sweden.

The London-based EBA, which sets guidelines for Europe’s supervisors, says the merits of region-wide disclosure standards are being reviewed as the layers of bank capital grow and the industry issues new types of instruments to fill them.

The head of Denmark’s Financial Supervisory Authority says there’s a risk investors will put up less capital if there’s a lack of transparency around triggers that have the potential to cancel out dividends and other payouts. That includes disclosing individual requirements.

“I can’t see how you can avoid publishing it,” Jesper Berg, director general of the FSA in Copenhagen, said in an interview. “I would think that investors would be very hesitant to invest in something where they wouldn’t know when the bar for dividends and interest on additional Tier 1s goes down. It’s very difficult for investors to know when they are hammered.”

The Danish FSA posts the information -- as well as inspection results -- on its website. It began the practice in 2008, after the collapse of a regional bank revealed shortcomings in existing disclosure standards and investors complained bitterly.

Meanwhile, there’s also confusion about how national Pillar 2 requirements fit in with European rules that limit dividend and interest payments when capital thresholds are breached. Daniele Nouy, head of the European Central Bank’s supervisory arm, said last month there remain “different ways of understanding” EU law, just months before it comes into force in January.

Berg, who was head of regulation at Nykredit before starting at the FSA in October, says “it’s a problem that’s increasingly being discussed on the European scene, because people have to think about how do we implement this sort of stuff.”

According to Haben, regulators also need to consider that “there are legitimate and real concerns about transparency and Pillar 2, especially as it is often misunderstood that the outcomes are seen as a sort of supervisory rating, which it’s not.” Even so, “we have heard requests for transparency to help investors understand,” he said.

Before it's here, it's on the Bloomberg Terminal.