Bank reporting - why more is less

Big banks routinely produce annual reports so long and opaque that even the people paid to read them can't figure them out. So what's the point?

by Andrew Saunders
Last Updated: 08 Jun 2015

Doorstop annual reports may satisfy banking regulator but they serve no other purpose.

Here at MT we freely admit that the vagaries of big bank financial results often leave us scratching our heads. Page after page of tables and appendices on capital requirements, valuations, provisioning, not to mention the question of on and off balance sheet assets - lots of numbers but what are they all saying? Too often it seems designed to aggravate rather than ameliorate uncertainty.

Happily it turns out that we are in good company - Matt Spick, a London-based analyst at Deutsche Bank, has written a bold article in the company organ Konzept to pretty much the same effect.

‘Bank reporting has spiralled out of all control and meaning’ he says, pointing out that UBS’s annual report last year ran to no fewer than 868 pages, three times longer than the (still pretty weighty) 256 pages it was back in 2006.

It’s a problem that applies equally to other big banks and, he adds, much of the bloat is pointless ballast. ‘The calculations behind many bank disclosures are opaque and mostly useless to an outsider because they are deeply technical. Even professional equity analysts struggle to understand.’

Much of this is due of course to the massively increased regulatory requirements that banks now face, a burden which they have largely brought upon themselves. Since 2008, so many banks have been exposed as such appalling corporate citizens that if the world’s regulatory authorities now require them to disclose a great deal more data than they used to, then so be it. They must take their medicine and mend their ways.

The problem with this, on the face of it not unreasonable, view is that it doesn’t work. In fact, if the point of those 800 page reports is to increase transparency and arm investors with the knowledge and insight they require to make better decisions about which banks to put our pension funds on, then they actively makes things worse.

No-one can act on data that no-one reads or understands. Or as Spick puts it: ‘One of the biggest problems with the explosion of compliance with disclosure is that it hinders the market’s ability to enforce discipline on the banks, especially in their riskiest areas. If everything is considered a risk factor, then nothing really is.’

So even though banks and regulators ought in theory to share a fundamental common purpose - the simplest, clearest and most comprehensible accounts possible, in order to allow market discipline to do its thing - we end up with the opposite.

A situation you might think suits many bank’s modus operandi nicely - keep the punters guessing and you’re always one step ahead after all. A more prosaic (and more likely) interpretation is that banks also know that all the bumf is worthless, they are simply doing what the regulators tell them to.

Either way, says Spick, it costs. The market punishes all that complexity by undervaluing complicated banks by a factor of 0.2 times tangible asset value by comparison with simpler ones.

So perhaps if banks don’t want to face renewed calls for them to be broken up into smaller and intrinsically less complicated entities, now is the time to start making a vigorous case for better, rather than just greater, disclosure.

Less data, more information. Well, you can hope…

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