What Constitutes Appropriate Disclosure for a Financial Conglomerate?

Abstract

This paper addresses the disclosure issues for financial conglomerates principally from the same perspective as that of the Basel Committee on Banking Supervision: that disclosure is important for the safety and soundness of banks. However, we reach substantially different conclusions with respect to three important disclosure issues: the role of market value accounting; the frequency of disclosures; and the role of subordinated debt.We start by asking why any special disclosure might be required for financial conglomerates. This question immediately leads to a discussion of what is special about financial conglomerates. We also address the question of, "Disclosure to whom?" There are at least two potential audiences for information disclosures: financial regulators; and the publicinvestors/creditors/customers of a financial conglomerate. Issues of the appropriate structure for a financial conglomerate, and the information revelation that should accompany that structure, are also raised. Finally, we return to the title topic: What constitutes appropriate disclosure for afinancial conglomerate.Unfortunately, by turning its back on the three most important steps that could be taken to improve information disclosure mandating market value accounting (MVA) for banks' reports to regulators, aiming toward daily submission of these reports, and requiring the issuance of subordinated debt the Basel Committee has fundamentally undermined its efforts to enhancebanks' safety and soundness.

Keywords: Banks, Disclosure, Regulation, Basel II, Market Value Accounting, Subordinated Debt