Never the Twain Shall Meet? Addressing the Disconnection Between Banks’ Financial and Regulatory Reporting

40 Pages Posted: 19 Feb 2011

See all articles by Paul J. M. Klumpes

Paul J. M. Klumpes

Nottingham Trent University

Peter Welch

affiliation not provided to SSRN

Date Written: January 18, 2011

Abstract

This paper reviews the arguments for and against the decoupling of IFRS versus Basle II based capital ratio calculations based on IFRS from those based on Basel II. We analyse recent trends in both accounting and regulatory supervision related to banks post after the financial crisis and identify areas where there remain are still deficiencies in the transparency of accounting versus regulatory-based capital disclosures and calculations. We find that the variation in disclosure practices across IFRS and versus BIS-based capital estimations is significant for a sample of major European banks. We also identify how, for a large Swiss bank, variations in IFRS asset and capital bases for capital ratio calculations for a large Swiss Bank can enhance the transparency of disclosures make disclosures more transparent. We find evidence that the extent of variation in disclosure of the regulatory capital to shareholders capital is related to the size of the bank, the extent of off-balance-sheet activities and subordinated debt, the net interest margin, return on assets, value added, and productivity per employee. Variation in disclosure of the leverage ratio is related to bank size, subordinated debt exposure, return on assets, and cost efficiency. We recommend that banks enhance the scope and nature of the reconciliation of IFRS to BIS-based capital ratios to improve the efficiency of markets in reducing information asymmetry about these variations.

Keywords: BIS Capital, IFRS, Capital Ratios, Leverage Ratios, Reconciliation

JEL Classification: G21, M40

Suggested Citation

Klumpes, Paul J.M. and Welch, Peter, Never the Twain Shall Meet? Addressing the Disconnection Between Banks’ Financial and Regulatory Reporting (January 18, 2011). Available at SSRN: https://ssrn.com/abstract=1763817 or http://dx.doi.org/10.2139/ssrn.1763817

Paul J.M. Klumpes (Contact Author)

Nottingham Trent University ( email )

Burton Street
Nottingham NG1 4BU, NG1 4LN
United Kingdom

Peter Welch

affiliation not provided to SSRN ( email )

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