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Response to consultation on guidelines on disclosure of encumbered and unencumbered assets
Go backShould the disclosure information on encumbered and unencumbered assets, in particular on debt securities, be more granular and include information on, for example, sovereigns and covered bonds? Please explain how sensitive the disclosure of this information is.
Investors almost universally prefer more granular disclosure. The Enhanced Disclosure Task Force, of which PIMCO is a member, has recommended a more granular breakout of encumbered and unencumbered assets by balance sheet category, including breakouts for cash and equivalents, sovereigns, other investment securities, derivatives, loans and other assets. In terms of disclosure about the quality of encumbered and unencumbered assets, investors would find it useful to distinguish between “investment grade” and “below investment grade” debt securities. This information is crucial for investors considering unsecured investments in a bank because the encumbrance of the balance sheet directly impacts recovery rates in the event of a default and there are marked differences in the liquidity and secondary marketability of each of the balance sheet categories requested.Should the disclosure information on encumbered and unencumbered assets also include information on the quality of these assets? What would be a suitable indicator of asset quality? Please explain how sensitive the disclosure of this information is.
As noted in the response to Question 1, investors would find it useful at a minimum to distinguish between “investment grade” and “below investment grade” debt securities.Do you think that the disclosure required in Template A could lead to detection of the level and evolution of assets of an institution encumbered with a central bank, given that the information should be disclosed based on median values (see paragraph 7 of Title II) and the lag for disclosure is 6 months (see paragraph 10 of Title II)?
Please see attached responseShould the disclosure of information relating to the ‘nominal amount of collateral received or own debt issued not available for encumbrance’ on unencumbered collateral be requested? Please explain the relevance of this information for market participants and the sensitivity of the disclosure of this information.
Please see attached responseDo you agree with the proposed granularity of Template B given that collateral swaps with central banks will not be disclosed? Please explain how sensitive the disclosure of this information is.
Please see attached responseDo you think that the information on the sources of encumbrance in Template C is too sensitive to be disclosed? Should this information be disclosed in Template D instead (as narrative information)? Please explain the relevance of this information for market participants and the sensitivity of the disclosure of this information.
Template C presents valuable information on sources of encumbrance that is critical to analysts’ understanding of the institution’s business model and the funding choices that affect its balance sheet. An open narrative as proposed in Template D would not only reduce comparability over time and across institutions, but could be less comprehensive if institutions were to emphasize certain forms of encumbrance at the expense of others.Should the information be disclosed as a point in time (e.g. as of 31 December 2014) instead of median values? Please explain why.
Reconciliation to balance sheet statements is important for debt and equity investors and reporting of median values is unlikely to tie to quarter-end financial statements. As a result, we would suggest that banks report both median and end-of-period balances for asset encumbrance disclosuresDo you agree with the proposed list of disclosures under narrative information in Template D? Should the guidelines explicitly state that emergency liquidity assistance by central banks (ELA) should not be disclosed?
The proposal states that “in public disclosures assets and matching liabilities encumbered to central banks via ELA shall be reported as unencumbered.” While we support the ESRB recommendation that the amount of (emergency) liquidity assistance given by central banks should not be reported, the proposed misrepresentation is factually incorrect and could be subject to legal and accounting challenges, particularly from international investors and/or regulators (e.g., SEC for banks issuing in the US), and it would represent a reduction in the level of transparency currently available to investors. In the extreme, such an approach could result in public disclosures that show available collateral levels increasing at stressed banks as they lose market access because the assets pledged for ELA would be shown as unencumbered, while those pledged to market counterparties remain encumbered (i.e., the more a bank relies on ELA, the more “liquid” its balance sheet will appear in public disclosures). Rather than requiring banks to misrepresent encumbered assets as unencumbered, we would recommend that banks provide no information at all about the encumbrance levels of certain assets, namely those assets that private investors would not normally accept as collateral (e.g., whole loans / fixed assets). At a minimum, it is critical for investors to have an accurate understanding of the amount of available collateral in banks’ securities portfolios. Debt and equity securities pledged for ELA funding in Template B should be reported as encumbered and unavailable in public disclosures, even if the source of that encumbrance is not disclosed in Template C.Do you agree that the disclosures should be published no later than six months after the publication of the financial statements? Do you consider a time lag of no more than six months sufficient to ensure that the information disclosed will not adversely impact the financial stability of markets and institutions?
The Enhanced Disclosure Task Force recommends disclosure of all relevant financial information at the same time. Disclosures on asset encumbrance should be no exception. Toward that end, we would encourage banks to provide information on asset encumbrance in conjunction with regular financial reporting, ideally on a quarterly basis, and there should be clear criteria that define when a time delay of up to six months is appropriate. In periods without significant systemic distress, complete disclosure of asset encumbrance information should be provided immediately, even if that provides a means for the market to identify institutions that are experiencing specific idiosyncratic challenges. For example, the EBA, ESRB or national regulators could designate whether there are systemic risks in a particular country on a quarterly basis and banks operating in that country would be allowed to delay asset encumbrance reporting that quarter for up to six months; however, if no such systemic risks are present then all banks should be required to provide their asset encumbrance disclosures in conjunction with regular financial reporting.Name of organisation
PIMCO
