EU banks’ financial statements lack comparability

INVESTORS are struggling to compare the financial health of European banks because of big variations in how their financial statements are prepared, a financial regulator has said.

A review of the accounts of 39 major European banks carried out by the European Securities and Markets Authority (ESMA) found that while disclosures required under IFRS were “generally observed, the quality of information varied wildly and that disclosures were insufficient to compare one bank with another.

According to ESMA, some financial institutions provided disclosures that were not specific enough, lacked links between quantitative and narrative information, or provided disclosures that could not be reconciled to the primary financial statements.

In particular, ESMA found it difficult to compare the income statements of the financial institutions, due to differences in their structure, the line items content and lack of comprehensive accounting policy disclosures and that in many cases financial statements did not include sufficient information on the use of derivatives.

Steven Maijoor, ESMA chair, said: “ESMA has identified a number of areas where financial institutions can improve the information that they provide in their financial statements, particularly on issues such as credit risk and forbearance.”

As a result of the conclusions and recommendations included in this review, ESMA expects enhanced disclosures to be provided in 2013 on exposures to credit risk, its mitigation e.g. by collateral, guarantees or credit default swaps, analysis of specific concentrations of credit risk and disclosure of impairment policies in order to enable investors to assess the overall credit risk.

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