Jaime Caruana: Reflections on financial information from the standpoint of a
banking supervisor
Speech by Mr Jaime Caruana, Governor of the Bank of Spain, at the 13th XBRL International
Conference, Madrid, 16 May 2006.
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Introduction
Good afternoon.
I would like to begin by thanking the organisers of this 13th XBRL International Conference for their
kind invitation to participate. I am delighted to have this opportunity to close today's session by sharing
with you some reflections on financial information from the standpoint of a banking supervisor. And it
is, of course, a special pleasure for me to be able to address this audience in my home country.
I guess that, looking from the outside, it might seem somewhat strange that banking supervisors and
other regulators are taking such an active interest in a computer language. But I think that all of us
here are very well aware of the role that tools such as XBRL can play in promoting the effective and
efficient flow of financial information, and it is on this wider objective that I want to focus my
intervention today.
I will begin with a brief introduction to recall the important role that information plays in financial
markets from a macroeconomic perspective. But I would like to devote the main part of my
presentation to five initiatives that I believe regulators - as one of the sources of information demands
on the industry - can take to contribute to ensuring that financial information can be generated,
transmitted and used in the most efficient and effective way, to the benefit of stakeholders and
interested parties, in today's complex financial markets. In doing so, I will draw on my experience as
the Governor of an EU central bank with prudential supervisory responsibilities, and also as the
current Chairman of the Basel Committee on Banking Supervision.
The importance of financial information
So, why is information so important? Quite simply, because information is the fabric from which
financial markets are made. Let me elaborate on this statement.
In economic terms, an efficient market is defined as one in which prices reflect all available
information. Extrapolating this, we can say that the efficient functioning of financial markets requires
that the prices within those markets reflect all the information on the financial asset being traded. For
markets to be efficient, therefore, it is necessary that sufficient information flows with sufficient speed.
However, information is neither created nor transmitted spontaneously. First, it must be generated.
Then, it must be transmitted to users, through the appropriate channels and in the appropriate format
and presentation. These users, in turn, must incorporate the information into their own
decisionmaking processes. This is a process which clearly implies costs, both in terms of time and resources.
Regulators are one of the stakeholders in this process. In order to fulfil our objectives and functions,
we need information from the entities and markets that we supervise. But financial institutions are
faced with requirements from other sources too. They have to produce information for a whole range
of other purposes, for example to fulfil mercantile, fiscal and statistical requirements, as well as to run
their own business, of course.
On top of this, changes in the financial markets themselves are having a major impact on information
flows. Increases in the complexity and volume of financial transactions are contributing to an increase
in the complexity and volume of information that entities need to produce and manage, even if only for
their own internal purposes. And if we add in the ever more prevalent international dimension, the
situation becomes even more complicated.
In the face of these developments, it seems important to me that we find new ways to manage the
information process.
So what can we do, as regulators, to promote the most effective and efficient processes for the
generation, transmission and use of financial information, and therefore the most efficient markets? I
believe there are five key elements in this process, and it is on these elements that I will focus in the
remainder of my intervention.
1 Convergence of regulatory requirements
The first of these involves starting at the beginning of the value chain of information requirements. In
my view, a greater degree of convergence in the underlying regulation which applies to financial
institutions and markets will provide us with an excellent basis for making progress on other aspects.
Let me refer to some initiatives that have been taken in this respect.
Of course, the first initiative that I must mention is that of International Financial Reporting Standards
(IFRS). Given the importance of accounting data as the basis of information flows, the development
and application of these standards is providing a valuable opportunity to enhance the efficiency and
comparability of information, especially on an international basis.
Indeed, with effect from 1 January 2005, all EU listed companies have been required by law to use
IFRS for their consolidated financial statements. The significance of this development should not be
underestimated. It means that market participants and other interested parties should be able to
compare and contrast information relating to companies in different jurisdictions on a like-for-like basis,
and thereby make more informed decisions. Common accounting standards increase transparency
and comparability for investors, thus promoting greater cross border investment.
And let me give you a less direct, but nonetheless important example of a regulatory convergence
initiative, from my perspective as Chairman of the Basel Committee on Banking Supervision. As you
may well be aware, at the end of the nineties, we embarked on a review of the so-called "Basel
Accord", an agreement reached back in 1988 to determine minimum regulatory capital requirements
for international banks. The result of this review, the new "Basel II" framework, will, like its
predecessor, be applied not only in the thirteen countries which are members of the Committee, but in
many other countries of the world, including the 25 countries of the European Union - in fact, in
probably more than 100 countries in total.
And Basel II is much more than a capital requirements regime. It is a major shift in regulatory
philosophy. First, although it still sets minimum capital requirements, these are based on a menu of
approaches with built-in economic incentives to encourage banks to develop and use more
sophisticated risk measurement and management systems which can be recognised for supervisory
purposes. Second, banks are encouraged to conduct their own assessments of their overall risk profile
in order to determine whether they need additional capital buffers and/or other risk mitigants.
Supervisors will evaluate these assessments and both parties will engage in dialogue on the basis of
their findings. Thirdly, the new regime sets out requirements for increased transparency and disclosure
by institutions to the markets. This is intended to leverage the ability of markets to provide discipline to
banks to ensure that they are not holding unrealistically low levels of capital.
In sum, Basel II will have wide-ranging effects, both on banks and on supervisors, across many
countries. Many aspects of the supervisory process which are currently subject to different
requirements in different countries will be captured within a common international framework for the
first time. This will not only help banks that operate on an international basis to establish more
convergent information bases across the countries in which they are present. It will also facilitate the
exchange of information among supervisors, because we will be speaking a more common language.
And, more directly, the transparency requirements will, in themselves, lead to the availability of more,
and more comparable, data for market participants and users.
Both these initiatives are international in nature. However, as I noted earlier in my intervention,
information demands also come from a range of sources including at the domestic level, and it is
certainly worth looking to see what can be done at this level too. One such initiative could be to look at
the possibility of using IFRS data for market, corporate law, prudential and tax purposes.
2 Convergence of reporting requirements
So, having common regulatory standards and approaches on an international basis can provide a
natural basis for more efficient information flows. However, without convergence of the reporting
requirements that stem from these standards and approaches, entities will still have to produce and
transmit different information, in different formats, to the regulators in the countries in which they are
present. In other words, common regulation does not automatically translate into common reporting
requirements - the second element that I want to mention today.
This has been highlighted as a particular issue in the European Union context, given the political
objective to promote a fully integrated financial market. Differences in reporting requirements can be
seen as a barrier to achieving the full potential of this "single" market, to the extent that they impose an
additional cost on those entities operating, or planning to operate, across borders.
Not surprisingly, therefore, there have been a number of calls for regulators to work together to
streamline the reporting requirements that apply to institutions which are active on a pan-European
basis.
The Committee of European Banking Supervisors, or "CEBS", established two years ago and charged
with promoting convergence of supervisory practices and cooperation and information sharing
between supervisors, has risen to this challenge and has taken a major initiative in this respect,
culminating in the publication of two sets of common reporting templates, one set for institutions to
report their solvency ratio results under Basel II, and the other set for institutions to report financial
information based on IFRS.
These two projects take advantage of the two initiatives for convergence in international regulatory
requirements I have already mentioned. Indeed, it would have been very difficult, if not impossible, to
have made progress without them. Both the introduction of International Financial Reporting
Standards and the implementation of Basel II are obliging supervisors to modify their existing reporting
requirements and systems. This presents a window of opportunity to make progress on more
convergent approaches.
The benefits of a common reporting framework are clear, both for the institutions generating the
information and for banking supervisors. From the standpoint of financial institutions, administrative
costs will decrease, particularly for cross-border banks. At the same time, supervisors will benefit from
easier exchange of information. And the framework offers the flexibility to incorporate future
modifications with lower costs. Overall, these positive effects should lead to higher quality in the
information flows generated.
I should say at this point that neither of these projects has been easy. If you consider that the
European Union is currently made up of 25 countries, you can well imagine that the starting situation
was complex, with each country requiring its banks to submit different information. In fact, the
differences were not limited to the definitions used by each Member State, but also related to the
reporting systems, and the technologies and formats used. But I would argue that it has been a very
worthwhile initiative, and one that will reap benefits for years to come.
3 Increased reliance on business information
Let me turn now to the third element that I believe is important for success. I believe that regulators
should put increased reliance on information generated and used by institutions within their own
business. Let me set the context for this remark.
I don't think it is an exaggeration to say that, over recent years, the Basel II initiative has driven a
paradigm shift in regulatory attitudes. Regulation used to be something that was rather imposed on
institutions "to be complied with", and seen by them as completely separate from their own internal
business processes, and therefore an additional cost. But it has been evolving to something which
increasingly goes in the direction of recognising and harnessing the best risk management practices of
the industry itself, and encouraging institutions to further improve their own risk management
practices. As I have already mentioned, Basel II includes explicit economic incentives for institutions to
adopt more sophisticated risk measurement and management systems. And to the extent that it is
based on institutions' own capital evaluation processes, it brings regulatory capital closer to economic
capital.
Such an approach means that regulation becomes less of a separate cost for institutions, which can
use the same systems for both business and regulatory purposes. What's more, such regulation can
have business benefits, because improved risk management also makes good business sense.
I think the same philosophy is applicable to regulatory reporting. In my view, regulatory reporting
requirements should, to the extent possible, be based on internal data used by managers to run their
business, and should encourage the effective collection, generation and use of this information for
internal risk management purposes. There is clearly a cost in asking for information that is not used
within the business. But more than this, it may well be that internal information is of better quality,
more reliable and more accurate than information generated for "external purposes".
To the extent that Basel II recognises internal risk management systems, the resulting reporting
requirements should naturally be based more on the internal information produced by those systems.
But I think that over the coming years, we should continue to explore ways to encourage institutions to
improve the way they collect and use internal information to run their business and manage their risks,
as well as the possibilities for harnessing and using this information as regulators.
4 Increased feed-back to reporting institutions
So far, I have mainly talked about initiatives which regulators can take that should have the impact of
reducing the costs of producing financial information. But I think it is possible to go further than this. In
fact, I think that we can take initiatives that actually give something back to the reporting entities - in
other words, initiatives that provide them with clear benefits. This is the fourth element that I wanted to
mention, and perhaps is best explained with a couple of examples.
Let me take my first example from the Spanish context. In Spain, as in some other countries, we
maintain a central credit register. This contains information about all the direct and indirect credit
exposures - i.e. loans and guarantees - with a value of €6000 or more, which have been granted by
banking institutions and other lenders to their clients. As a central bank and banking supervisory
authority, we use this database to assist us in evaluating macro-prudential trends and the credit risk in
the economy as a whole.
Of course, the data doesn't get into the register of its own accord but rather must be reported by the
lending institutions. Reporting this data is complex and costly for the institutions. But they receive
useful feedback in return. As contributors to the register, they are entitled to have access to aggregate
information on the credit extended by other lenders to potential and actual borrowers. This can be
helpful to them in making their own credit decisions and evaluating their credit risk situation.
Let me also mention another international initiative that I think will give something useful back to
reporting institutions. This is the initiative to promote increased supervisory transparency, or
"supervisory disclosure" as part of the EU implementation of the Basel II framework.
CEBS has developed a framework for supervisory disclosure, with information to be published on
CEBS' website, via a set of common templates. While much of the information to be published under
the framework relates to supervisory rules and processes, it will also include aggregate national
information on the banking sector, on credit risk, operational risk, market risk, and on supervisory
actions and measures.
Given that this information will be published in a single location for all EU countries, and in a format
that facilitates country-by-country comparisons, institutions will be able to use it see where they stand
in certain key respects against other banks, both on a national and international basis. This will be
valuable to them in making evaluations and decisions about their position.
In sum, I think that the general move towards greater transparency by regulators is positive and should
be encouraged. But, more than this, we should explore the possibilities to give greater feed-back to
reporting institutions, from which they can derive benefits.
5 Taking advantage of new technologies
The final element that I want to mention today is certainly not the least important. I believe that we
should make full use of the possibilities offered by new technologies and tools to collect, transmit,
manage and analyse the increasing amounts of data we are faced with.
A standard like XBRL can and should play a central role in enhancing information flows. Its great
advantage is that it allows for a more precise, reliable and rapid interface between the generators and
users of information.
But XBRL is not only a tool for transmission of data. Through the development of "taxonomies" or
dictionaries of terms, it allows information to be generated and interpreted on a consistent basis. XBRL
therefore means that financial information from entities can be understood and assimilated in other
parts of the world in an accurate and timely manner.
In the banking sector, XBRL could be a means of finding a common language for financial information
needs. It could thereby facilitate supervisory co-operation and promote a level playing field.
It is for these reasons that CEBS has decided to promote the use of XBRL in the two common
reporting initiatives that I mentioned earlier in my intervention. While national supervisory authorities
are free to decide on the technical transmission specifications to implement the new reporting
frameworks, CEBS considers that XBRL can be a helpful tool in constructing a harmonised European
reporting mechanism, and is therefore developing an XBRL platform which will be available free of
charge to national authorities and supervised institutions. XBRL taxonomies are being developed for
both frameworks.
Of course, we all recognise that it is not cheap to develop these technologies. But I do believe that the
benefits will greatly outweigh the costs in the medium to longer term, and I would encourage every
effort to be made to harness those benefits.
Conclusions
Let me finalise my intervention by briefly recapitulating the five elements that I believe are important
for progress: First, convergence of the underlying regulation that affects financial institutions and
markets. Second, convergence of reporting requirements on the basis of this more harmonised
regulation. Third, increased use of internal information, generated for business purposes, for external
reporting purposes. Fourth, increased feedback and information to the reporting institutions. And
finally, the use of new technologies.
I think the examples I have given from the banking perspective show that we are already making some
good progress, although there is of course more that could, and should, be done.
In closing, I would like to thank you for your attention and wish you a productive and enjoyable time
here in Madrid.