Transparency of Bank Sector and its Significance for the Sector Steady Behaviour – Problems and Outlooks
Chief Assistant Elena Stavrova, Ph. D
Faculty of Economics
“Neofit Rilski” Southwestern University
Blagoevgrad
Bulgaria
Annotation:
The liberalization of financial flows movement in 1980s, the internationalization and the penetration of foreign banks in the national bank market have provoked the increase of the financial unsteadiness. This brought to the necessity of development of standards for public announcement of internationally comparable information concerning the participants on the financial markets. The supervising organs and publicity have put forward a number of requirements in regard to this information – concerning its quantity, as well as its quality.
The development of reliable practices for the announcement of financial and non-financial information by the banks is of an exclusive significance for the guarantee of access to information and for the overcome of the asymmetry of the level of information between the bank management and investors, and for the facilitation of the efficient bank supervision.
Keywords: financial stability, asymmetric information, corporate governance, flatness, interest rate risk, credit risk, liquidity risk
Introduction
In the conditions of constantly complicating economic, social, political and institutional relations between the bank sector and its environment of economic subjects, the rate of their mutual determination, the manifestation of relations, standing in the basis of the phenomena and the development of general theoretical positions, that will let us lay and solve the whole aggregate of problems, arising as a result of this, is one of the most-perspective trends of modern science.
Studies of Problem
B. Boeva (2001) defines the transparency in the activities of economic agents as one of the most important principles of corporate governance for breaking the asymmetry of information between shareholders and executives. She also considers that the limited information and complicated access to information result in increase of expenses, in worsening conditions of work and in minimization of the effects from the application of the corporate governance principles.
G. Ganchev (2004) analyzes the current status of the bank sector, the status of assets and liabilities of the bank sector as a result of the measures taken by the Government and the money policy applied by the Central Bank and the conditions on the financial markets.
D. Zlateva (2003) studies Internet as a medium for making contacts and exchange of information between the economic agents, for demonstration of their marketing strategies based on the principle of voluntary participation and trust.
N. Kostova (2004) makes a retrospection of the bank’s announcement of the results of their credit policy in conformity with the international accounting laws.
N. Nenovski and K. Hristov (2002) study the chance of emergence of a system crisis of the banking system and of diagnostics of the “bad” and “good” banks, solvent and insolvent banks, as a result of the re-allocation of the deposits and loans and investments, in the context of announcement of their financial statements.
Berl, Ad. and Gardiner Means (1932), The Modern Corporation and Private Property – New York & Maclullian, treat the corporate governance as a process of exchange of control between the owners and managers.
Jonatan R. Macle and Maureen O Hara (2001) The Corporate Governance of Banks, consider that the problem of applying of methods of corporate governance is as much economic, as it is political and legal.
E. Philip David and Mark R. Stone (2004). Corporate Financial Structure and Financial Stability, IMF WP4124, analyze the way corporate financial structures reflect the influence of the financial crisis on the real sector and the ways of elimination or limitation of these effects impact.
Presentation of Problem
Proceeding to the study of the influence of macrofactors (the aggregate of formal and informal institutional limitations) on the stability of the national banking system, we commence with the institute “rules of the game” in society, regulating the interrelations between people and setting the structure and the motives of people’s interaction.
The formal institutes are limitation frames, set with legal regulative acts, special organizational and other official forms. Informal institutions cover a large range of generally accepted conventionalities and rules of behaviour that as a rule are not included in any official documents, but a great number of individuals do limit themselves by those factors in their interrelations in reality.
Some of the formal factors are the Basel Agreement of Bank Supervision, Banks Act, Bulgarian National Bank Act, Regulations of the Central Bank, Bank Deposits Warrant Act, Exchange Act, etc.
Informal factors are the mutual links with particular manufacturing structures, inherited from the transition to market economy, personal interrelations, the lack of trust in the legal and court system, in the national currency, corruption, the “shady” economy, etc.
The presence and operation of the system of formal institutional restrictions is manifested in the provision of the bank sector with legal and regulative acts, based on the principle of transparency, the sense of which is based on the establishment of an environment providing favourable conditions for available, clear and generally understandable (for all the participants in the market) decisions and actions. According to the opinion of Bistra Boeva (2001) “the corporate governance in the conditions of high dispersion of the shareholders’ ownership and market democracy is the principle of reveal of information. Its observance is a prerequisite for the decrease of information asymmetry in relations “owner / shareholders – managers” and “corporation – interested individuals”. The presence of transparent and useful information for the market participants and their operations constitutes an important element for functioning of an efficient market, as well as a condition for a market discipline. For the sake of efficient bank management and supervision, taking the risk into consideration, the information must reach all the participants in the market, including the supervision organs, share- and bondholders (inclusive of the potential ones), the deposit holders and other lenders, correspondent banks and other banks, all of which are parties in the business relations, and the economic environment. The trend of market liberalization in 1980s resulted in the accelerated market dynamics and increased the necessity of information as a media guaranteeing financial stability of global economic environment.
The Government and the Central Bank acknowledge that the transparency improves the predictability and consequently the efficiency of the policy of economic persons. It gives rise to facing the real status, the outer reality and makes the managers more responsible, particularly if they are aware they will bear responsibility for their actions. The transparency contributes also to the improvement of accounting systems and brings the bank management under control in decisions taking.
The transparency and the bank supervision are not the final stage, they increase the efficiency and may improve the running of international financial markets, reduce the risk for all the market participants. But they are not a panacea for all the risks, related to the financial system. They are not able to stop the financial crisis, to soothe the market participants’ reactions to negative information, to reduce the probability of panic and market collapse arising.
The transparency in accounting is manifested in submission of complete and straight information for the market participants, necessary for taking decisions. The adaptation to the International Accounting Standards is a necessary step towards facilitation of transparency and correct interpretation of accounting. The international accounting standards developed by the international committee in 1990 are acquired by the companies in many developed and developing countries, which use them to render accounts for their activities. Our national accounting laws are fully based on or in conformity with them.
The reciprocal relation between the companies’ managers and the investors is particularly important. It is impossible to accept that there are indicators that could increase the value of the company and do not constitute an interest for the potential investors. A group of such indicators includes: profit, financial flows, capital expenses, maintenance costs, innovations, business segments efficiency, strategic goals, development of new products and market share. These are financial and non-financial indicators, having influence on the value in a short-term, as well as in a long-term outlook. Other non-financial indicators could be the managers’ qualities, competitive environment, market growth, marketing costs, produced items qualities, employees’ qualifications and their motivation of work, the grade of customers’ satisfaction, the intellectual capital, the efficiency of business segments, the capital in the form of a trade mark.
The public announcement of information supposes the presence of generally accepted standards for its quality, and in consequence an adequate built-up methodology for its presentation. As a rule it is implied in the announcement of the information – in the quantities necessary and meeting particular quality parameters, presented in the form of financial statements in periods, defined by law. Although the banks are forced to make additional expenses to maintain sectors dealing with monitoring and analysis, the fact of its usefulness must take a leading position and to be comparative to its usefulness. The major benefits for the banks providing an adequate horizon of transparency in their activities may be described, as follows:
1. Increased trust in the bank management qualities.
2. Extra attention paid by the long-term investors.
3. Facilitation the access to capitals on the financial markets.
4. Increase of the market value of the traded financial instruments emitted by the bank.
5. Presence in the analyzer’s reports for the sector general condition, and in consequence – a chance of comparison making.
The accepted International Accounting Standards and their acquisition in accounting practice for announcement of the banks financial reports appear to be the necessary measure for the provision of transparency. The requirement for submission of information concerning the policies pursued by banks and the level of transparency of actions is the base for an efficient regulation, too. The announcement of information is an efficient mechanism for observance of the market discipline, though very often marked with confidentiality and a particular sensibility in regard to the market dynamics. Therefore it has to be sufficiently analytical within the reasonable limits.
Many banks and interested persons has been utilizing for a long time the resources of the Internet, which in opinion of D. Zlateva (2003), besides being a “medium for realizing a direct contact with the customers”, can also serve for announcement and search for information concerning the activities results, that is subject to emission and analysis. The investors rely on the fact that the information about the bank, placed in the information environment, will be of high quality, accessibility, easy to be used, and something of a particular significance – trustworthy. Regretfully these expectations are not always justified. The evolution of information carriers – from the Web sites to the PDF-formats – makes the contents more and more accessible. The current use of the Internet resources is unfortunately contained in
reproduction of the electronic media on a paper carrier with the inherent limitations, which, no matter what their content is, do not meet the current wants of the interested persons – shareholders, investors and deposit holders.
The general criteria for the observance of the transparency requirements concerning the information announced by the bank institutions may be presented, as follows (See Table № 1):
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1. Quality of information |
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1.1.International accountant standards 1.2. External control system 1.3. Availability of Internal Control |
- Put in place; - Consolidated reporting; - External auditor reputation; - Availability of internal units Audit and Risk Management; - Presence of system-search line market and signed contracts. |
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2. Information content |
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2.1. Transparency structure ownership
2.2.Information on management
2.3. Dividend policy
2.4. Information about preparation
2.5. Analytical reports of management of the bank; |
-Information for shareholders PL and legal entities;ownership- Information for holders of control package of shares, -The degree of influence on the company and the relationships between them; - List of owners of packages of shares disclosed shareholdings] -Percentage of shareholding in the bank"s overall capital; - Information on the Treaty with members of the Management and Supervisory Board - Information on their salaries; - Content and pursued a strategy - Dividends paid in previous years] - Notification of the General Assembly Shareholders; - Provide discussion materials; - Information on the procedures for voting; - Analytical summaries of - Strategy Development Bank] - Strategy Development Bank; - Comments on the activities and major events during the past period; - Analysis of market and risks; - Forecasts and comments; |
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3. Timeliness of information |
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Disclosure of information;-Provision of information Shareholders; -Providing information to supervisors; -Timeliness of information WEB-site. |
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4. Accessibility statement |
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