Publication: Working Paper Series No. 105

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EBI is especially pleased to announce a contribution of Prof. Edgar Löw (Frankfurt School of Finance & Management – Accounting Department) and Michelle Elodie Schröder in the EBI Working Paper Series No. 105. Their paper entitled “Disclosure Quality on Covid-19 of European Banks in Half-Year and Year-End Financial Statements 2020” was published on 14 November 2021.

In March 2020, Covid-19 was declared a pandemic by the World Health Organization. Most European governments reacted with lockdowns. A drop in demand as well as supply disruptions affected the economy which also hit European banks with quite a lot of uncertainty, not only regarding possible future loan losses. Due to the experience of the last financial crisis in 2008 European regulatory bodies and standard setters (like ESMA, EBA, IOSCO or IASB) immediately communicated their expectations on disclosure regarding the pandemic’s impact in order to meet the objective of the IFRS to provide decision-useful information to stakeholders. The majority of these publications was released during the second quarter of 2020 and became available to the banks for the preparation of their half-year reports. As ESMA considers Covid-19 a significant event under IAS 34 a high level of disclosures is required in interim reports.

The aim of the following study is to examine the extent to which banks fulfilled the disclosure expectations communicated by the relevant professional institutions. For this purpose, a disclosure index approach will be applied to half-year reports and annual reports for the year 2020 from European banks. The selection of banks is based on the list of significant entities being directly supervised by the ECB. A totality of 86 annual reports and 67 interim reports are analysed. To a large extent, the sample appropriately reflects the European banking sector seen by the EBA.

48 disclosure items are derived to structure a disclosure index. A dichotomous approach is used to avoid a high degree of subjectivity. Items are grouped thematically, resulting in twelve categories. Therefrom, the category “credit risk”, forms with a total of 13 elements by far the largest category. Furthermore, for comparison reasons a weighted as well as an unweighted index are calculated for each report. Within the weighted index quantitative disclosure elements are being weighted more heavily than qualitative ones.

Seven hypotheses are tested with the following expectations. The disclosure quality in annual reports is higher than in half-year reports. Banks, which have published a half-year report 2020, fulfil the disclosure expectations in their annual reports 2020 to a higher degree. Larger banks provide more information on Covid-19 related topics. Listed banks meet disclosure expectations to a greater extent than unlisted banks. Profitable banks provide more information. The CET1 ratio is positively linked to the level of disclosure. Banks which are more heavily affected by the pandemic fulfil the disclosure requirements to a minor degree than other banks.

It is shown that less than 50 per cent of the expected disclosures of the respective authorities are fulfilled. Only parts of the credit risk disclosure satisfy and there is a lot of room for improvement for the next reporting period. Furthermore, the study provides a deep and detailed insight into the areas and the level of disclosure of European banks.

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