Inconsistent bank regulation spells trouble for investors

Posted on April 24, 2023 by Editor

XBRL US CEO Campbell Pryde took a deep dive into bank regulation in the wake of the recent Silicon Valley Bank failure. He points out that XBRL data could have easily helped predict the crisis, as financial statements demonstrated the fragility of SVB’s finances. However, regulatory loopholes and fragmentation elsewhere are allowing banks to avoid SEC oversight and disclosures, reducing market efficiency, and leading to increased workload for investors. Campbell highlights the new Financial Data Transparency Act (FDTA) – which also makes an appearance elsewhere in this newsletter – as an opportunity to address regulatory fragmentation and improve reporting efficiencies:

The failure of Silicon Valley Bank (SVB) was not a surprise to regulators or investors who took the time to check the bank’s financial statements and footnotes. By March of 2021, unrealized debt securities losses for the bank had already begun to climb, reaching ($1,343) million by year-end December 2021, and leaping to ($15,160) million a year later, and all the while the bank’s stockholders’ equity remained flat.

SVB, like most public companies, submits financial statements to the Securities and Exchange Commission (SEC) in machine-readable (XBRL) format. Unrealized debt securities losses and stockholders’ equity were easily available in their financials and footnotes. In fact, they were prepared in structured, machine-readable (XBRL) format and thus could be extracted for analysis from the statements within seconds. SVB losses were an obvious red flag and had been for two years.

While with Silicon Valley Bank, the facts were in plain sight, other banks may be leveraging regulatory loopholes to skirt around disclosure requirements. That could spell more trouble ahead for the banking system….” {Ed — Of course, we agree with Campbell, but would point out that sophisticated investors in the US should be well aware of the “forced” transparency in the FFIEC data, which fills many of these data gaps. Other markets should take note.}

Keep reading on the XBRL US website.

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