* Initiative promises greater transparency on capital ratios
* 2012 annual reports to show first impact
* Review found big difference in banks' capital calculations
* Confusion on ratios curbing investor appetite for bankshares
By Laura Noonan
LONDON, Feb 3 (Reuters) - The game may soon be up for banksthat have made themselves look healthier by understating howrisky their businesses are, which should help pension funds,savers and companies to decide which institutions to invest in.
Bowing to pressure from regulators and investors, some ofthe world's biggest banks will soon implement a landmarkinitiative that promises to reveal far more detail on how bankscalculate how much capital they need to guard against potentialfuture losses.
It's designed to restore faith in the capital ratios thatare the global benchmark for banks' financial health, ratiosthat are highly sensitive to banks' risk judgments since they are determined as a percentage of banks' own measure of assetsas weighted by risk.
"We're expecting a lot of good disclosure from the banks,and where it's not happening we're expecting institutionalinvestors to challenge management on why they're not doing so,"said Russell Picot, chief accounting officer at bank HSBC and co-chair of the industry taskforce that came upwith the new standards for what banks should tell investors.
The initiative was instigated by global financial rulessetter the Financial Stability Board (FSB).
A study by the Basel Committee last week showed preciselywhy it is necessary, revealing that the most aggressive banksassign just one eighth of the risk weighting applied by theirmost conservative competitors, making their capital positionappear far more robust.
Deutsche Bank came under fire on Thursday when ittold investors that it managed a better-than-expectedimprovement to its capital ratio in the fourth quarter, despitelosing 2.5 billion euros ($3.4 billion), largely by changing itsapproach to risk-weighted assets (RWAs).
EXPERTS IN THE DARK
Even analysts who specialise in banks' finances are unableto unravel the figures and work out which banks are really thehealthiest or making the most progress, because of inadequatedisclosure.
The new measures, which have been publicly endorsed byindustry giants including HSBC, Deutsche Bank and Santander, will reveal key insights on the RWAs that feed intothe banks' capital calculations.
Newly available information will include how much of theirRWA improvements come from "optimisation", or model changes suchas Deutsche Bank revealed last week.
"There may be a bank that is neither well capitalised norliquid, and they may feel concerned that by publishing ingreater detail, it will become even more obvious," Picot said.
"The message for them has to be that the market is prettygood right now at understanding banks' shortcomings."
Some banks will show their hands in the 2012 annual reportsthey will publish in the coming weeks. Stragglers are expectedto follow suit later in the year as the transparency driveintensifies.
The capital disclosure measures are part of a broader suiteof reporting enhancements devised by a taskforce of the world'sbiggest banks, money managers, research houses and accountancyfirms to address concerns about banks' often opaque accounting.
The initiative Picot co-chaired began on a wintry day inBasel in December 2011, when 82 senior executives convened forwhat one attendee described as a "frank" round-table debate onhow banks could improve the way they report their results.
INVESTOR CONFIDENCE
The FSB, headed by the Bank of England's incoming GovernorMark Carney, wanted to restore investor confidence in banksrocked by the market turmoil that began in 2008 and has yet toabate.
"The FSB felt that certain risk information was needed byparticipants right now," said Gerald Edwards, a senior officialwith the U.S. Federal Reserve Board who was closely involvedwith the taskforce while on secondment to the FSB in 2011.
The taskforce executives, drawn from global leadersincluding BlackRock, BNP Paribas, Allianz, Ernst & Young, FitchRatings, JP Morgan, Royal Bank of Canada, Santander and KPMG,began work in earnest in May 2012 and were given until Octoberto finish.
Such was the intensity of the job that HSBC's Picot said hehad two of his bank's staff working on it full time and recallsgetting emails at midnight on a Sunday from one of thetaskforce's subgroups.
With the task completed in a fraction of the time formalregulation would have taken, the focus is now on implementation.
Picot said there was no set target for take-up, but heexpected to see some banks incorporate the new measures in their2012 annual reports.
"We would hope that in a particular country, a bank thatadopts this report and adopts it well will reset the level ofwhat is considered good disclosure, and that other banks wouldadopt similar practices, and from that, the tide would rise," headded.
Regulators across the globe, who had extensive engagementwith the taskforce, are also keenly following progress and willbe encouraging their banks to opt in, according to Picot andEdwards.
Those who don't, may end up having to give more informationanyway. "Some of this will be picked up and put intoregulations," said Edwards.
DOUBTS REMAIN
The effort does have its doubters, including DierkBrandenburg, banking analyst with Fidelity WorldwideInvestments.
"We remain sceptical that banks across a wide variety ofjurisdictions (Europe, U.S. and Asia) and accounting regimes ...are in a position to meet the requirements," he said, addingthat the increased links between governments and rescued bankscould "put a limit to what authorities may deem to be theappropriate level of disclosure to investors".
Crispin Southgate, a taskforce member and director ofInstitutional Investment Advisors, has high hopes for banks'voluntary adoption, nonetheless.
Banks were consulted and were "very responsive", he said.
"This report is setting a marker for some very highstandards, which we hope banks will reach for ... We don't wantbanks to wait for new rules."
HSBC Holdings (HSBA)