31 October 2014

European Commission assesses economic consequences of country-by-country reporting requirements set out in Capital Requirements Directive

The objective of the Commission's report is to assess whether CBCR leads to significant negative economic effects. The results of the econometric analysis suggest that improved disclosure quality can lead to a reduction in the cost of equity capital amongst other benefits.

The European Commission adopted a report containing a general assessment of the economic consequences of country-by-country reporting (CBCR) by banks and investment firms under CRD IV.

Vice-President Michel Barnier, responsible for Internal Market and Services, said: "Country-by-country reporting would allow stakeholders to gain a better understanding of the structures of financial groups, their activities and geographical presence and help to understand whether taxes are being paid where the actual business activity takes place. Mandatory country-by-country reporting is an important element of the corporate responsibility of institutions towards stakeholders and society and will help to restore trust in the banking sector. Today's report shows that the reporting obligations under CRD IV are not expected to have a significant negative economic impact, including on competitiveness, investment, credit availability or the stability of the financial system."

The report, which draws on the results of a public consultation, a round table and an external study, explains that stakeholders expect CBCR to have some positive impact on the transparency, accountability and public confidence in the European financial sector. Nevertheless, it is suggested that transparency would benefit from additional guidance to ensure consistent implementation in the Member States. Some stakeholders point to a number of positive effects such as:

• Investors will be able to make more informed investment decisions and be more able to hold banks to account
• CBCR will lead to better risk management by reporting institutions, thus reducing the risk of scandals and increasing stability in the financial sector

The results of the econometric analysis suggest that improved disclosure quality – which is a key objective of CBCR – would lead to a number of positive outcomes:

• Greater disclosure quality can lead to a reduction in the cost of equity capital which may be passed on to businesses and households in the form of lower lending rates and thus benefit credit availability and investment
• It can also lead to a reduction in the ability of reporting institutions to mask their true performance (earnings management)
• An increased accounting quality which could result in greater competitiveness and increased financial stability

Press release

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