Peering Behind the Curtain of Banks’ Employee Benefit Plan Obligations

In assessing banks’ credit risk, the financial reporting for pension plans and other post-retirement benefit obligations has not traditionally featured on a short-list of things to be concerned about. Although the monitoring of such plans has been an integral part in the analysis of corporate issuer’s, banks’ obligations in this area typically have not had such close scrutiny. However, the financial crisis has created an environment that highlights the impact that these plans can have on a bank’s Equity and Net Income, after the smoothing effects of unrecognized actuarial gains and losses are peeled back. The results are very significant in some cases. In this Special Comment, we review a sample of 14 banks from across the world to indicate the significant anomalies that exist in how accounting standards permit these benefit plans to be reported. The results illustrate why we are proposing to introduce a global standard adjustment to ensure increased comparability amongst banks that have these plans, and to apply principles that we believe better reflect their true economic condition. Our implementation of this proposed adjustment – together with the other adjustments - would not have an immediate impact on ratings. However, via formalizing our methodology for interpreting these plans, their impact on banks’ capital and financial results would be more transparent than in the past.