Undisclosed Reserves

Banks in several jurisdictions are allowed to build undisclosed or hidden reserves as risk provisions and as earnings not included as retained earnings in the calculation of disclosed reserves. Banks can use hidden reserves as earnings management tools, releasing them year-to-year to smooth earnings volatility, to avoid reporting losses or to meet peer group comparisons. Undisclosed reserves are included in internal assessments but, as the name suggests, are not disclosed or are hidden from public disclosure. Because they represent funds created out of earnings that go through the same level of regulatory scrutiny as disclosed reserves and are able to absorb losses, unencumbered hidden reserves can nominally count as supplementary Tier 2 capital if supervisors permit. Many supervisors disallow them owing to lack of transparency.