Better disclosure would aid bank comparisons, raise trust: EDTF

Among other things, it calls for: banks to describe and discuss their top and emerging risks on a timely basis; disclose key regulatory ratios, such as liquidity coverage and leverage ratios; provide stress testing disclosures; report detailed capital ratios; provide granular information to explain how risk-weighted assets relate to business activities and related risks; tabulate credit risk in the banking book; and, disclose further qualitative and quantitative breakdowns of significant trading and non-trading market risk factors. It also calls for discussion of other risks, such as operational, reputational, fraud, and legal risk, and any publicly known risk events.

“High-quality risk disclosures should be viewed as a collective public good given the systemic importance of banks and the contingent liability they represent for taxpayers. Poor quality disclosures can result in higher uncertainty premiums, and this can undermine the extension of credit needed to support employment and productive investments in struggling economies, and affect its price,” it says.

The report identifies seven fundamental principles for enhancing risk disclosure. And, it says its recommendations should enable investors to better understand: a bank’s business models; its liquidity position and sources of funding; the calculation of risk-weighted assets and the drivers of changes in both assets and regulatory capital; the relationship between a bank’s market risk measures and its balance sheet; and, the nature and extent of a bank’s loan forbearance and modification practices and howthey may affect the reported level of impaired or non-performing loans.

The task force says that its recommendations are aimed at large international banks, but that they are equally applicable to banks that actively access the major public equity or debt markets. It also says that many of the recommendations may be adopted in2012 or 2013, however some will take longer to develop and implement.

“We believe that the adoption of the recommendations in this report can make a significant and enduring contribution to restoring investors’ confidence and trust in the risk disclosures of banks. However, the ultimate success of this report will be judged on the willingness of large international banks to enhance their risk disclosures proactively by implementing our recommendations,” it says.

The Financial Stability Board (FSB) — which called for the task force — welcomed the report, and encouraged banks to continue to strive to improve risk disclosures.

The report notes that while international regulators and standard setters, among others, have made efforts to improve banks’ risk disclosures, its report is different “because it is the product of a unique collaboration between users and preparers of financial reports”, including asset management firms, investors and analysts, global banks, credit rating agencies and external auditors.