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Enhancing the risk disclosure of banks

30 Oct 2012

The Enhanced Disclosure Task Force (EDTF) has presented a report to the Financial Stability Board (FSB) recommending key enhancements to the risk disclosures made by banks. The report identifies seven fundamental principles for enhancing risk disclosure which underpin the recommendations made and are considered to provide a framework for future work on risk disclosures and a benchmark by which banks can judge the quality of their current and future disclosures.

The EDTF was formed in May 2012 at the initiative of the FSB and had wide geographic representation with participants from asset management firms, investors and analysts, global banks, credit rating agencies and external auditors.  The task force also liaised with regulators and standard setters in undertaking its work.

The task force established six work streams reflecting banks’ primary risk areas, being: risk governance and risk management strategies/business model, capital adequacy and risk-weighted assets, liquidity and funding, market risk,  credit risk, and other risks.  Each work stream analysed current disclosures in its risk area by reviewing a sample of banks’ recent annual and interim reports, 'Pillar 3' reports (under Basel) and other publicly available information,  such as media releases and presentations to investors, and developed recommendations for enhancing disclosures for that risk area.  The recommendations from each work stream were then analysed by the task force as a whole and discussed with various international and other bodies.

The seven fundamental principles for enhanced risk disclosures identified in the report are:

  1. Disclosures should be clear, balanced and understandable
  2. Disclosures should be comprehensive and include all of the bank’s key activities and risks.
  3. Disclosures should present relevant information
  4. Disclosures should reflect how the bank manages its risks
  5. Disclosures should be consistent over time
  6. Disclosures should be comparable among banks
  7. Disclosures should be provided on a timely basis.

Each of the principles is further elucidated through the use of guidelines and examples of how it should be met.  The report then outlines 32 specific recommendations for enhancing risk disclosures based on the application of the principles, providing general recommendations and those for each of the work streams. These recommendations include both broad objectives, such as presenting all risk information in one place and providing narrative discussion about the nature of risks, and detailed specific requirements such as flow statements of each tier of regulatory capital and risk-weighted assets and a tabulated summary of credit risk in the banking book.

The report is agnostic on where the disclosures should be made, noting "banks should retain flexibility in what  they choose to disclose in their annual reports and other filings".  Reference is made to existing requirements, which in the case of IFRS, include IFRS 7 Financial Instruments: Disclosures and IFRS 13 Fair Value Measurement.

The report notes that the EDTF believes that many of the recommendations can be adopted in 2012 or 2013, particularly where existing disclosure simply needs to be presented differently or where information is already available.  Other recommendations may require system changes or require regulatory change and may take longer to implement.

Click for press release (link to FSB website).  Deloitte participated in the EDTF and has endorsed the recommendations in the report.

On 2 November 2012, the IASB published a press release welcoming the report saying that it "complements our own efforts to enhance transparency and the usefulness and comparability of financial statements". The IASB has also announced that it will consider the EDTF recommendations as it develops new financial reporting disclosure principles in the conceptual framework project. Click for access to the press release on the IASB website.