The review finds that FSB member jurisdictions have successfully prompted financial institutions to improve their disclosure of exposures to structured credit products. Most FSB members have also taken steps to implement enhanced Pillar 3 disclosures regarding securitisation.
The recent financial crisis highlighted the importance to market confidence of firms making clear disclosures of their exposures to risks. The Financial Stability Forum (predecessor to the FSB) recommended, in its report on Enhancing Market and Institutional Resilience published in April 2008, improvements in disclosures about structured credit products and certain other risk exposures that were of concern to market participants in 2008.
This FSB report reviews both financial institutions’ public disclosures of these risk exposures, as well as the actions undertaken by FSB member jurisdictions and the private sector participants to enhance disclosure practices.
More generally, standard-setting bodies have improved their disclosure requirements for financial institutions in these areas, in the wake of the financial crisis.
Although firms’ compliance with the FSF’s recommended risk disclosures has generally been good, the quality of public risk disclosures varies across institutions and jurisdictions, and there remains room for improvement. In particular there is room to improve disclosures on: 1) the descriptions of the use and objectives of special purpose entities (SPEs) used for securitisation; 2) off-balance sheet exposures of SPEs; 3) exposures both before and after hedging; and 4) the level of detail and granularity of the sensitivity analysis of securitisation exposures measured at fair value.
The level of external audit assurance provided on risk disclosures typically varies depending on whether the disclosures are made in financial statements, Pillar 3 reports, or management analyses in financial reports or websites, and practice varies on how that level of assurance is disclosed. The FSB recommends that the International Auditing and Assurance Standards Board review whether further guidance is needed in this area.
The FSB also recommends that banks improve their Pillar 3 disclosure practices, including better aligning the publication of their Pillar 3 disclosures with the publication date of financial reports. They should also enable users to compare these different types of disclosures better.
The report urges follow-through on the earlier FSF recommendation that the financial industry, investors and auditors work together to provide risk disclosures that are most relevant as market conditions evolve, by developing principles and identifying leading disclosure practices. Tiff Macklem, Chairman of the FSB’s Standing Committee on Standards Implementation, said that “the private and official sector should work together to develop principles for useful risk disclosures, and to develop leading practice disclosures”. He added that “the risk exposures of current interest to markets would include: 1) concessional loan restructurings, 2) exposures to sovereign debt and to other financial institutions, and 3) liquidity and funding positions”.
The FSB, drawing upon its members’ expertise, intends to evaluate emerging risks and vulnerabilities periodically, and make recommendations as needed to enhance risk disclosures by financial institutions. Efforts involving international standard-setting bodies and joint private sector initiatives will in many cases be the most appropriate manner to take those recommendations forward.
Mario Draghi, Chairman of the FSB, said “We welcome the swift actions taken by FSB members’ authorities in 2008 and 2009 to promote improved risk disclosures on structured credit exposures”. He added: “However, the peer review also identified areas where risk disclosures should be further improved. The FSB will organise a round-table later this year to encourage improvements in risk disclosures.”
© Financial Stability Board
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