29 October 2012

FSB welcomed EDTF report, 'Enhancing the Risk Disclosures of Banks'

The EDTF’s principles and recommendations for improved bank risk disclosures and leading disclosure practices are designed to provide timely information useful to investors and other users, which together with current regulatory developments and standard-setter recommendations can contribute, over time, to improved market confidence in financial institutions.

The EDTF's report identifies seven fundamental principles for enhancing the risk disclosures of banks. These principles provide a firm foundation for developing high-quality, transparent disclosures that clearly communicate banks’ business models and the key risks that arise from them. As well as underpinning the recommendations in the report, the EDTF believes that the principles provide an enduring framework for future work on risk disclosures and a benchmark by which banks can judge the quality of their current and future disclosures.

The seven fundamental principles for enhanced risk disclosures 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.

The recommendations in the EDTF's report arise from the collaborative efforts of the diverse EDTF membership and are the result of significant discussion, deliberation and debate. EDTF's recommendations are not meant to suggest that current disclosure requirements are inadequate or that banks are not applying such requirements properly. Rather, they enhance existing requirements to meet users’ needs better. While the recommendations cover all areas of risk, the EDTF highlights those areas where users have expressed particular concern and where enhanced risk disclosures could be especially helpful. Specifically, recommendations should enable users to better understand the following key areas:

• a bank’s business models, the key risks that arise from them and how those risks are measured;
• a bank’s liquidity position, its sources of funding and the extent to which its assets are not available for potential funding needs;
• the calculation of a bank’s risk-weighted assets (RWAs) and the drivers of changes in both RWAs and the bank’s regulatory capital;
• the relationship between a bank’s market risk measures and its balance sheet, as well as risks that may be outside those measures; and
• the nature and extent of a bank’s loan forbearance and modification practices and how they may affect the reported level of impaired or non-performing loans.

The EDTF also highlights a number of examples of leading or best practice disclosures to assist banks in adopting the recommendations in this report, and provides illustrations of particular instances where investors have suggested that consistency of presentation would improve their understanding of the disclosed information and facilitate comparability among banks.

The fundamental principles are applicable to all banks. However, the EDTF has developed the recommendations for enhanced risk disclosures with large international banks in mind, although they should be equally applicable to banks that actively access the major public equity or debt markets. The EDTF believes that many of the recommendations may be adopted in 2012 or 2013. However, some recommendations, especially those affected by the timing of regulatory pronouncements, will take longer to develop and implement so the EDTF envisages enhancements to risk disclosures continuing after 2013. The EDTF would expect that smaller banks and the subsidiaries of listed banks will adopt only those aspects of the recommendations that are relevant to them.

The EDTF believes 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 the EDTF´s recommendations.

Press release

Report

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