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FSB Provides Bank Risk Disclosure Recommendations

by Ulrika Lomas,, Brussels

01 November 2012

The Enhanced Disclosure Task Force (EDTF), a private-sector task force formed at the initiative of the Financial Stability Board (FSB), has published a report containing its principles and recommendations for improving banks’ risk disclosures, and designed to provide timely information useful to investors and other users.

The FSB believes that the importance to market confidence of useful risk disclosure by financial institutions about their exposures and risk management practices has been underscored in recent years and, thus, the need for improvement in risk disclosure has been the subject of a number of FSB initiatives.

In 2008, disclosures were improved about structured credit products and certain other risk exposures that were of concern to market participants at that time, and, in March 2011, the FSB published a thematic peer review report of risk disclosure practices by financial institutions in FSB member jurisdictions.

Subsequently the FSB agreed to facilitate the formation of the EDTF to develop principles for enhanced disclosures, based on current market conditions and risks, including ways to enhance the comparability of disclosures, and also to identify leading practice risk disclosures presented in annual reports for end-year 2011.

Formed in May this year, the EDTF brought together, on a global basis, senior officials and experts from financial institutions, investors, and audit firms – to develop recommendations for enhancing risk disclosure practices by major banks starting with end-year 2012 annual risk disclosures, and continuing into 2013 and beyond.

The EDTF’s report identifies the fundamental principles for enhancing the disclosure by banks of governance and risk management strategies/business models, capital adequacy and risk-weighted assets (RWAs), liquidity and funding, and market and credit risks.

Those principles are designed to provide a firm foundation for developing high-quality, transparent disclosures that clearly communicate banks’ business models and the key risks that arise from them. It is also believed that the principles should 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.

In addition to a better understanding of a bank’s business models, the EDTF’s recommendations should help users understand, for example, a bank’s liquidity position, its sources of funding and the extent to which its assets are not available for potential funding needs; and the calculation of a bank’s RWAs, and the reasons for changes in both those assets and the bank’s regulatory capital.

The recommendations have been developed with large international banks in mind, although they should be equally applicable to banks that actively access the major public equity or debt markets. It is expected that smaller banks and the subsidiaries of listed banks will adopt only those aspects of the recommendations that are relevant to them.

The DDTF has also pointed out that, while it understands that the Basel Committee on Banking Supervision is reviewing its Pillar 3 disclosure requirements for banks and that other standard setting bodies are undertaking work related to the risk areas discussed in its report, it hopes that its report will inform their processes in a practical manner.

TAGS: compliance | business | law | banking | capital markets | standards

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