1. Summary and recommendations
This report contains recommendations for improving the public disclosure practices of financial intermediaries. These recommendations are being put forward by a Multidisciplinary Working Group on Enhanced Disclosure (the Working Group), jointly sponsored by the Basel Committee on Banking Supervision (BCBS), the Committee on the Global Financial System of the G-10 central banks (CGFS), the International Association of Insurance Supervisors (IAIS), and the International Organisation of Securities Commissions (IOSCO), and are addressed to the Working Group’s sponsoring organisations for their consideration.
The Working Group’s recommendations for improving the state of disclosure practices fall into three categories. First, the Working Group recommends a specific set of disclosures that should be provided by financial intermediaries that incur a material level of the relevant financial risks, through periodic reports to their shareholders, creditors and counterparties. Second, the Working Group has identified other disclosures which could be informative but with respect to which further investigation is necessary of their costs and benefits or precisely how they should be made. These issues should be capable of resolution in the near term. Third, the Working Group identified certain areas where quantitative information would fill an important gap in disclosures, but for which further development of risk assessment concepts and methods are necessary before practical disclosures could be considered. The Group envisions that efforts in the last two categories would involve collaborative endeavors by the authorities across financial sectors along with private sector efforts as appropriate. Each set of recommendations is summarised below and described in the body of this report.
In response to growing interest in the international regulatory and central banking community in how market discipline can play an important role in maintaining financial market stability, the Working Group was established in June of 1999 to provide advice to its sponsoring organisations on steps that would advance the state of financial institutions’ disclosures of financial risks in order to enhance the role of market discipline. The Working Group conducted a pilot study in which forty-four private sector financial institutions, comprising a broad cross section of financial firms from nine countries, voluntarily provided confidential data from the second quarter of 2000 about a broad range of financial risks. The pilot study data served as a vehicle for the Working Group to establish a concrete and factual discussion with the participating firms about disclosure concepts, helping the Working Group to arrive at its conclusions. While the Working Group benefited immensely from the dialogue with the participating firms, and from the support of a number of other supervisory authorities, the conclusions and recommendations in this report are those of the Working Group alone.
The Working Group reached three broad conclusions about the challenge of improving financial disclosure practices which inform the Group’s specific recommendations.
First, in order for public disclosures to provide a more meaningful picture of the extent and nature of the financial risks a firm incurs, and of the efficacy of the firm’s risk management practices, it is necessary that there be a healthy balance between quantitative and qualitative disclosures. Disagreements do not occur about this principle but tend to focus on how this balance is achieved.
Second, disclosures should be consistent with firms’ own risk management practices. Where the Working Group has focused on specific elements of risk, firms should frame their disclosures regarding these elements in ways determined by the internal parameters and exposure categories that firms use to assess and manage their risks when meaningful comparability can not be achieved. While comparability is an important objective, it is recognised that this will not always be practicable.
Third, information about intraperiod exposures – particularly in the form of high, median and low observations – can provide a more meaningful view of a firm’s risk profile than period-end data alone. Much of current disclosures still rely on period-end information that permits window dressing of the information provided to creditors and investors. Continue reading