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 the risk disclosures of banks and to establish a benchmark by which banks can judge the quality of their current and future disclosures.
The task force, which was formed in May 2012 at the initiative of the FSB, established six work streams reflecting banks' primary risk areas, which includes; risk governance and risk management strategies/business model, capital adequacy and risk-weighted assets, liquidity and funding, market risk, credit risk, and other risks.
The seven fundamental principles for enhanced risk disclosures identified in the report are:
- Disclosures should be clear, balanced and understandable
Disclosures should be comprehensive and include all of the bank's key activities and risks.
Disclosures should present relevant information
Disclosures should reflect how the bank manages its risks
Disclosures should be consistent over time
Disclosures should be comparable among banks
Disclosures should be provided on a timely basis.
The report expands on each of the principles through the use of guidelines and examples of how it should be met. It 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 EDTF believes many of the recommendations can be adopted in 2012 or 2013, particularly where existing disclosures simply need 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.
Mark Rhys, Deloitte financial services partner and member of the EDTF said: 'Confidence in financial services is a vital component in the recovery of economies across the world. The EDTF's recommendations should make it easier for investors and analysts to understand the risks a bank has, and help to restore trust in the industry. The EDTF's collaborative approach, involving banks, investors and auditors, has resulted in recommendations for banks' risk disclosures that are practical to deliver.'
