Public disclosures by banks: results of the 2000 disclosure survey

May 2002

Executive Summary

This report presents the results of a survey on public disclosures made by a sample of internationally active banks in 13 countries. The survey was conducted by the Basel Committee on Banking Supervision (the Committee) to promote market discipline in banking and capital markets. Taken together with a similar survey conducted a year earlier, the survey also is intended to identify trends in disclosure practices and to serve as a guide to the banking industry by indicating which disclosure practices are currently prevalent and where enhanced disclosures would be desirable.

The survey covers quantitative, strategic, and methodological information that should enable the market to better evaluate banking organizations. It includes questions on capital structure, capital adequacy, market risk internal modelling, internal and external credit ratings, credit risk modelling, securitisation activities, credit risk, credit derivatives, other derivatives, risk diversification, accounting and presentation policies, and other risks.

The results of the 2000 survey show that the most basic information relating to capital structure and ratios, accounting and presentation policies, credit risk, and market risk is well disclosed, with disclosure rates typically over 80% for these survey questions. Disclosure rates generally decrease, however, as the sophistication, complexity, or degree of proprietary of the information increases, with information about credit risk modelling, credit derivatives, and securitisation disclosed by fewer than half of the banks. These areas are of particular importance under the Committee's latest paper on public disclosures, entitled Working Paper on Pillar 3 - Market Discipline and released in September 2001. Thus, it appears that the banking industry is already meeting some of the working paper's proposed disclosure requirements, but there is room for improvement. Moreover, once these proposals are finalised, the Committee expects to see disclosures increase in anticipation of the New Accord coming into force.

Overall, there appears to be a modest increase in the frequency of disclosures as compared to 1999. The most notable increases involve questions on complex capital instruments, policies and procedures for setting credit risk allowances, securitisation, and operational and legal risks - although securitisation disclosures still are not very frequent. For a few survey questions, there appears to be some backsliding, with disclosures appearing less frequently in 2000 compared to 1999.

Other key findings are:

• Most banks continue to release fundamental quantitative data pertinent to their capital structure, as would be required under the Pillar 3 working paper. While they have been less forthcoming about their holdings of innovative and complex capital instruments, the rate of disclosure here has generally been improving.
• While the risk-based capital ratio was almost always disclosed, fewer than half of the banks provided information on the credit and market risks against which the capital serves as a buffer.
• Most banks appeared to make fairly extensive disclosures about their internal models for market risk. The main opportunity for future improvement involves the results of stress testing.
• Just over half of the banks described fully their process for assessing credit exposures, and only a few more provided summary information on the use of internal ratings. Fewer than half provided basic information about their credit risk models. These disclosure areas take increased importance under a proposed revision of the Basel Capital Accord, as disclosure of key information regarding the use of internal ratings will be necessary for banks to qualify for the internal ratings-based approach in the new Accord. In this regard, the large improvement in the disclosure of the internal risk rating process since the 1999 survey is encouraging.
• In the area of asset securitisation, less than one half of banks provided even the most basic disclosures of the amount and types of assets securitised and the associated accounting treatment.
• Most banks disclosed key quantitative information concerning credit risk, another area with required disclosures under the Pillar 3 working paper. Disclosures of provisioning policies and procedures are improving. About one half of the banks discussed the techniques they use to manage impaired assets. However, only a small number of banks disclosed the effect of their use of credit risk mitigants.
• Approximately three fourths of banks discussed their objectives for derivatives and their strategies for hedging risk. The proportion of banks making quantitative disclosures was lower, and trends here are mixed.
• Approximately two fifths of banks that use credit derivatives disclosed their strategy and objectives for the use of these instruments, as well as the amount outstanding. However, more detailed information was not often provided.
• While approximately four fifths of banks provided breakdowns of their trading activities by instrument type, somewhat fewer provided information about the diversification of their credit risks. Less than one half supplied a categorical breakdown of problem credits.
• There was a dramatic increase in the rate of disclosures of operational and legal risks since the 1999 survey, although the level is still not as high as that for the more basic market and credit risk information.
• As might be expected, basic accounting policies and practices were generally well disclosed.