Public disclosures by banks: results of the 1999 disclosure survey
This survey is a component of the Basel Committee on Banking Supervision's (the Committee) ongoing efforts to promote effective market discipline in banking and capital markets through improved public disclosures. In general, the Committee encourages banks to publicly disclose both quantitative and qualitative information that will allow bank counterparties and other financial market participants to make informed decisions regarding banks' risk management practices and financial strength. More specifically, the Committee is proposing that market discipline should be enhanced in the context of the New Basel Capital Accord. The Committee believes that a regime of enhanced disclosure relating to key elements of the New Basel Capital Accord - capital, risk exposure and assessment and capital adequacy - will assist participants in effecting discipline in the capital markets. This framework of disclosure is proposed as the third pillar of the New Basel Capital Accord, along with minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2). In January 2001, the Committee issued a Second Consultative Package on the New Basel Capital Accord. The consultation period lasts until 31st May 2001.
Over the past several years, the Committee's Transparency Group has conducted surveys of the public disclosure practices of internationally active banks headquartered in its member countries. The Committee's intention with this survey of 1999 disclosure practices is twofold: first, it gives an impression of the current scope of disclosure practice for comparison with the Committee's disclosure proposals in the New Basel Capital Accord. Second, it will serve as a guide to the banking industry and standard setters by indicating the areas in which disclosure is relatively prevalent or lacking.
The areas covered by the survey of 1999 disclosure practices generally coincide with those identified in the proposed third pillar of the New Basel Capital Accord. To achieve this the survey was streamlined in some areas compared to previous years, and expanded in others to give a broader picture of the totality of relevant disclosure. The survey reviewed the disclosure of both quantitative information and the qualitative strategic and methodological disclosures that should enable the market to better evaluate the banking organisation. As in previous years, the survey was conducted by national supervisory authorities that, based on public reports, assessed the extent of disclosure by banks in their jurisdiction. The Committee will continue monitoring disclosure practices in the light of the requirements and recommendations in the New Basel Capital Accord. This will help encourage their implementation.
The areas surveyed include:
- Capital Structure; disclosures that provide a view of the bank's level and composition of capital and the use of any hybrid capital instruments.
- Capital Adequacy; disclosures that detail the bank's assessment of capital needs relative to its risks and business lines.
- Market Risk Internal Modelling; disclosure of the type of market risk models used (e.g. VAR), the model's parameters, the bank's policies and procedures for back testing and the disclosure of results from stress or scenario shock testing.
- Internal and External Ratings; disclosures that provide insight on the bank's use of internal and external ratings in the bank's internal capital allocation process.
- Credit Risk Modelling; disclosures regarding the type, methodology and validity of credit risk models employed.
- Securitisation Activities; disclosures regarding the types of assets securitised, the bank's strategy and objectives, recourse provisions and accounting treatment.
- Credit Risk Allowances; disclosures that assess the adequacy of allowances and help make informed conclusions on the bank's credit risk exposure.
- Credit Derivatives and other Credit Enhancements; disclosures regarding the use of derivatives and other enhancements to mitigate, buy or sell credit risk.
- Derivatives; disclosures regarding the bank's strategy, business objectives, exposures and hedging uses of derivatives other than specific credit risk derivatives.
- Geographic and Business Line Diversification; disclosures that reveal the nature and extent of any concentration in risk exposures.
- Accounting Policies; a key area of disclosure that spans various activities.
- All Other Risks; disclosures regarding litigation, operational and liquidity risks.