A report on enhancing bank risk disclosures. Their objectives are sensible, and seven fundamental principles are suggested:
- 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.
It sounds elementary – of course you would want that – but it is a measure of how far banks’ disclosures fail to meet the standard of `what a reasonable person trying to understand the firm would ask’ that I cannot think of a single large bank today that meets that requirement. There is a lot of information in annual reports and Basel pillar 3 documents, but there is a lot that is missing too. These recommendations are a very good step towards filling in the gaps.
Banks will of course push back on this. The last thing that most of them want is to provide information that facilitates users’ understanding of the bank’s credit risk profile, including any significant credit risk concentrations’. That is short-sighted: investors would trust banks more if they could understand them. The reason that many trade below book is their opacity, and enhanced disclosure is the only solution to that.