Current Practices and Evolving Standards
Public disclosure practices of banks are typically governed by banking laws in some countries and by the listing requirements for publicly traded companies under the countries’ securities regulations and the applicable company laws. This type of disclosure of financial information on banks and other financial institutions helps to enforce prudential standards and to protect investors and creditors by promoting market discipline. Market discipline is an effective tool to limit excessive risk taking by banks, particularly in countries with a generous government safety net.19 Market discipline becomes even more fundamental because supervisory approaches are increasingly shifting from hard prudential limits toward a more risk-based supervisory review. In this framework, banks establish their own policies with respect to risk tolerance and risk management while supervisors validate those policies and procedures, supported by harnessing market forces to foster sound risk management policies. In support of enhanced market discipline, additional disclosure requirements are being introduced as one of the pillars (Pillar III) in the New Capital Accord (Basel II).20
The New Basel Capital Accord (Basel II) provides a new international standard on disclosure practices for banks, although elements of it are already covered in the IFRS, in the national listing requirements, and to some extent in Basel Core Principles (e. g., Core Principle 21). The Basel Core Principles, however, do not explicitly require disclosure of banks’ financial information.21 Nevertheless, disclosure practices consistent with the spirit of the principle should be taken into account in BCP assessment. For example, the New Zealand financial supervisory framework relies to a large extent on market discipline, with only a limited recourse to prudential limits and onsite inspections. Therefore, the effectiveness of mandatory disclosure requirements was considered and taken into account in the assessment of several core principles.22
The Basel Committee has issued several papers with guidelines for supervisors to enhance disclosure and has described best practices in disclosure of specific banks’ activities such as lending and derivatives.23 In addition, the BIS survey of disclosure practices by banks contains a detailed list of disclosures and provides a benchmark for comparing the practices of domestic banks in the different categories (e. g., disclosure of capital elements, asset quality, derivative activities). The benchmark provided is the level of disclosure in those areas by international banks.24 Given that the survey looks only at the type of items that are disclosed, conclusions with respect to the comprehensiveness of domestic banks’ practices—as compared with those of international banks—should be qualified to take into account the adequacy of the underlying accounting practices.25
Countries adopting risk-based supervision frameworks should considerably enhance the disclosure of banks’ risk exposures and risk management techniques in line with the new accord requirements. A detailed example of a rather comprehensive disclosure
requirement on banks’ risk exposures is the requirements imposed on bank holding companies by the U. S. Securities and Exchange Commission (SEC).26 The recommended disclosure templates of Pillar III (see section 10.5.2) are more detailed in several areas and more focused on specific types of risks, and they complement the SEC requirements. In addition, supervision could become more effective if national authorities disclose aggregate information on the level and trends in risk exposures of the system.27
