District Circular Letters
April 5, 2001
BANKING SUPERVISION AND REGULATION:
ENHANCEMENTS TO PUBLIC DISCLOSURE
To Bank Holding Companies
and Others Concerned,
in the Twelfth Federal Reserve District
Enhancements to Public Disclosure (SR
01-6 [SUP])
The Federal Reserve has long supported meaningful public disclosure by
banking and financial organizations with the objective of enhancing market
discipline and fostering stable financial markets.
Public disclosure and market discipline are important complements to
bank supervision and regulation. With sufficient information, market participants
can better evaluate counterparty risks and adjust the availability and
pricing of funds in ways that can promote more efficient financial markets
and sound practices by banks. In order to advance public disclosure efforts
and to strengthen market discipline regarding banking organizations, the
Federal Reserve has worked with other regulators, accounting authorities,
users of financial statements, and the banking industry.
Earlier this year, the private sector Working Group on Public Disclosure
issued a report recommending several enhancements to public disclosure
for large banking organizations and securities firms in the areas of credit
and market risk.1 The Working Group
agreed on some broad principles, including the observation that disclosures
should reflect information that is consistent with an organization's approach
to risk management. The group recommended that disclosures should explain
how risk within a firm changes over time and should evolve with innovations
in a firm's risk management practices. The group also suggested that disclosures
should balance quantitative and qualitative information and include clear
discussions about a firm's risk management processes.
In addition to these broad principles, the Working Group recommended
several specific practices that would enhance current disclosures. These
include quarterly disclosure of some market risk information now disclosed
annually and enhanced quarterly disclosures about credit concentrations
and credit quality. In particular, the Working Group recommended that
firms disclose the following:
- Aggregate high, average and low trading value-at-risk (VAR) over the
quarter
- High, average, and low trading VAR by major risk category (e.g., fixed
income, currency, commodity, and equity) over the quarter, including
diversification effects
- Quantification of how well market risk models performed (e.g., histogram
of daily trading revenues compared to average VAR over the quarter)
- Current credit exposures by internal rating, reflecting the effects
of netting, collateral, and other credit protection. Firms should provide
explanatory information on their ratings, including, if appropriate,
how they compare to external ratings. Recognizing that it might be inappropriate
or not feasible to include certain credit products in this disclosure
(e.g., debt securities in trading inventory), firms should make it clear
which products are included. Distinguishing between loan and other credit
exposures also would be helpful.
- Information about the maturity profile of transactions giving rise
to material current credit exposures.
- Insight into credit concentrations (e.g., industry sector and country
risk)
Private sector efforts, such as those of the Working Group, and official
regulatory initiatives can help to foster a consensus and advance thinking
on what constitutes sound or best practice regarding public disclosure.
The Federal Reserve believes that the types of disclosures recommended
by the Working Group, when properly executed, can enhance the transparency
of well-managed institutions. Accordingly, the Federal Reserve encourages
each large banking organization to use these recommendations as it seeks
to enhance its disclosures and convey more effectively information about
its risk profile. The Securities and Exchange Commission and the Office
of the Comptroller of the Currency are also encouraging large securities
firms and financial institutions involved in lending and trading activities
to consider the Working Group's recommendations as they develop enhanced
disclosures. Many of the enhanced disclosures are appropriate for quarterly
and annual financial reports, though firms also may want to consider other
forums (e.g., public websites) to disclose quantitative and qualitative
information outside of routine financial reports.
Large banking organizations are encouraged to balance the need for information
on a firm's risk profile and performance over time with disclosures that
will provide a basis for reasonable comparisons across firms involved
in similar activities. In this regard, large banking organizations are
encouraged to provide meaningful information based on their particular
risk management strategies and risk profiles, recognizing that, as risk
management practices evolve, opportunities will increase to provide additional
relevant information that is more comparable across firms.
The Federal Reserve will continue its dialogue on public disclosure with
other domestic and foreign regulators and the financial industry, and
is exploring additional ways of addressing disclosure issues and encouraging
sound disclosure practices in connection with the ongoing supervisory
process. In this regard, supervisors will consider the recommendations
of the Working Group in current efforts to improve public disclosures,
including the project to revise the Basel Capital Accord. Furthermore,
the Federal Reserve plans to issue additional guidance later this year
that addresses the role of the supervisory process in promoting sound
practices for qualitative and quantitative disclosures.
Additional Information
For additional information about enhancement to public disclosure, please
contact our Banking Supervision and Regulation Department, at (415)
974-2128.
FEDERAL RESERVE BANK OF SAN FRANCISCO
Notes:
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