London, United Kingdom, 1 November 2012
As the need for better risk disclosures has been evident throughout the financial crisis, CFA Institute supports the recent Enhanced Disclosure Task Force (EDTF) report, which encourages large banks to improve communications around their key risks and makes recommendations which are both implementable by banks and useful to investors. The fundamental disclosure principles and enhanced risk disclosure recommendations were put forward in the EDTF report, Enhancing the Risk Disclosures of Banks (PDF), issued by the Financial Stability Board (FSB) on 29thOctober 2012.
The EDTF report articulates principles which aim to improve comparability and enhance the readability of risk disclosures, and at the same time enhance key areas of current information deficiencies within these disclosures. A CFA Institute study on risk disclosures published in 2011 (PDF) showed that while risk information was considered to be important by investors, sell-side, buy-side and credit rating analysts (users), they were dissatisfied with existing risk disclosures due to their low comparability and inconsistency across reporting entities. Users also indicated that risk disclosures often did not include key information and were difficult to understand.
Vincent Papa, CFA, Director of Financial Reporting Policy at CFA Institute commented: “As we proposed in our report on risk disclosures in 2011, what is crucial is for reporting entities to have a mindset of communication of risks rather than a ‘tick box’ compliance with mandatory requirements. We welcome the EDTF’s report emphasis on communication rather than compliance by reporting banks. If the EDTF recommendations are adopted, the quality of risk reporting within financial reports of banks will be strengthened.”
The EDTF recommendations are focused on key risk areas including: risk governance and business model; capital adequacy and risk weighted assets, credit; liquidity and funding; market risk and other risks. The recommendations touch on several areas of significant deficiencies including disclosures of encumbered assets, risk weighted assets and capital adequacy, and impairments of renegotiated loans.
Vincent Papa continued: “The fundamental disclosure principles and specific risk disclosure enhancements of the EDTF are highly relevant because they are heavily informed by the input of banking sector specialists and the development of the recommendations placed a significant emphasis on primarily ensuring that user information needs were being met. Investors will be well served if all major global banks adopt the enhanced risk disclosure recommendations contained within the EDTF report.’
About the EDTF
The EDTF is a private sector initiative, mandated by the FSB and which began its review of enhancing banking risk disclosures from May 2012. The EDTF comprised of senior representatives from banking institutions, audit firms, bank equity and fixed income investors from leading investment management houses, and different investor organisations including CFA Institute. The EDTF recommendations were developed with the task force members divided into work-streams across the key risk areas, and recommendations were developed over a couple of months based on: comprehensive review of existing disclosure practices amongst large global banks; identifying user information needs; and extensive review of other existing risk reporting related studies.
Furthermore, through four in-person meetings of task force members spread over five full days, there was an extensive process of validation of recommendations with a critical review and debate to ensure that all the recommendations put forward should be implementable by the banks and also useful to investors.
CFA Institute
CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an environment where investors’ interests come first, markets function at their best, and economies grow. CFA Institute has more than 113,000 members in 140 countries and territories, including 102,000 CFA charterholders, and 137 member societies. For more information, visit www.cfainstitute.org.