In a recent collaboration, the Federal Reserve Board, the Office of the Comptroller of the Currency (OCC) and the Securities and Exchange Commission (SEC) have joined forces to advocate improving public disclosure of risk. Following recent moves by regulators such as the Basel Committee for Banking Supervision and the FASB, the three agencies have established a private-sector working group in order to develop and present options on improving disclosure of financial information by banking and securities organizations.
The Working Group on Public Disclosure will be chaired by Walter Shipley, the recently retired chairman of Chase Manhattan Bank, and includes 12 other members from the financial community, as well as representatives from each of the agencies involved. The group is charged with developing options for improving disclosure, which in turn is aimed at improving transparency and the markets ability to evaluate risk exposure and risk management at financial firms. The group is expected to issue a report sometime in the fall detailing the industry practices on risk disclosure as well as its recommendations for enhancing that disclosure in the future.
"We have seen the problems associated with not disclosing," says Nawal Roy, a member of the executive committee of the Global Association of Risk Professionals (GARP). "This is a move toward getting banks to disclose their risk appetite and show how they're holding their risk so investors and stockholders have a better understanding."
Some possible outcomes from the Working Group could include a more standard method of accounting for risk at least in terms of disclosure purposes. "Right now one of the problems is that even the limited risk information that is made available isn't comparable. If you look at one firm's VaR of 12 and another's VaR of 12, you don't really know who has more risk because they could be counting very different ways," says Leslie Rahl, president of Capital Markets Risk Advisors, a financial advisory firm specializing in risk management. "I think it's definitely possible to set a more consistent measurement, say on quarterly reports to agree to use the same period of history or the same methodology."
She adds that while firms may continue to measure their risks in other ways as well, the consistent risk measurement could be used in addition, to address any disclosure requirements suggested by the Working Group. "I fully respect each institution's right and need to manage itself counting the way it is most comfortable, but that doesn't mean that from time to time they can't agree to count on a standard basis so that at least the counting is comparable," adds Rahl.
Another possible outcome, says GARP's Roy, "Overall, the fluctuation of their target risk and how they are performing, they might have to disclose that amount." He adds that while he does not believe disclosure guidelines will be widely accepted initially, a certain amount of incentive attached could push even those least likely to disclose in the right direction. Any recommendations resulting from the Working Group would be somewhat voluntary, but Rahl adds that "it depends on public pressure, peer pressure as well as regulatory pressure." In other words, if those pressures were exerted to a certain extent it may further the adoption of any disclosure recommendations.
Fed Governor Laurence Meyer, who has been an outspoken advocate on the increased disclosure of risks, has suggested several areas for improvement in speeches over the past few months. New disclosure areas suggested by Meyer and a recent report by the Fed include more data on asset values, internal credit ratings and adequacy of loan loss reserves, as well as regulatory rankings, daily trading results and the top-10 credit exposures.
While the outcome and adoption of any recommendations resulting from the Working Group remains to be seen, the Securities Industry Association (SIA) has issued a statement in support of the initiative saying, "We have long urged that regulators grant recognition to the use of modern risk management tools, and are glad that they are working together on this issue. We are hopeful that it may lead to the elimination of disparate regulatory requirements."