Best Practices for Credit Risk Disclosure
A discussion paper by the Basel Committee on Banking Supervision
Executive Summary: This paper provides guidance on best practices for public disclosure of credit risk in banking institutions. The objective is to encourage banks to provide market participants and the public with the information they need to make meaningful assessments of a bank's credit risk profile. Transparency in this area is particularly important since weak credit risk management practices and poor credit quality continue to be a dominant cause of bank failures and banking crises worldwide.
The issuance of this paper is a component of the Basel Committee's ongoing efforts to promote adequate transparency and effective market discipline. As discussed in its report on Enhancing Bank Transparency, well-informed investors, depositors, creditors and other bank counterparties can provide a bank with strong incentives to maintain sound risk management systems and internal controls and to conduct its business in a manner that is both prudent and consistent with stated business objectives. Also, transparency strengthens confidence in the banking system by reducing the uncertainty in the assessment of banks. Therefore, the Basel Committee considers the transparency of banks' activities and the risks inherent in those activities to be a key element of an effectively supervised, safe and sound banking system. The Basel Committee coordinates its efforts with the work undertaken in other groups to address the need for transparency of financial institutions' activities and risks, including the work being carried out by the Committee on the Global Financial System.
The best practices guidance discussed in this paper forms an integral part of the Basel Committee's work to provide comprehensive guidance addressing the credit risk in banking activities. In parallel with this paper, the Committee is presenting a report with sound practices guidance on credit risk management in banks. Also, the Basel Committee has issued a paper with sound practices guidance for loan accounting and disclosure. The best practices guidance in this paper complements the recommendations in the loan accounting paper in that it focuses on credit risk not only in lending activities, but also in all other types of banking activities, including trading, investments, liquidity / funding management and asset management. The table annexed to this paper compares the credit risk disclosure guidance in this paper with that of the loan accounting paper.
The best practices guidance contained in this paper is based on the current disclosure practices in various countries and on the information needs of market analysts and other information users. The Committee undertook fact-finding surveys, including interviews with a wide range of information users and surveys of actual disclosure practices, to identify gaps in current credit risk disclosure practices and form the basis for the recommendations contained in this paper. The guidance encompasses five broad areas of information critical to an assessment of a bank's credit risk profile: accounting policies and practices; credit risk management; credit exposures; credit quality; and earnings.
The Basel Committee recognises that each bank's specific disclosures will vary in scope and content according to its level and type of activities. Therefore, it may not be necessary for a bank to provide all the disclosures discussed in the paper, if particular information is not material for an external assessment of the bank. Nevertheless, all banks are expected to provide sufficient, timely, and detailed information that allows market participants to make meaningful assessments of the bank's credit risk profile.
Apart from providing best practices for credit risk disclosure, the paper also discusses related supervisory information needs and the types of information supervisors collect on credit risk.
This paper was originally published for consultation in July 1999. The Committee is grateful to the numerous central banks, supervisory authorities, banking associations, institutions and academics that provided comments. These comments provided helpful suggestions for improvements to this final version of the paper.
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