Seal of the Board of Governors of the Federal Reserve System BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM

WASHINGTON, D. C.  20551
DIVISION OF BANKING
SUPERVISION AND REGULATION
SR 01-6 (SUP)
March 23, 2001

TO THE  OFFICER IN CHARGE OF SUPERVISION AND SUPERVISORY STAFF AT EACH FEDERAL RESERVE BANK AND TO EACH LARGE, DOMESTIC BANKING ORGANIZATION SUPERVISED BY THE FEDERAL RESERVE

SUBJECT:   Enhancements to Public Disclosure

                     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 observing 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:

  1. Aggregate high, average and low trading value-at-risk (VAR) over the quarter.
  2. High, average, and low trading VAR by major risk category (e.g., fixed income, currency, commodity, and equity) over the quarter, including diversification effects.
  3. Quantification of how well market risk models performed (e.g., histogram of daily trading revenues compared to average VAR over the quarter).
  4. 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.
  5. Information about the maturity profile of transactions giving rise to material current credit exposures.
  6. 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 efforts under way 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.

                     Reserve Banks are asked to distribute a copy of this SR letter to domestic financial and bank holding companies with consolidated total assets of $10 billion or more.  Given the increased efforts to foster enhanced transparency and market discipline at the international level, the Federal Reserve will share this guidance with supervisors of large foreign banks, as well as members of the Basel Committee on Banking Supervision.  Questions may be directed to Gerald Edwards, Associate Director and Chief Accountant - Supervision, at (202) 452-2741, Charles Holm, Assistant Director, at (202) 452-3502, or Gregory Eller, Project Manager, at (202) 452-5277.


Richard Spillenkothen
Director



Notes:

1.   In April 2000, the Federal Reserve established the Working Group on Public Disclosure with the participation of the Office of the Comptroller of the Currency and the Securities and Exchange Commission.  The Working Groupís members were senior executives from major domestic and foreign banking organizations and securities firms, and the group was chaired by Walter Shipley, retired chairman of Chase Manhattan Bank.  Its objective was to recommend improvements in public disclosure by large financial institutions.  This objective was fulfilled by setting forth a number of recommendations in a letter to the federal agencies, sent on January 11, 2001.  The report and the agencies' accompanying joint press release and response letter are available on the Federal Reserve Board's website at www.federalreserve.gov/boarddocs/press/general/2001.  Return to text


SR letters | 2001