Financial stability and risk disclosure
Keynote address by Mr Jaime Caruana, General Manager of the BIS, to the FSB Roundtable on risk disclosure, Basel, 9 December 2011.
High-quality risk disclosure is good for markets, because it helps investors make more informed decisions. It is good for prudential supervisors, because it makes banks more accountable to both supervisors and investors. And it is good for financial stability, because it reduces the chance that unexpected events will disrupt the system. To be effective in promoting market discipline, disclosure must be complemented by strong incentives for counterparties to engage in monitoring. The public sector's role in ...view middle of the document...
Your discussions today are an essential part of making progress on this agenda. If we can achieve a significant improvement in the quality, comparability and timeliness of risk disclosures by financial firms, this will without a doubt help break the vicious cycles of contagion, asset sales and pullback from risk-taking that have paralysed markets repeatedly over the last few years.
The three pillars of Basel II continue to guide our efforts to strengthen financial regulation in the Basel III era and beyond. We've now accomplished a great deal on Pillar 1 - minimum capital requirements. The task now is to follow through on Pillar 2 by strengthening supervisory review, with a focus on firm-wide risk management and risk governance, and on Pillar 3 disclosures, by improving market discipline. And while Pillar 3 is a good step in the right direction, achieving our overall objective of stronger market discipline will require efforts that go beyond strictly regulatory approaches.
How do we promote market discipline? First, we need to make sure that the market has the information it needs. And a key element of market information is sound, consistently high-quality risk disclosures. That will be the subject of my remarks, and of course the theme of your discussions today. But I should also point out that market discipline only works when investors have the right incentives to use the information, and banks have the right incentives to take account of the signals sent by the market. For these incentives to be right, the perception of a public safety net for banks that are "too big to fail" needs to be eliminated. This points to the relevance of the work by the FSB and Basel Committee to reduce moral hazard by increasing loss absorbency, strengthening resolution procedures and enhancing supervisory intensity for systemically important banks. If we successfully follow through on this work, then investors will have stronger incentives to develop a comprehensive picture of the risks and exposures facing financial institutions, and the banks should face more pressure to be as accurate and transparent as possible about these exposures.
The FSB and the Basel Committee have long supported sound accounting and robust disclosure standards and practices. Examples include the risk disclosure template for structured credit products set out in the Financial Stability Forum's report to the G7 in April 2008, the Basel Committee's work on Pillar 3 disclosures, and the more recent work to encourage sound expected-loss provisioning rules and related disclosures.
Sound standards and practices enhance the quality of information available to investors, depositors and other market participants, as well as to prudential authorities and regulators - including about risk exposures, risk management practices and policies, governance, and capital measures and ratios. This can lead to greater transparency that can support market confidence, improve market discipline and...