Credit derivatives disclosure still lacking, says Basel Committee

The disclosure by banks related to their credit mitigation techniques is still lacking, according to a survey released today by the Basel Committee on Banking Supervision. The survey analysed public disclosure by banks in 2001 and found that, although the overall level of public disclosure by banks on items disclosure hit 63% compared with 59% in 2000, there was still scope for significant improvement.

The survey found that the best disclosures in 2001 were accounting and presentation policies (84%), interest rate and operational risk (84%) and capital structure (82%). Credit risk modelling (33%), credit derivatives and other credit enhancements (34%), remained the least well reported disclosures, though all three areas had, nonetheless, seen a large increase from the previous year's survey.

Overall qualitative reporting of derivatives information, excluding credit derivatives, remained fairly high, with 80% of banks discussing their objectives for the use of non-trading derivatives and how these are used to hedge risks. But quantitative information on derivatives use was less widely available. Apart from the gross positive (81%) and negative (70%) market values of derivatives that were disclosed, only 35% of banks disclosed the future potential exposures for derivatives, and 39% disclosed the notional amounts and average marked values for trading and non-trading portfolios. Qualitative information on the use of credit derivatives was disclosed by 51% of respondents, with 54% disclosing their notional amounts of these products. Only 30% of respondents listed a breakdown of the different types of credit derivatives products in their portfolios.

The most noteworthy improvement from the previous year was in the disclosure of information on ‘other risks’, such as operational, liquidity and interest rate risk, up from 65% in 2000 to 84%. The report also points to the enhanced transparency in the area of securitisation, which has grown alongside the general growth in the industry. But this still remains fairly limited compared with other activities, with only 45% of all banks reporting their securitisation activities, both quantitatively and qualitatively.

The report said banks should further enhance their transparency, particularly pointing to disclosure on the use of credit risk mitigation techniques, including credit derivatives. This is especially important, as disclosure in these areas will be qualifying criteria for the recognition or use of these techniques for capital relief under the new capital Accord, Basel II.

The survey, focusing on the annual reports of 54 banks, posed 104 questions addressing quantitative and qualitative disclosures on issues such as capital structure, capital adequacy, market risk modelling, credit risk modelling, securitisation and derivatives.