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Market Risk Disclosure in Banks’ Balance Sheets and the Pillar 3 Report: The Case of Italian Banks

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Contemporary Issues in Banking

Abstract

Market risk has taken on growing importance in banking in recent years. Risk disclosure has strategic importance for the efficiency of financial markets and overall financial stability. It plays a pivotal role in strengthening market discipline and building trust in stakeholder relationships.

The aim of this chapter is to investigate market risk disclosure in banking. The author employs content analysis to conduct an empirical study on a sample of the ten largest Italian banks. The study provides evidence that banks differ in their market risk reporting, even though they are subject to similar regulatory requirements and accounting standards. It also shows that there is room to improve various aspects of risk disclosure and provides some useful insights for further research.

The structure of this chapter is as follows. Section 1 introduces market risk disclosure in banking. Section 2 provides the theoretical foundations of risk disclosure. Section 3 analyses the specific nature of market risk and provides a regulatory and accounting perspective. Section 4 presents a hybrid scoring model based on analytical grids of risk disclosure parameters to assess market risk disclosure. Section 5 analyses and discusses the main research findings, as well as the potential implications, while Sect. 6 presents the conclusions drawn.

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Notes

  1. 1.

    This pillar requires banks to prepare a Pillar 3 disclosure report. It gives banks the possibility to disclose a wide range of information on market risk, from both a quantitative and a qualitative point of view. Compared to the past, the new financial regulation requires banks to meet further disclosure standards, but this might not be sufficient to achieve the objective for which the greater disclosure has been requested, that is, the drive for an effective market discipline.

  2. 2.

    The most significant revisions, with respect to the previous Pillar 3 disclosure requirements, relate to the use of templates for quantitative disclosure accompanied by definitions, some of which have a fixed format. The Basel Committee on Banking Supervision expanded risk disclosure requirements in order to promote consistency of reporting and comparability across banks and enhance market discipline. These requirements may increase the transparency of the information available to market participants and thus market discipline.

  3. 3.

    These studies usually aim to evaluate the level of user satisfaction of the bank’s risk disclosure and are based on users’ perspectives on the usefulness of risk disclosure, employing interview and survey techniques.

  4. 4.

    Goldstein and Sapra (2014) show that disclosure of banks’ stress test results to the market has both advantages and drawbacks.

  5. 5.

    It should be noted that International Accounting Standards Board (IASB) published the Practice Statement Management Commentary in 2010 to assist management in presenting a useful Management Commentary that relates to financial statements that have been prepared in accordance with International Financial Reporting Standards (IFRS). This framework is not an IFRS. Consequently, banks applying IFRS are not required to comply with the Practice Statement.

  6. 6.

    See Beretta and Bozzolan (2004, 2008) for a discussion of the idea that the amount of disclosure is a sound proxy for the quality of disclosure.

  7. 7.

    It is worth noting that IFRS 9 (Financial Instruments), which is to come into effect in January 2018, will enhance derivative disclosure with better information about risk management , derivative instruments and hedging strategies, and the effect of hedging activities on financial statements. It will enable banks to better reflect derivative instruments and strategies in their financial statements, with enhanced disclosures about risk management activity.

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Authors and Affiliations

  1. Department of Economics, Business, and Statistics, University of Palermo, Palermo, Italy

    Enzo Scannella

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  1. Enzo Scannella
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Correspondence to Enzo Scannella .

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  1. Facultad de Económicas, University of Cantabria, Santander, Spain

    Myriam García-Olalla

  2. Facultad de Económicas, University of Cantabria, Santander, Spain

    Judith Clifton

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Scannella, E. (2018). Market Risk Disclosure in Banks’ Balance Sheets and the Pillar 3 Report: The Case of Italian Banks. In: García-Olalla, M., Clifton, J. (eds) Contemporary Issues in Banking. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-90294-4_4

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  • DOI: https://doi.org/10.1007/978-3-319-90294-4_4

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