Operational Risk Disclosure in Financial Services Firms

Although there have been substantial developments in financial reporting over recent years, the reporting of risk in statutory reports is still very much evolving. This comes as no surprise, given numerous definitions and subsequent measures of risk. In the financial services sector, the industry standard for risk disclosure is value at risk (VaR), but this applies only to a relatively small proportion of financial service sector risk-this being market risk in trading activities. Although operational risk has been at the core of the collapse of a number of financial services firms over recent years, there are no formal reporting standards for operational risk. Further, the Basel Committee's requirements on operational risk disclosures are qualitative. This chapter examines the structure, form, consistency, and usefulness of risk disclosures by international banks, with a primary focus on operational risk disclosures. The information uses a large sample of international banking institutions. We find that the quantity and quality of operational risk disclosures vary significantly across institutions. The disclosures are predominantly descriptive and, in their current form, of little use to users of financial statements for the assessment and comparison of risk across institutions.