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Avram, Katherine J; Skully, Michael T --- "Risk reporting. Australian banks" [2007] MonashBusRw 32; (2007) 3(2) Monash Business Review 6

Risk reporting
Australian banks

Katherine J Avram, Michael T Skully

Operational risk (OR) is a key risk faced by banks, but traditionally it has not been a focus for markets or for regulators. Even defining OR has proved a challenge for both the industry and its regulators. The disclosure of key areas of risk is important for both market discipline and effective bank regulation. Financial industry estimates suggest that operational risk contributes approximately one quarter of total bank risk. OR has also been the source of substantial bank losses – a recent example occurred in 2004 when the National Australia Bank lost $360 million as a result of operational risk in its foreign exchange options trading area. This study of voluntary operational risk disclosure in Australian bank annual reports was undertaken between 1998 and 2003 during a period in which substantial regulatory change had been foreshadowed, but not yet formally implemented. The research offers the first empirical investigation of whether Australian banks have changed their level of OR disclosure.1

During the period of this study, the Basel Committee on Banking Supervision (BCBS) formulated a standard definition for OR and announced a new Basel Capital Accord (Basel 2) on OR disclosure and minimum capital requirements. Thus, banks had an incentive to reveal their level of operational risk as it would help prepare them for the formal requirements of Basel 2. There was also an incentive to show that formal requirements were unnecessary by implementing high levels of disclosure. Basel 2 is due to be implemented in Australia on 1 January 2008. Over the six years of the study, only 10 Australian banks afforded access to full annual reports. Trends in the quantity and quality of disclosure were examined. The absolute data was then tabulated and ratios calculated relative to the relevant total risk report.

The initial response of the Australian banking sector was to increase the quality of reporting on OR. But in the absence of a formal requirement, there has not been a significant increase in the quantity of reporting and not all banks specifically discussed OR in their annual reports over the study period. This is surprising given the regulatory environment. However, when the formal regulatory requirements are in place in January 2008, substantial change should be expected.

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Endnotes

1 Thanks to Mamiza Haq for her valuable research assistance.

Cite this article as

Avram, Katherine J; Skully, Michael T. 'Risk reporting'. Monash Business Review. 2007.; Monash University ePress: Victoria, Australia. http://www.epress.monash.edu.au/. : 6–7. DOI:10.2104/mbr07032

About the authors

Katherine J Avram

Katherine J. Avram is a Senior Lecturer in the Department of Accounting and Finance, Monash University.

Michael T Skully

Michael T. Skully is a Professor in the Department of Accounting and Finance, Monash University.


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