Market risk is the oldest part of Basel II, being substantially
unchanged from the 1996 (1998 implemented) market risk amendment to the
original Basel I Accord. As such, the “Big 4” have all been using these
methodologies for about a decade. All that really changed with Basel II
was the addition of Pillar 3 – these disclosures. As such, you would
expect that these should be the clearest disclosures as the underlying
systems and processes are very well understood.
Over the last year, though, this area has probably undergone the most change, both globally and in Australia due to the market turmoil. The VaR numbers have probably moved enormously, particularly over the last few months as some of the extreme movements have come through to the modelling.
That makes the disclosures of great interest – the only real problem is that they are effectively two months out of date when they come out – except in the case of the Commonwealth, where they were five months out of date.
These range from the almost insultingly short (that’s you, Westpac) to the sorts of disclosures that probably come close to best practice (thanks – CBA again). The CBA diagrams could be used as slides in a presentation and the text used to read out at that presentation. They are that good.
In reverse qualitative order, then:
Westpac has kept them as short as is humanly possible while still maintaining compliance with APS 330, provided you use a generous interpretation of what “describe” means. For example, I do not see this desciption of backtesting as in the spirit of comprehensive disclosure:
Daily backtesting of VaR results is performed to ensure that model integrity is maintained. A review of both the potential profit and loss outcomes is also undertaken to monitor any skew created by the historical data.
That’s it – the entire description of their backtesting regime. The descriptions of stress testing and everything else are equally short. If you are looking for which disclosures to use as an example of best practice under Pillar 3, well, you would not use these unless you are attempting to work out how minimal your compliance needs to be. If you want to know how Westpac actually goes about managing these risks then using these disclosures will not be an appropriate place to start.
Score – 1 out of 5 as it does comply with the standards. Sort of.
The ANZ is slightly better than Westpac – but still on the marginal side of good – with just a brief description of internal processes and a little bit better description of things like backtesting. At least they are using some hard numbers for what a backtesting exception is, even if they give no examples. Westpac at least beats them here – but only with a diagram that really tells you very little. Again, do not use these to find out what the ANZ is up to or how it really manages its risks.
2 out of 5.
The NAB is appreciably better in all areas than either the ANZ or Westpac, with some real disclosures of how they manage the market risk processes. The chart of backtesting results, with actual dates on it, represents a form of disclosure that gives me some confidence that they are actually managing the risks. Given the problems that the NAB have experienced in this area over the last few years, I am happy to see this. Their stress testing description, for example, while not exactly adding to the published literature is actually usable.
3 out of 5.
The guernsey for the best disclosures go to the Commonwealth (again). The diagram on the first page of those disclosures, by itself, beats anything that either Westpac or the ANZ has put out. Read on and it just gets better. For example, not only have they put in a table giving each and every day over the period where backtesting exceptions occurred, but they have added the hypo loss and VaR numbers for each of those days. They have also named the functions responsible for each of the areas of risk and have added their reporting lines and some of the delegations.
4.5 out of 5 – but only because I like to leave some room for improvement.
The important numbers here are the VaR numbers – but these cannot be directly compared as each of the banks has their own, differing, portions of their portfolio covered by the Standardised method – i.e. they are not included in the published VaR numbers, even if they are modelled internally using VaR. The other problem is that CBA’s numbers are as at 30 June and the others are as at 31 September. Given the increased volatility over those three months, the CBA numbers would have increased.
With those caveats, though, the capital numbers1 in both alphabetical and size order are:
- ANZ: $175m Standardised and $34m IMA
- CBA: $225m Standardised and $135m IMA
- NAB: $274m Standardised and $133m IMA
- WBC: $291m Standardised and $234m IMA
While fairly small in the context of each of the banks, these numbers are intersting in themselves, with WBC being by far the largest and the ANZ the smallest. Given that, it is doubly disappointing that WBC chooses to say the least.
1. They are buried in differing ways in each of the disclosures, but this is my calculation from the published numbers