An empirical investigation into market risk disclosure: is there room to improve for Italian banks?

Published date23 March 2020
Date23 March 2020
AuthorSalvatore Polizzi,Enzo Scannella
Subject MatterAccounting & Finance,Financial risk/company failure,Financial compliance/regulation
An empirical investigation into
market risk disclosure: is there
room to improve for Italian banks?
Salvatore Polizzi and Enzo Scannella
Department of Economics, Business and Statistics, University of Palermo,
Palermo, Italy
Purpose This paper aims to examine the market risk disclosure practices of large Italian banks. The
contribution providesinsights on the way banks should provide information aboutmarket risk. The problem
related to the asymmetric information betweenbanks from one side, and investors and stakeholders on the
other, representsa crucial issue that requires further considerationsby scholars and regulators.
Design/methodology/approach This contribution adopts a mixed methodological approach to
analyse both qualitativeand quantitative proles of market risk disclosure in banking. This paper analyses
the most important documentsItalian banks are required to prepare for risk disclosure purposes, namely the
managementcommentary, the Basel Pillar 3 disclosure report and the notes.
Findings The results show thatbanks do not fully exploit the potentialities of managementcommentary
and Pillar 3 disclosure report. Various areas of information overlapping between the different nancial
reports worsenthe overall comprehensibility andrelevance of bank risk reporting.
Practical implications The reduction of the information overlapping,the careful choice of the location
of the information and more appropriate use of the management commentary to provide qualitative
informationabout market risk strategies represent crucial areas of improvementbanks and regulators should
take into account.
Originality/value Providing an in-depth analysis of the marketrisk disclosure practices of a sample of
large Italian banks,this paper detects the main drawbacks of theirmarket risk reporting and provides useful
recommendationsto improve it.
Keywords Financial regulation, Risk disclosure, Risk management, Market risk, Banking,
Banking regulation, Risk reporting
Paper type Research paper
1. Introduction
This paper investigates the marketrisk disclosure practices in the nancial reports of large
Italian banks, to detect their main drawbacks and possible areas of improvement. Market
risk is one of the most important risks in the banking industry(Basel Committee on Banking
Supervision, 2006;Sironiand Resti, 2008;Tutino et al., 2011). Regulatorsat the national and
international levels have been put several efforts to reduce it at a systemic level. The last
attempt to tackle this problem is the recently revised minimum capital requirements for
market riskissued by the Basel Committee on Banking Supervision (Basel Committee on
Banking Supervision,2019). The importance of regulating this specic kind of risk is related
to the fact that bank risk exposure is becoming larger andlarger at expenses of credit risk
(Polizzi, 2017). Furthermore, nancial innovation and nancial engineering lead to the
The authors thank the participants of the Bangor Business School Research Seminar Series and two
anonymous referees for useful comments and suggestions.
An empirical
into market
Received15 May 2019
Revised11 January 2020
Accepted25 February 2020
Journalof Financial Regulation
Vol.28 No. 3, 2020
pp. 465-483
© Emerald Publishing Limited
DOI 10.1108/JFRC-05-2019-0060
The current issue and full text archive of this journal is available on Emerald Insight at:
increased complexityof measuring and providing information aboutmarket risk (Hull, 2018;
Barth and Landsman, 2010). Another important issue related to market risk disclosure
concerns the hedge accounting practices and rules banks adopt when they buy derivative
instruments for risk managementpurposes (Fortuna, 2002;Ahmed et al.,2006).The recently
revised International Financial Reporting Standards (IFRS) 9 issued by the International
Accounting Boardtackles exactly this problem, stating that:
[...] the objective of hedge accounting is to represent, in the nancial statements, the eect of an
entitys risk management activities that use nancial instruments to manage exposures arising
from particular risks that could aect prot or loss or other comprehensive income.
The asymmetric information related to bank risk disclosure can be interpreted as a typical
principal-agent problem(Fama, 1980) between bank shareholders and potential investors on
one side and bank management on the other. In a wider perspective, the assessment and
disclosure of bank market risk exposure isa central issue also for any bank stakeholder, as
an excessive risk exposure for one single bank might have a detrimental impact on the
stability of the entire nancialsystem (Mottura,2011, 2016;Tutino,2013, 2015).
The empirical investigation proposed in this paper adopts a recently designed research
methodology (Scannella and Polizzi, 2018), which deals with both qualitative and
quantitative proles of bank risk reporting, based on the content analysis setting proposed
by Krippendorff (1980). We analyse the three most important ofcial nancial reports for
risk reporting purposes, namely,the management commentary, the Basel Pillar 3 disclosure
report and the notes to the consolidated nancialstatement.
This contribution sheds additional light on bank market risk disclosure, adopting a
regulatory and empirical perspective. More specically, the regulatory requirements are
crucial for a proper understanding of the environment where banks compete (Cotter et al.,
2011), especially when it comesto market risk disclosure. To reduce information asymmetry
and to avoid market failures (Akerlof, 1970), regulators impose banks some minimum
requirements in terms of the amountof information to be provided in bank nancial reports
(Rutigliano,2012, 2016). Hence, the analysis of national and international regulatory
requirements about risk disclosure is crucial to carry out this research (Acharya and Ryan,
2016). On the other hand, performing an empirical investigation is another crucial step to
provide further insightson the existent knowledge of this eld of study.
Our ndings show that large Italian bank risk reporting is characterised by some
drawbacks and this study providesuseful practical solutions. From our analysis, it emerges
an overall improvementin risk disclosure over time, even though some banks perform better
than others. However, several efforts are still necessary to provide a fully satisfactory
disclosure for shareholders and stakeholders. The scarce utility of the management
commentary and widespread information overlapping between bank nancial reports and
their excessive number of pages represent crucial areas of improvements both banks and
regulators shouldtake into consideration.
The policy implications of this study involve greater attention by regulators, not only
with respect to the amount of information disclosed by banks for risk reporting purposes
but also in terms of the overall comprehensibility of the information provided and to its
location. Moreover, a greater emphasis should be given to the management commentary
because of its potential characteristics of complementing the disclosure provided by the
notes and the Pillar 3 disclosure report.
This paper provides a contribution to the extant scientic literature on market risk
disclosure in banking, analysing both quantitative and qualitative proles of bank market
risk disclosure andidentifying the main drawbacks of Italian bank riskreporting practices.

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