What Market Risk Capital Reporting Tells Us about Bank Risk

n recent years, financial market supervisors and the financial services industry have placed increased emphasis on the role of public disclosure in ensuring the efficient and prudent operation of financial institutions. In particular, disclosures about financial institutions’ risk exposures have frequently been cited as an important way for debt and equity market participants to get the information necessary to exercise “market discipline” on the risk-taking activities of these institutions. Such market discipline is often viewed as an important means of influencing the behavior of financial institutions, especially with regard to their risk-taking activities. For instance, a 1994 report by the Euro-currency Standing Committee of the Bank for International Settlements stated that “financial markets function most efficiently when market participants have sufficient information about risks and returns to make informed investment and trading decisions.”1 Similarly, in recent proposed amendments to the minimum regulatory capital requirements for internationally active banks, the Basel Committee on Banking Supervision included market discipline as a primary pillar, and the proposals themselves contained extensive recommendations for disclosures about banks’ risk exposures (see Basel Committee on Banking Supervision [2001]). Finally, a group of senior officials of large financial institutions recently