Financial update (Second Quarter 2008)

Senior Supervisors Group Releases Report on Disclosure of Risky Exposures

bank risk graphic Senior banking regulators from the United States and four European countries issued a report in April on the ways large financial services firms disclose exposures to financial instruments that the marketplace considers high risk.

The high-risk instruments the report examined include collateralized debt obligations (CDOs), residential mortgage-backed securities, commercial mortgage-backed securities, other special purpose entities, and leveraged finance.

The report is from the Senior Supervisors Group, which is composed of banking supervisory officials from the Federal Reserve Board of Governors, the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and regulatory agencies from France, Germany, Switzerland, and the United Kingdom.

Press releaseoff-site image
Comptroller of the Currency’s comments on the reportoff-site image
Senior Supervisors Group reportoff-site image

Disclosures span broad cross-section
The report highlights examples of leading-practice disclosures taken from a sample of documents posted to the public Web sites of 20 large, internationally oriented financial firms, 15 banks, and five securities firms.

The disclosure practices noted in the report include

  • details on the credit quality of subprime mortgages, such as credit rating, loan-to-value ratios, and performance measures;
  • breakdowns of subprime mortgage exposure by the loans' date of origination, because some loans made during certain periods are considered riskier than others;
  • breakdowns of CDOs by type, tranche, rating, etc.;
  • details of CDO collateral by type; and
  • breakdowns of collateral by industry and geography for commercial mortgage-backed securities.

Disclosure improvements noted
Many financial firms have recently enhanced their disclosures of these exposures, according to the report. The Senior Supervisors Group's survey indicates that disclosure practices can be improved without necessarily changing existing disclosure requirements, as such requirements allow firms considerable discretion in how they convey information.

The study took a broad view of disclosure; it includes not only information in public securities filings but also earnings press releases and accompanying information on firms' Web sites. Indeed, the report noted that some of the leading disclosure practices covered were contained in advance or supplementary material, which the report said can provide market participants with more timely information about exposures that could be a source of concern.


May 15, 2008