Much of the answer may involve disclosures about how risks are being managed and valued, drawing less on accounting information and more on information available in risk management reports. Disclosures need not be fully standardized; rather each firm should tell its own story. One area in which improved disclosures by banking organizations are needed involves credit risk and the allowance for loan losses.
As you know, there is a high degree of management judgment in estimating the loan-loss allowance, and that estimate can have a significant impact on an institution’s balance sheet and earnings. Expanded disclosures in this area would improve market participants’ understanding of an institution’s risk profile and whether the firm has adequately provided for its estimated credit losses in a consistent, well-disciplined manner.