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 ﬁnancial statements, the eﬀect of an
entity’s risk management activities that use ﬁnancial instruments to manage exposures arising
from particular risks that could aﬀect proﬁt 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 ﬁnancialsystem (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 proﬁles of bank risk reporting, based on the content analysis setting proposed
by Krippendorff (1980). We analyse the three most important ofﬁcial ﬁnancial reports for
risk reporting purposes, namely,the management commentary, the Basel Pillar 3 disclosure
report and the notes to the consolidated ﬁnancialstatement.
This contribution sheds additional light on bank market risk disclosure, adopting a
regulatory and empirical perspective. More speciﬁcally, 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 ﬁnancial 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 ﬁeld of study.
Our ﬁndings 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 ﬁnancial 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 scientiﬁc literature on market risk
disclosure in banking, analysing both quantitative and qualitative proﬁles of bank market
risk disclosure andidentifying the main drawbacks of Italian bank riskreporting practices.