Basel disclosure by private and public sector banks in India: assessment and implications

Author:Prodyot Samanta, Mohinder Dugal
Position::ThirdEye RiskInsights, Westchester, New York, USA
Pages:453-472
SUMMARY

Purpose The aim of this paper is to assess the nature and characteristics of regulatory risk management reporting by private and public sector banks in India. Design/methodology/approach Using a sample of 38 banks, a content analysis of their Basel II disclosure reports for the year 2012-2013 is examined. Findings The assessment shows that while the majority of the... (see full summary)

 
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Basel disclosure by private and
public sector banks in India:
assessment and implications
Prodyot Samanta
ThirdEye RiskInsights, Westchester, New York, USA, and
Mohinder Dugal
Department of Management/Strategy,
Western Connecticut State University, Danbury, Connecticut, USA
Abstract
Purpose The aim of this paper is to assess the nature and characteristics of regulatory risk
management reporting by private and public sector banks in India.
Design/methodology/approach – Using a sample of 38 banks, a content analysis of their Basel II
disclosure reports for the year 2012-2013 is examined.
Findings – The assessment shows that while the majority of the disclosure across banks focuses on
credit risk and capital adequacy ratios, the total quantity of disclosure varies signicantly across banks.
Of the three broad risk categories (market, credit and operational), operational risk disclosure is the
least, with minimal to no disclosure on several key aspects of operational risk, suggesting that
operational risk issues are likely to emerge as an area of concern among Indian banks. Further, for the
sector as a whole, the authors observe that asset size and net income are positively correlated with the
quantity of regulatory disclosure and negatively correlated with the variation of this disclosure,
suggesting a possible precautionary behavior on the part of larger and more protable banks toward
excessive scrutiny by the regulators and a regulatory regime in which no institution is too big to fail.
Originality/value – As an exploratory research article to address the characteristics of regulatory
disclosure of private and public sector banks in India, it is informative, particularly for those working
in the area of banking regulation and compliance. Areas for further research are suggested.
Keywords Operational risk, Basel, Indian banks, Risk management, Enterprise risk management,
Regulatory reporting
Paper type Research paper
Motivation
The Basel Committee on Banking Supervision (BCBS) provides banks with
recommendations and guidance on minimum capital adequacy and prudent risk
management practices, through the Basel accords (see BIS). In addition to issuing
guidance on minimum capital requirements, liquidity and leverage ratios, the BCBS also
provides direction on risk reporting/disclosure requirements (referred to in the Basel
accord as Pillar 3/market discipline) to improve transparency and consistency of a
bank’s regulatory capital and risk management processes, thereby enabling market
An earlier version of this paper was presented at the Northeast Decision Science Institute’s
(NEDSI) Annual conference in Philadelphia, March 2014. The authors would like to acknowledge
the research assistance provided by Shreya Mathai and Ascede Joseph.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
Basel
disclosure
453
Journalof Financial Regulation
andCompliance
Vol.24 No. 4, 2016
pp.453-472
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-12-2015-0065
participants with a common platform for comparison across and within jurisdictions.
International accounting agencies, including the IASB, have contributed to this
effort by crafting a uniform set of reporting standards as proposed by the
International Financial Reporting Standards rules. While guidance of this nature is
continually evolving and being ne-tuned, its primary objective is to ensure greater
clarity and public comparability of nancial information and risk reporting across
companies. As a result of this push, banks across the globe, including BRICS, are
adopting these comprehensive corporate governance and transparent reporting
recommendations and standards.
The Reserve Bank of India (“RBI” – India’s central bank), under the leadership of a
new governor, is taking signicant steps to reform the nancial sector and boost growth
(It is only since the mid-1990s through the liberalization reforms that the RBI has
become more independent in its operations). Given the increased focus by the RBI to
strengthen the banking sector and the global push for stronger corporate governance
and nancial transparency, this paper assesses, through publicly disclosed information,
the nature and characteristics of regulatory risk disclosure in the Indian banking sector.
Banks in India disclose their Basel compliance status along with their annual reports,
and this study specically assesses the nature and characteristics of this disclosure as it
currently exists. Any analysis that addresses the nature of transparency of publicly
disclosed information is inherently limited both qualitatively and quantitatively by the
depth of meaningful statistical analysis, and this paper is no exception. However, as a
rst exploratory article to assess the nature of regulatory transparency of public and
private sector banks in India, it is informative, particularly for those working in the area
of banking regulation, compliance and research.
Earlier research on risk disclosure assessments
There is an existing body of academic work that has looked at assessing risk disclosure
within organizations in general (Dobler et al., 2011). Most of these studies conduct this
assessment from a corporate governance perspective (Woods et al., 2007). Some of these
earlier studies on corporate risk disclosure were primarily driven by concerns about the
lack of corporate governance and corporate accounting fraud of the early 2000s (starting
with Enron in the USA and followed by other global corporations). Corporate
white-collar crimes at that time drove the global accounting community, along with a
push from the US Congress to establish stringent corporate governance practices and
disclosure standards through nancial accounting regulation and compliance rules,
commonly known as Sarbanes-Oxley, leading to greater disclosure and transparency on
the nancial and corporate health of organizations.
Other studies related to this area of research have found interesting results. For
example, research on the nature of corporate disclosure across industries have found
rm size to be a signicant factor in determining the quantity of risk disclosure [Lajili
and Zeghal (2005) for Canadian rms; Linsley and Shrives (2006) for UK rms; Linsley
et al. (2006) for banks in the UK and Canada; Helbok and Wagner (2006) for operational
risk reporting in banks in Asia, Europe and USA; Konishi and Mohobbot (2007) for
Japanese rms and Amran et al. (2009) for companies in Malaysia]. Some studies have
addressed issues relating to discretionary disclosure and strategic incentives (Jorgensen
and Kirschenheiter, 2003;Dobler, 2008;Linsley and Shrives, 2000). Other examples of
risk disclosure studies include Rajgopal (1999) and Linsmeier et al. (2002), who analyzed
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