Liquidity and market risk disclosures

Bank risk disclosures: a liquidity maturity analysis

The large negative gap in the first month is normal for a bank: demand deposits are contractually repayable at once but, in practice, most stay for years, while loans run for long periods. IFRS 7 requires the contractual view; many banks also explain the behavioural maturity they expect and the liquid assets they hold, such as government bonds that can be sold or pledged, to show how they would cope with outflows.

What does IFRS 7 require for credit risk?

The credit risk management practices, including how significant increases in credit risk and default are defined; the inputs and assumptions used to measure ECL; reconciliations of the loss allowance by stage; credit risk exposure by credit grade; collateral held; and concentrations. See ECL disclosures under IFRS 7.

How is market risk disclosed?

Either a sensitivity analysis for each type of market risk, showing how profit and equity would change for reasonably possible changes in interest rates, exchange rates and other prices, or, if the bank manages risk that way, a value-at-risk figure with an explanation of the method and its limitations. For a bank's banking book, interest rate risk is usually the largest market risk, often shown as the effect of a 100 basis point parallel shift in rates on net interest income and on equity.

How is interest rate risk in the banking book shown?

Usually as two sensitivities: the effect of a parallel shift in rates on net interest income over the next year, and on the economic value of equity. A bank might disclose that a 100 basis point rise would increase net interest income by 40 million, because its loans reprice faster than its deposits, but reduce the economic value of equity by 120 million, because of its long fixed-rate mortgages.

What about concentration risk?

IFRS 7 requires disclosure of concentrations of risk, such as large exposures to one sector, region or counterparty. For many banks, commercial real estate and lending to a handful of large corporate groups are the concentrations readers look for first.

What are the rules for the maturity analysis?

• Use contractual, undiscounted cash flows, including interest, so the totals differ from balance sheet amounts.
• Place each liability in the earliest period in which the bank could be required to pay, so demand deposits go in the first band.
• Show loan commitments in the earliest period they could be drawn, and financial guarantees in the earliest period they could be called.
• Choose time bands that suit the bank's business; the standard does not fix them.

How do IFRS 7 disclosures relate to Pillar 3?

Pillar 3 reports are regulatory disclosures required under Basel standards, covering capital, risk-weighted assets, liquidity coverage and leverage. Many banks present IFRS 7 risk disclosures and parts of Pillar 3 together in a risk report, cross-referenced from the financial statements. The two use different definitions in places, so reconciliations help readers.

Where to go next

See how to read a bank's financial statements, bank accounting and offsetting and netting.

This guide is general information. It is not tax or legal advice for your situation.