Liquidity Risk Financial Disclosure: The Case Of Large European Financial Groups

Abstract

This paper examines the informational content and the usefulness of financial groups' liquidity risk public financial disclosure. This theme is of interest since the factors that influence the level of liquidity risk are complex, and they strongly interact with other originating factors from related financial risks. These characteristics have made it more difficult for financial services industry regulators and private sector ERM experts to recommend a practical and well defined framework for the management and subsequent public disclosure of liquidity risk financial information. The results of the study are based on an in-depth content analysis of the Annual reports (2004) published by twenty-one of Western Europe's largest financial groups using the liquidity risk management factors proposed by the Basel Committee on Banking Supervision and its Joint Forum (2003, 2006). The results of the study revealed a disparity between commercial banks from the same or different European countries as to the level and extent of liquidity risk public financial disclosure. The same was also found for the description of the risk management structures and the accompanying explanatory comments on liquidity risk management practices. In addition, the study documented the overall scarcity of quantitative data which supports qualitative discussions on liquidity risk management. There were also areas of more complete financial disclosure that apply to factors explaining the origins of cash flows, and the explanations and discussion about foreign exchange risk management.