The nature of credit risk information disclosed in the risk and capital reports of the top-5 South African banks

Abstract

This paper used the Credit Risk Disclosure Measurement Tool (CRDMT) constructed on the basis of six main areas, namely, banks own description of credit risk (i.e., as it applies to the banks operations), banks strategy of reducing credit risk exposure (i.e., objectives of credit management), banks approach to credit modelling or the internal rating system, banks approach and the manner in which they assess their exposure to credit risk, banks credit risk mitigation strategies employed (i.e., collateral and other credit enhancements), and banks approach to the valuation of pledged collateral and other credit enhancements to assess the information disclosed on the risk and capital management reports of the top-5 South African banks. Results demonstrated that the top-5 South African banks were fairly in line with the main six credit risk areas that would result in an informative risk and capital management report, as proposed by the CRMDT. It was observed that there were, however, pockets of information that could be improved to enhance these risk and capital management reports, particularly the credit risk information made available to public. These areas included the information relating to banks credit risk mitigation strategies employed and banks strategy of reducing credit risk exposure, as well as the information relating to banks approach to the valuation of pledged collateral and other credit enhancements. These areas were noted for their partial or non-disclosure of information. Keywords: banks, credit risk, Credit Risk Disclosure Measurement Tool (CRDMT), disclosure analysis and risk and capital reports. JEL Classification: G21, G32