Risk disclosures in the annual reports of UK banks, 1995-2010

• Main Author: Rattanataipop, Phorntep
• Published: University of Newcastle upon Tyne 2013
• Subjects: 332.10941
• Online Access: http://ethos.bl.uk/OrderDetails.do?uin=uk.bl.ethos.588224

The internationalisation of financial flows has meant that the assessment of risk reporting has recently become one of the most significant issues in financial markets. The findings of this study are analysed using decision-usefulness to enhance the understanding of the risk disclosures of UK banks. In particular, these findings have enhanced the understanding of risk categories, information richness, and the influence of societal discussion on the risk reporting of the banking sector. This study analyses risk disclosures in the annual reports of six UK banks (i.e. RBS, NatWest, Lloyds TSB, HBOS, and HSBC), between 1995 and 2010, and in three main areas, which are: risk category membership, information richness, and the intensity of societal discussion (on risks). Content analysis is developed in this study to investigate both longitudinal and intrasectoral aspects for interpreting the content of risk disclosures in annual reports. In addition, content analysis of the news coverage of UK newspapers is conducted by using the LexisNexis electronic database to analyse the association between volumes of longitudinal banking sector risk disclosures against the intensity of societal discussion as proxied by the frequency, by year, of relevant newspaper citations, and by risk category. The findings of this study show that credit risk is the most disclosed risk (by volume) for all banks and in all years. Almost all of the risks are disclosed with high information content (in both qualitative and quantitative aspects), although the proportion of quantitative disclosures has declined over time. In addition, the majority of risk disclosures are neutral news statements, while a small proportion of disclosures give a warning of bad news. Risk reporting has become proportionately more concerned with the narrative of opinion and perception rather than the reporting of facts and quantitative information. Both fact and quantitative information are found to be disclosed with decreasing proportions over time. The volume of overall risk disclosures has had a smooth increase over time; however, this trend conceals a volumetric increase with many switch points in many risk categories (particularly during 2005 to 2009). The causes of these switch points have been found to include the adoption of accounting standards in 2005 and the financial crisis of 2007. Moreover, the findings of the correlations between all of the risk categories disclosed and the number of newspaper citations are indicative that newspaper citations are positively associated with the disclosure of key strategic banking risks (i.e. risk management, credit risk, liquidity risk, market risk, equity risk, and insurance and investment risk). The pattern of volume fluctuation is most frequently observed in the disclosures of Lloyds TSB and HBOS. This study has found that the risk disclosures of all companies have increased over time. In particular, both the quantity of disclosures and the number of risk categories disclosed have increased, in both the overall analysis of all companies and in the analysis of the individual companies.