Financial reporting of derivates in banks : disclosure conventions in Germany, Great Britain, and the USA

The Group of Thirty, the Bank for International Settlements (BIS), the Institute of International Finance (IIF) and central banks in various countries are concerned with financial market stability in an environment of rapid growth and increasing complexity of derivatives business. As a consequence, greater attention has been paid to the supervision and transparency of derivatives activities in financial institutions, which are the major players in these markets. Through capital requirements for market and credit risk exposures as well as disclosure of meaningful and accurate information, the BIS and the IIF want to impose strong market discipline upon banks and reduce the risk of bank runs. Concerning the transparency of derivatives activities, two major issues have been addressed by people involved in the standards setting process: Firstly, they try to develop sound accounting standards for derivatives, to provide the foundations for credible and comparable balance sheets and income statements. Secondly, they attempt to define disclosure requirements which help the readers of financial statements to assess the risks resulting from derivatives and trading activities. This paper explains the current state of the discussion on these issues by addressing the following questions. Firstly, what are the present accounting conventions for derivatives in US, UK and German banks and what recommends the BIS and the International Accounting Standards Committee (IASC)? The analysis distinguishes between accounting for derivatives held or issued for trading purposes and accounting for non-trading derivatives. Secondly, what supplementary information on the earnings from derivatives activities as well as their credit risk, market risk, liquidity risk, the applied risk management system and the risk philosophy of the company is disclosed in the notes and the management report? 1994 and 1995 annual financial statements of banks are explored to approach this question. Thirdly, what is the information value of these disclosures? To what extent do actual disclosures help to assess earnings and risks resulting from the bank's derivatives activities