The purpose of chapter is to determine the extent of which commercial banks in Malaysia are providing risk management disclosure as suggested under FRS 132. Besides that, this chapter also testing hypothesis, analysis and discuss on findings.
5.1 Hypothesis Testing
Rashid Ameer (2009), studies on disclosure practices among listed companies in Bursa Malaysia shown that among type of risks, interest rate disclosure was the most mentioned category and the credit risk was the least mentioned category. The finding might seem to suggest a belief among companies that credit risk information was immaterial and therefore need not to be disclosed. Hence, first hypothesis has developed as follow:
H1 = Interest rate risk disclosure was favored as compared to credit risk.
Type of risk
Number of bank disclose (percent)
Number of bank do not disclose (percent)
Total
Operational risk
9(100)
-
9
Credit risk
9(100)
-
9
Liquidity Risk
9(100)
-
9
Market risk:
Foreign Currency Exchange Risk
9(100)
Interest Rate Risk
9(100)
Equity Risk
9(100)
Total
9
-
9
Table 6: Type of Risks Banks Disclosed for the year 2007 to 2009.
In refer to Table 6 in the above, the findings have shown that among the years 2007 to 2009 hundreds percent of local commercial banks disclosed all type of risks as required by the standards. However, the extents of information disclosed were varying among banks. Refer to the note to the accounts for each of the bank (Appendix A, B, C, E, F, G, H, I, and J) some of the banks disclosed more on interest rate risk, while some of banks disclosed more on credit risk. As compared to the length on the information disclose for this two types of risks, both are equally disclosed. Among all type of risks all risks are equally disclosed in the note to accounts of the banks. Hence, it is said that commercial banks in Malaysia is more emphasis on risk as compared to listed companies in Malaysia. The hypothesis is rejected as the banks disclosed equal amount of risks information in their annual reports.
Hypothesis 2: Mandatory and voluntary
According to Linsley and Shrives (2005), studies into various aspects of voluntary disclosure had been taken place in the last 20 - 30 years until recently the subject of risk and risk management was taken into consideration. Various guidelines were issued by authorities and accounting bodies to mandate banks have such disclosure in order to protect the users (e.g.: stakeholders, employees, customers and society) to make sound decision. Banks might reluctant to disclose significant amounts of risk information. Second hypothesis is expanding as follow:
H2 = The commercial banks disclosed both mandatory and voluntary risk information.
Bank
Bank disclose voluntary risk information
Bank do not disclose voluntary risk information
Affin Bank Berhad
√
Alliance Bank Malaysia Berhad
√
AmBank (M) Berhad
√
CIMB Bank Berhad
√
EON Bank Berhad
√
Hong Leong Bank Berhad
√
Malayan Banking Berhad
√
Public Bank Berhad
√
RHB Bank Berhad
√
Total
5
4
Table 7: Banks' disclosed of voluntary risk information.
The commercial banks in Malaysia are mandatory to disclose minimum required risk information as comply with FRS 132. However, they are given the right to choose whether to disclose additional risk information or not. As shown in the Table 7, amongst those banks, five out of nine banks; AmBank, CIMB Bank, Hong Leong Bank, Malayan Banking, and Public Bank disclosed additional risk information in their annual reports. The rest of the banks only provided sufficient risk disclosure as required by the standards, which is credit risk, operational risk, cash flow interest rate risk, market risk.
Voluntary risk information as provided by those banks consisted of reputation risk management, strategic risk management, product risk management, and legal regulatory risk management. The bank explain on each type of risk management and on how to proper controls the risk and mitigate the risk. AmBank provided additional risk management approach as shown in Appendix K. It is very valuable, as it help public to been understanding for the risk of the bank. Nevertheless, the rest of the four banks reluctant to provided additional information, as they might worry the valuable information is available to their competitors and provided competitive disadvantages or the cost of disclosed is relatively higher than the benefit. Hypothesis two accepted as the commercial banks in Malaysia provided both risk information in their annual reports.
Hypothesis 3: Disclosure risk management objectives and policies
According to paragraph 56 of FRS 132 - bank shall describe its financial risk management objectives and policies in relation to its use of financial instruments.
Paragraph 57 of FRS 132, in additional about particular balances and transactions related to financial instruments. A discussion of management's policies for controlling the risks associated with financial instruments included policies on matter such as hedging of risk exposures, avoidance of undue concentrations of risk and requirements for collateral to mitigate credit risk. Therefore, the third hypothesis is:
H3 = All commercial banks in Malaysia disclosed financial risk management objectives and policies.
Listed Bank
(percent)
Non - Listed Bank(percent)
Total
Financial Risk management statement and policy
Yes
8(100)
1(100)
9(100)
No
-
-
-
Total
8(100)
1(100)
9(100)
Table 8: This table reports the number of banks providing financial risk management and policy.
In refer to Table 8 in the above, it is shown that hundred percent of banks disclosed financial risk management statements and policies in their annual reports. Although the Standard does not prescribe its location within the financial statements, all banks disclosed their risk management objectives and policies in the note to the accounts. In addition, each of the banks discloses the use of financial instruments within the risk management statements and policies. Yet, some banks disclosed more information which can assist the users of financial statements to have better understanding of the financial instruments, while some banks limited their disclosed to the extent required by the standard.
Even through, all the banks fulfill the requirement of paragraph 56 of FRS 132, disclosed risk management objectives and policies but not all the banks fulfill the requirement of paragraph 57 of FRS 132. Not the all banks provided the discussion of management policies for controlling the risks associated with financial instruments such as policies on matter such as hedging of risk exposures, avoidance of undue concentrations of risk and requirements for collateral to mitigate credit risk. The extent of compliance varied, some of the banks disclosed this in their risk management framework, some disclosed in their Directors' Report; some disclosed it under the Code of Corporate Governance. Amongst those banks, Public Bank has a very good discussion on management policies where disclosed in the bank's risk management section. (Source 1)
Source 1: Public Bank Berhad, 2008.
Hypothesis 4: Level of compliance
Paragraph 58 of FRS 132 required that an entity shall disclose a description of hedge; nature of risk being hedged, and a description of the financial instruments designated as hedging instruments and their fair values at the balance sheet date.
Paragraph 67, an entity shall also disclose information about its exposure to interest rate risk, including effective interest rates and maturity dates which is in tabular form. Information about maturity dates indicates the length of time for which interest rates are fixed, and information about effective interest rates indicates the levels at which they are fixed. Fourth Hypothesis is as follow:
H4: The commercial banks in Malaysia complied with paragraph 58 and 67 of FRS 132.
All the commercial banks complied with this standard; however, some disclosed it more some disclosed it short and simple. In refer to Appendix L, note to accounts of RHB bank, note 10: Derivatives financial instruments and hedging activity explain the description of the hedge, and the nature of risk being hedged. Besides that, the note to accounts also separately for designated fair value hedges, cash flow hedges and hedge of derivative that do not qualify for hedge accounting. Hence, it is said that, the banks complied with the FRS 132 paragraph 58 requirement.
Apart for this, it was noticed that all of the banks have followed FRS 132 guidelines on reporting interest rate risk. The interest rate risk is shown as, re - priced in the following periods after the balance sheet date in one year or less and in more than one year but not more than two years; in more than two years but not more than three years; in more than three years but not more than four years; in more than fours but not more than five years; and more than five years. Interest rates information are disclosed for individual instruments, effective or weighted average rates or a range of rates are presented for each class of financial instrument.(Appendix M). Hence, it is said that the banks complied with paragraph 58 and 67 of FRS 132.
5.3 Conclusion
In conclusion, the first hypothesis is rejected while the second, third and fourth hypothesis were accepted. The first hypothesis has rejected as banks disclosed all type of risks as required by the standard. The interest risk and credit risk are equally disclosed. This chapter do not involved any calculation as the focused for risk disclosure was only on narrative part or non - financial information of the annual reports.
