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More Pillar 3 disclosures for banks

More Pillar 3 disclosures for banks

The Basel Committee has published another consultation paper (PDF 973 KB) on Pillar 3 disclosure by banks, covering (i) disclosures relating to the final standards on credit risk, operational risk, credit valuation adjustment and the output floor; (ii) asset encumbrance; (iii) capital distribution constraints; and (iv) the composition of regulatory capital.

Basel 4

Reflecting the final standards published by the Basel Committee in December 2017, the proposed amendments to Pillar 3 disclosures include:

  • Credit risk - revised asset classes and risk weightings under the standardised approach; and revisions to the asset classes for which banks can use IRB approaches to calculate regulatory capital.
  • Non-performing exposures (NPEs) - additional detail on the prudential treatment of NPEs (if required by the national supervisor). 
  • Operational risk - four new templates to capture the single revised standardised approach, covering a bank's operational risk framework; its historical losses; its business indicator (BI) and the sub-components of the BI; and its internal loss multiplier and minimum operational risk capital requirement.
  • Credit valuation adjustment (CVA) - two new qualitative disclosure requirements and four new quantitative disclosure requirements, depending on whether a bank is using the new BA-CVA or SA-CVA.
  • Output floor - new “benchmark” templates to show standardised approach capital requirements for banks using internal models for credit and/or market risk, and to standardised approach and internal model based results (overall, by risk type and by credit risk asset class).
  • Leverage ratio - revisions to the definition of a bank's exposures and the introduction of a leverage ratio buffer requirement for G-SIBs.

Encumbered assets

Information on banks' encumbered and unencumbered assets, to provide an overview of the extent to which a bank's assets would remain available to creditors in the event of insolvency.

Capital distribution constraints

Information on the point (in terms of minimum capital ratios) at which a national supervisor would impose constraints on capital distributions by the bank. This would enable investors to make more informed decisions about the risks of coupon cancellation for capital instruments, thereby potentially enhancing price discovery and market stability.

This could lead to a bank disclosing its Pillar 2 requirements, which could be deemed by supervisors to be sensitive information. Such a disclosure would be mandatory for banks only when required by their national supervisor.

Composition of regulatory capital

It is proposed to expand the scope of application of the current template on the composition of a bank's regulatory capital to resolution groups in addition to (as currently) the consolidated group, although this may not work where capital requirements are not applied at the level of (some) resolution groups.

Implications

Cost to banks - this extension of Pillar 3 disclosures will be costly for banks because such disclosures must be subject to at least the same level of internal review and control processes as the information provided by banks for their financial reporting; banks must establish a formal board-approved disclosure policy for Pillar 3 information that sets out the relevant internal controls and procedures (including regular reviews of the disclosures); and a senior officer of a bank must attest in writing that Pillar 3 disclosures have been prepared in accordance with board-agreed internal control processes.

Greater alignment of market disclosures and regulatory reporting.

Pillar 3 disclosures are becoming so dominated by an increasing number of mandated standard templates that banks have restricted scope to tell their own stories of how they assess and manage their risks.

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