BASEL Pillar 3 disclosure requirements - consolidated and enhanced framework - consultative document

17 Marvh 2016, Bachir El Nakib (CAMS) Senior Consultant Compliance Alert LLC

Pillar 3 disclosure requirements - consolidated and enhanced framework - consultative document

March 2016
 

Pillar 3 of the Basel framework seeks to promote market discipline through regulatory disclosure requirements. The proposed enhancements issued in this consultative document build on revisions to the Pillar 3 disclosure requirements that the Committee finalised in January 2015. Taken together, they form the consolidated and enhanced Pillar 3 framework. The proposals in this consultative document include:

  • the addition of a "dashboard" of key metrics,
  • disclosure of hypothetical risk-weighted assets calculated based on the Basel framework's standardised approaches, and
  • enhanced granularity for disclosure of prudent valuation adjustments.

The proposals also incorporate additions to the Pillar 3 framework to reflect ongoing reforms to the regulatory framework. These include, disclosure requirements for:

The Committee welcomes comments from both Pillar 3 users and preparers on the proposals described in this consultative documenthere by Friday 10 June 2016. All comments will be published on the website of the Bank for International Settlements unless a respondent specifically requests confidential treatment.

Disclosure requirements for prudent valuation adjustments In July 2009, the Committee issued revisions to the market risk framework, which included guidance for banks on the prudent valuation framework. 9 The revisions required banks to provide qualitative information on their approach to calculating prudent valuation adjustments. This disclosure requirement was incorporated in the new Pillar 3 standard issued in January 2015 through Table LIA, which requires banks to provide details of the systems and controls they have in place to ensure that their valuation estimates are prudent and reliable. However, the July 2009 revisions to the market risk framework did not require banks to provide detailed quantitative disclosures of their prudent valuation adjustments. Banks were only required to provide the aggregate sum of their prudent valuation adjustments in the disclosure requirement for composition of capital.10 The Committee considers that an additional breakdown of a bank’s aggregate prudent valuation adjustment would provide meaningful information to users and improve market discipline. A new disclosure requirement (Template PV1) is proposed to meet this objective. The new template is set out below in Part 3. The Committee proposes that the new disclosure requirement be published annually by all banks that record a prudent valuation adjustment.

Operational risk The Committee noted in its June 2014 Consultative Document that it would consider the disclosure requirements for operational risk in the second phase of its review of Pillar 3 once the policy reviews in this area were completed. As a consequence, the original disclosure requirements for operational risk set out in the 2004 Pillar 3 framework were unchanged

Market risk The Committee issued revised disclosure requirements for market risk in January 2015 (see Part 7 in the revised Pillar 3 standard issued in January 2015). The Committee has since concluded its work on the fundamental review of the trading book (FRTB) and has issued a revised standard,15 which includes new market risk measurement methods. The Committee has therefore revised the disclosure requirements it issued in January 2015 to reflect these changes. The new disclosure requirements are set out below at Part 11. The Committee proposes that the new market risk disclosure requirements be implemented concurrently with the implementation of the new standard, ie from 31 December 2019, at which point the new disclosure requirements will supersede those set out in the January 2015 standard. The frequency of the disclosure requirements are set out in Part 11 below. 

Interest rate risk in the banking book The Committee noted in its June 2014 Consultative Document that it would consider the disclosure requirements for interest rate risk in the banking book (IRRBB) in the second phase of its review of Pillar 3 once the policy reviews in this area had been completed. The Committee issued a Consultative Document on IRRBB in June 2015,16 and the Committee’s work in this area is in the process of being finalised. New disclosure requirements and the implementation date will be included in the final IRBB framework. In the interim, the disclosure requirements for IRRBB set out in Part 9 of the revised Pillar 3 standard issued in January 2015 remain in place. 

Consolidation of all existing and prospective BCBS disclosure requirements into the Pillar 3 framework As noted in the revised Pillar 3 standard issued in January 2015, the Committee intends to gather all existing and new disclosure requirements in a single and coherent Pillar 3 framework to facilitate users’ access to comprehensive regulatory information and to improve market discipline. With this aim in mind, the second phase of the work on Pillar 3 has reviewed all existing disclosure requirements arising from earlier Basel standards and prospective disclosure requirements arising from Basel III and the Committee’s wider reform agenda. The review has resulted in amendments to the format and frequency of these disclosures to align them with the new Pillar 3 standard issued by the Committee in January 2015. The Committee will not consider comments aimed at modifying disclosure requirements which remain unchanged from previously issued standards. The review proposes to consolidate the disclosure requirements issued by the Committee in the following documents:17 • Composition of capital disclosure requirements (June 2012) • Global systemically important banks: updated assessment methodology and the higher loss absorbency requirement (July 2013) • Basel III: A global regulatory framework for more resilient banks and banking systems – revised version (June 2011) – section dealing with the geographical distribution of credit exposures subject to the countercyclical buffer • Basel III leverage ratio framework and disclosure requirements (January 2014) • Liquidity coverage ratio disclosure standards (January 2014) • Net Stable Funding Ratio disclosure standards (June 2015) • Pillar 3 disclosure requirements for remuneration (July 2011)

Disclosure requirements for macroprudential supervisory measures (a) G-SIB methodology In July 2013, the Committee issued an updated methodology for assessing G-SIBs and the higher loss absorbency requirements for those banks.21 The methodology set out 12 indicators to assess G-SIBs and required those indicators to be made publicly available. In consolidating these disclosure requirements into this Consultative Document, the Committee has transposed the 12 indicators into a new disclosure requirement (Template G-SIB1). However, national authorities have discretion to require banks to disclose a more detailed breakdown of the assessment indicators, which is set out in the existing template used by banks to report their data to the Committee’s data hub. Those banks which are required by their national authorities, or choose, to disclose the full breakdown of their indicators should include the web link or other relevant reference in their Pillar 3 report to facilitate users’ access to this information. The amended disclosure requirements for the G-SIB indicators should be published on an annual basis and included in a bank’s first Pillar 3 report issued after the indicators are published on its website. This should be no later than four months after the bank’s financial year-end, commencing in 2017, and no later than end-July each year. The revised disclosure requirements are set out in Part 5. (b) Geographical distribution of credit exposures subject to countercyclical buffer The Committee set out details of the countercyclical buffer regime in December 2010 and issued an FAQ document22 in October 2015 clarifying a number of elements of how the regime should operate in practice. The FAQ also included a section on disclosure requirements around the calculation of the buffer, including details of the geographic breakdown of banks’ private sector credit exposures. The Committee is proposing to introduce a new template (Template CCyB1) to capture this disclosure requirement. It is proposed that Template CCyB1 should be published semiannually, with the first disclosure due in a bank’s Pillar 3 report as at its financial year-end 2017. The revised disclosure requirements are set out in Part 5. 3.3. Disclosure requirements for the leverage ratio The Committee issued its standard on the leverage ratio disclosure requirements in January 2014.23 The disclosure requirements comprise two elements: a summary comparison of accounting assets versus the leverage ratio exposure measure, and the leverage ratio common disclosure template. As part of the consolidation exercise, the Committee has transposed these disclosure requirements into two new templates (Templates LR1 and LR2) to align them with the new Pillar 3 format. The new disclosure requirements do not give rise to any substantive changes from the disclosure requirements issued in January 2014. Therefore, at this time the Committee is not considering modifying the content of these templates. The Committee plans to consult on proposed revisions to the Basel III leverage ratio framework. Any revisions to the leverage ratio framework that require changes to the templates LR1 and LR2 will be reflected in due course.

Disclosure requirements for the Liquidity Coverage Ratio and Net Stable Funding Ratio (a) Liquidity Coverage Ratio (LCR) The Committee issued disclosure standards for the LCR in January 2014.24 These contained a common disclosure template for the LCR and provided guidance on additional quantitative and qualitative information that banks may choose to disclose relating to, inter alia, their internal liquidity risk measurement and management framework. In consolidating these disclosure requirements into the new Pillar 3 framework, the Committee proposes to transpose the LCR common disclosure template into a new template (Template LIQ1) without change. Therefore, at this time the Committee is not considering modifying the content of this template. The Committee has also decided to transpose the guidance on additional disclosures into a table (Table LIQA) to provide additional qualitative information for users on a bank’s liquidity risk management framework. The format of the content of this table is flexible, to enable banks to disclose those elements of its liquidity risk management framework it considers relevant, given its business model and liquidity risk profile. T

Disclosure requirements for remuneration As part of its consolidation process of all existing disclosure requirements, the Committee has reviewed the disclosure requirements for remuneration that it issued in July 2011 in order to bring them into line with the revised Pillar 3 format. 

 

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