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Overview of Basel Committee’s Revised Pillar 3 Disclosures

The Basel Committee has finalized its standard revising the Pillar 3 capital disclosures applicable to internationally active banks.  Pillar 3 of the Basel framework aims to promote market discipline through qualitative and quantitative regulatory disclosure requirements, whereas Pillar 1 encompasses the framework of risk-based capital ratios and other quantitative requirements.  Pillar 3 was first introduced in 2004 as part of Basel II and revised in 2009 as part of Basel 2.5.  The newly finalized revisions will take effect concurrent with banks’ year-end 2016 financial reporting, superseding the earlier Pillar 3 standards (although other disclosure standards, such as the Basel III leverage ratio disclosure requirements published in January 2014, remain in force).  These revisions were proposed for public comment in June 2014, which we summarized here.

The main objective of the new Pillar 3 revisions is to improve the comparability and consistency of capital disclosures while balancing the need to permit flexibility to provide qualitative, bank-specific commentary on a bank’s risk profile. The revised standard strikes this balance by introducing a hierarchy for the required disclosures that includes the following presentation formats:

  • Fixed templates are prescribed formats to be populated with quantitative information in accordance with specified definitions. Fixed templates are generally used for disclosing information that the Committee considers to be “essential for the analysis of a bank’s regulatory capital requirements”—for example, information about risk-weighted assets (RWAs).
  • Flexible templates contain quantitative information generally to be presented in accordance with the provided template, unless such information would be more clearly presented in another format. Flexible templates and tables are used for disclosing information that the Committee considers “meaningful to the market but not central” to the analysis of regulatory capital.
  • Flexible tables are used to provide qualitative information for which no specific format is prescribed.

In addition to the disclosures required be disclosed in accordance with these templates and tables, banks are also expected to supplement their Pillar 3 disclosures with a narrative commentary explaining significant changes in the information required to be disclosed and, optionally, additional information on the bank’s idiosyncratic risk position.

The standard also permits “signposting”—i.e., incorporating information into the stand-alone Pillar 3 disclosure document by reference to other separate documents such as annual reports—of the required information, provided certain criteria are met.

The table below summarizes the templates and tables required under the revised Pillar 3 standard, indicating for each requirement the associated format type and required disclosure frequency.  The four quarterly disclosure requirements are for templates showing the following items:

  • Overview of RWAs by type of exposure and approach;
  • Changes in RWAs for credit risk exposures under the Internal Ratings-Based approach (IRB);
  • Changes in RWAs for counterparty credit risk exposures under the Internal Model Method (IMM); and
  • Changes in RWAs for market risk exposures under the Internal Models Approach (IMA).

 

Basel Committee’s Revised Pillar 3 Disclosures (Final Standard)
Disclosure Category Required Tables and Templates Format Type Frequency
Overview of risk management and RWA OVA Bank risk management approach Flexible Table Annual
OV1 Overview of RWA Fixed Template Quarterly
Linkages between financial statements and regulatory exposures LI1 Differences between accounting and regulatory scopes of consolidation and mapping of financial statements with regulatory risk categories Flexible Template Annual
LI2 Main sources of differences between regulatory exposure amounts and carrying values in financial statements Flexible Template Annual
LIA Explanations of differences between accounting and regulatory exposure amounts Flexible Table Annual
Credit risk CRA General information about credit risk Flexible Table Annual
CR1 Credit quality of assets Fixed Template Semi-annual
CR2 Changes in stock of defaulted loans and debt securities Fixed Template Semi-annual
CRB Additional disclosure related to the credit quality of assets Flexible Table Annual
CRC Qualitative disclosure requirements related to credit risk mitigation techniques Flexible Table Annual
CR3 Credit risk mitigation techniques – overview Fixed Template Semi-annual
CRD Qualitative disclosures on banks’ use of external credit ratings under the standardized approach for credit risk Flexible Table Annual
CR4 Standardized approach – credit risk exposure and Credit Risk Mitigation (CRM) effects Fixed Template Semi-annual
CR5 Standardized approach – exposures by asset classes and risk weights Fixed Template Semi-annual
CRE Qualitative disclosures related to IRB models Flexible Table Annual
CR6 IRB – Credit risk exposures by portfolio and PD range Fixed Template Semi-annual
CR7 IRB – Effect on RWA of credit derivatives used as CRM techniques Fixed Template Semi-annual
CR8 RWA flow statements of credit risk exposures under IRB Fixed Template Quarterly
CR9 IRB – Backtesting of probability of default (PD) per portfolio Flexible Template Annual
CR10 IRB (specialized lending and equities under the simple risk weight method) Flexible Template Semi-annual
Counterparty credit risk CCRA Qualitative disclosure related to counterparty credit risk Flexible Table Annual
CCR1 Analysis of counterparty credit risk (CCR) exposure by approach Fixed Template Semi-annual
CCR2 Credit valuation adjustment (CVA) capital charge Fixed Template Semi-annual
CCR3 Standardized approach of CCR exposures by regulatory portfolio and risk weights Fixed Template Semi-annual
CCR4 IRB – CCR exposures by portfolio and PD scale Fixed Template Semi-annual
CCR5 Composition of collateral for CCR exposure Flexible Template Semi-annual
CCR6 Credit derivatives exposures Flexible Template Semi-annual
CCR7 RWA flow statements of CCR exposures under the Internal Model Method (IMM) Fixed Template Quarterly
CCR8 Exposures to central counterparties Fixed Template Semi-annual
Securitization SECA Qualitative disclosure requirements related to securitization exposures Flexible Table Annual
SEC1 Securitization exposures in the banking book Flexible Template Semi-annual
SEC2 Securitization exposures in the trading book Flexible Template Semi-annual
SEC3 Securitization exposures in the banking book and associated regulatory capital requirements – bank acting as originator or as sponsor Fixed Template Semi-annual
SEC4 Securitization exposures in the banking book and associated capital requirements – bank acting as investor Fixed Template Semi-annual
Market risk MRA Qualitative disclosure requirements related to market risk Flexible Table Annual
MRB Qualitative disclosures for banks using the Internal Models Approach (IMA) Flexible Table Annual
MR1 Market risk under standardized approach Fixed Template Semi-annual
MR2 RWA flow statements of market risk exposures under an IMA Fixed Template Quarterly
MR3 IMA values for trading portfolios Fixed Template Semi-annual
MR4 Comparison of VaR estimates with gains/losses Flexible Template Semi-annual

 

Materials:

Basel Committee, Revised Pillar 3 disclosure requirements (January 2015), available at:  http://www.bis.org/bcbs/publ/d309.pdf

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