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