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