Basel committee tightens disclosure requirements for banks

February 6, 2015

In an effort to streamline banks’ regulatory data through increased transparency, and make them more comparable and consistent across the board, the Basel Committee on Banking Supervision has publishedrevised standards on disclosures.

The standards, building on the committee’s June 2014 consultation document made the disclosure requirements more detailed. It also made changes for securitization exposures, credit risk exposures, and credit risk mitigation techniques. 

The role of “Pillar 3″ 

The disclosures form the Pillar 3 of the Basel framework, which supports the minimum capital requirements (Pillar 1) and the supervisory review (Pillar 2).

Specifically, Pillar 1 focuses on the calculation of regulatory capital for three major components of risk (credit, operational, and market). The committee allows various methods for these calculations, depending on the size and complexity of banks — for example, banks with relatively simple balance sheets use the standardized approach for credit risk, whereas internationally active large banks use the advanced internal ratings-based approach.

Pillar 2 is the process by which the banks assess the adequacy of their capital — a process known as “internal capital adequacy assessment”, and the regulators evaluate banks’ process, risk management practices, and check overall compliance. It was perceived to complement Pillar 1 by taking into account the dimensions of risks — such as business and strategic risk, interest rate risk in banking book — that do not neatly fall under credit, operational or market risks, and to allow supervisory intervention in case of a sudden drop in capital levels. In short, Pillar 2 can be referred to as the regulatory kick in the tire.

A better framework to assess banks’ levels of risk 

The committee undertook the work of reviewing the Pillar 3 in response to its failure during the financial crisis to identify banks’ material risks, and its inability to provide sufficient and comparable information for market participants to adequately assess banks’ capital levels and make meaningful comparison to their peers.

“The revised disclosure framework represents an important shift in both the format and granularity of required bank disclosures. These changes substantially strengthen the disclosure framework and will help users of the disclosures to better understand and assess the measurement of a bank’s risk-weighted assets,” said Stefan Ingves, chairman of the Basel Committee on Banking Supervision and Governor of Sveriges Riksbank.

An adequate mix of flexible and fixed templates 

While the committee offers harmonized templates to increase consistency and comparability, it strikes a balance in its disclosure requirements.

For quantitative information such as regulatory capital requirements, analysis of counterparty credit risk exposure, credit valuation adjustment, and risk-weighted asset (RWA) flow statements of market risk exposures, a set form of template is required. For example, in filling out the template on credit risk mitigation techniques, banks are asked to provide information on how they cover for their loan and debt securities exposures — amount by collateral, financial guarantees, or credit derivatives.

For more qualitative information, such as bank’s risk management approach, and explanations regarding differences between accounting and regulatory exposure amounts, banks are given flexibility in their methods of providing the information. The committee, however, hints at what it expects in these templates by providing representative outlines so as to guide banks.

The committee has, as in its previous version (the consultative document), kept the same five criteria for its guiding principles. These are: clarity, comprehensibility, meaningfulness, consistency, and comparability.

“I see a bit of an imbalance among the risk areas in the templates,” said Mayra Rodriguez Valladares, managing principal at MRV Associates, over an interview with Thomson Reuters. “There is a lot more granularity on credit risk than on operational and market risk. This is a good sign, as it probably means that Pillar 1 work on credit risk area is finally nearing completion, and we are likely to see more work in other areas of risks.”

The revised requirements are due to take effect from end-2016. They supersede the existing Pillar 3 disclosure requirements first issued as part of the Basel II framework in 2004 and the subsequent Basel 2.5 revisions introduced in 2009.

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. Compliance Complete provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Accelus compliance news on Twitter: @GRC_Accelus)

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