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Basel ii Accord
Sections 808 to 822 |
Part 4: The
Third Pillar — Market Discipline
I. General
considerations
A. Disclosure
requirements
808. The
Committee believes that the rationale for
Pillar 3 is sufficiently strong to warrant
the
introduction of disclosure requirements for
banks using the Framework. Supervisors have an
array of measures that they can use to require
banks to make such disclosures. Some of these
disclosures will be qualifying criteria for
the use of particular methodologies or the
recognition of particular instruments and
transactions.
B. Guiding principles
809. The
purpose of Pillar 3 ─ market discipline is to
complement the minimum capital
requirements (Pillar 1) and the supervisory
review process (Pillar 2). The Committee aims
to
encourage
market discipline by developing a set of
disclosure requirements which will allow
market
participants to assess key pieces of
information on the scope of application,
capital,
risk
exposures, risk assessment processes, and
hence the capital adequacy of the
institution.
The
Committee believes that such disclosures have
particular relevance under the
Framework,
where reliance on internal methodologies gives
banks more discretion in
assessing
capital requirements.
810. In
principle, banks’ disclosures should be
consistent with how senior management
and the
board of directors assess and manage the risks
of the bank. Under Pillar 1, banks
use
specified approaches/methodologies for
measuring the various risks they face and the
resulting
capital requirements. The Committee believes
that providing disclosures that are
based on
this common framework is an effective means of
informing the market about a
bank’s
exposure to those risks and provides a
consistent and understandable disclosure
framework
that enhances comparability.
C. Achieving
appropriate disclosure
811. The
Committee is aware that supervisors have
different powers available to them to
achieve
the disclosure requirements. Market discipline
can contribute to a safe and sound
banking
environment, and supervisors require firms to
operate in a safe and sound manner.
Under
safety and soundness grounds, supervisors
could require banks to disclose
information. Alternatively, supervisors have
the authority to require banks to provide
information in regulatory reports.
Some
supervisors could make some or all of the
information in these reports publicly
available. Further, there are a number of
existing mechanisms by which supervisors may
enforce requirements. These vary from country
to country and range from “moral suasion”
through dialogue with the bank’s management
(in order to change the latter’s behaviour),
to reprimands or financial penalties.
The nature
of the exact measures used will depend on the
legal powers of the supervisor and the
seriousness of the disclosure deficiency.
However, it is not intended that direct
additional capital requirements would be a
response to non-disclosure, except as
indicated below.
812. In
addition to the general intervention measures
outlined above, this Framework
also
anticipates a role for specific measures.
Where disclosure is a qualifying criterion
under
Pillar 1
to obtain lower risk weightings and/or to
apply specific methodologies, there would be a
direct sanction (not being allowed to apply
the lower weighting or the specific
methodology).
D.
Interaction with accounting disclosures
813. The
Committee recognises the need for a Pillar 3
disclosure framework that does
not
conflict with requirements under accounting
standards, which are broader in scope. The
Committee
has made a considerable effort to see that the
narrower focus of Pillar 3, which is
aimed at
disclosure of bank capital adequacy, does not
conflict with the broader accounting
requirements.
Going
forward, the Committee intends to maintain an
ongoing relationship with the accounting
authorities, given that their continuing work
may have implications for the
disclosures required in Pillar 3. The
Committee will consider future modifications
to Pillar 3 as necessary in light of its
ongoing monitoring of this area and industry
developments.
814.
Management should use its discretion in
determining the appropriate medium and
location
of the disclosure. In situations where the
disclosures are made under accounting
requirements or are made to satisfy listing
requirements promulgated by securities
regulators, banks may rely on them to fulfil
the applicable Pillar 3 expectations. In these
situations, banks should explain material
differences between the accounting or other
disclosure
and the supervisory basis of disclosure. This
explanation does not have to take
the form
of a line by line reconciliation.
815. For
those disclosures that are not mandatory under
accounting or other
requirements, management may choose to provide
the Pillar 3 information through other
means
(such as on a publicly accessible internet
website or in public regulatory reports filed
with bank
supervisors), consistent with requirements of
national supervisory authorities.
However,
institutions are encouraged to provide all
related information in one location to the
degree
feasible. In addition, if information is not
provided with the accounting disclosure,
institutions should indicate where the
additional information can be found.
816. The
recognition of accounting or other mandated
disclosure in this manner is also
expected
to help clarify the requirements for
validation of disclosures. For example,
information in the annual financial statements
would generally be audited and additional
material
published with such statements must be
consistent with the audited statements.
In
addition, supplementary material (such as
Management’s Discussion and Analysis) that is
published to satisfy other disclosure regimes
(e.g. listing requirements promulgated by
securities
regulators) is generally subject to sufficient
scrutiny (e.g. internal control
assessments, etc.) to satisfy the validation
issue.
If
material is not published under a validation
regime, for instance in a stand alone report
or as a section on a website, then management
should ensure that appropriate verification of
the information takes place, in accordance
with the general disclosure principle set out
below. Accordingly, Pillar 3 disclosures will
not be required to be audited by an external
auditor, unless otherwise required by
accounting standards setters, securities
regulators or other authorities.
E.
Materiality
817. A
bank should decide which disclosures are
relevant for it based on the materiality
concept.
Information would be regarded as material if
its omission or misstatement could
change or
influence the assessment or decision of a user
relying on that information for the
purpose of
making economic decisions.
This
definition is consistent with International
Accounting Standards and with many national
accounting frameworks. The Committee
recognizes the need for a qualitative
judgement of whether, in light of the
particular circumstances, a user of financial
information would consider the item to be
material (user test). The Committee is not
setting specific thresholds for disclosure as
these can be open to manipulation and are
difficult to determine, and it believes that
the user test is a useful benchmark for
achieving sufficient disclosure.
F. Frequency
818. The
disclosures set out in Pillar 3 should be made
on a semi-annual basis, subject
to the
following exceptions. Qualitative disclosures
that provide a general summary of a
bank’s
risk management objectives and policies,
reporting system and definitions may be
published
on an annual basis. In recognition of the
increased risk sensitivity of the
Framework
and the general trend towards more frequent
reporting in capital markets, large
internationally active banks and other
significant banks (and their significant bank
subsidiaries) must disclose their Tier 1 and
total capital adequacy ratios, and their
components,
(119)
on a
quarterly basis.
Furthermore, if information on risk exposure
or other items is prone to rapid change, then
banks should also disclose information on a
quarterly basis. In all cases, banks should
publish material information as soon as
practicable and not later than deadlines set
by like requirements in national laws.
(120)
(119) These components
include Tier 1 capital, total capital and
total required capital.
(120) For some small
banks with stable risk profiles, annual
reporting may be acceptable. Where a bank
publishes information on only an annual basis,
it should state clearly why this is
appropriate.
G.
Proprietary and confidential information
819.
Proprietary information encompasses
information (for example on products or
systems),
that if shared with competitors would render a
bank’s investment in these
products/systems less valuable, and hence
would undermine its competitive position.
Information about customers is often
confidential, in that it is provided under the
terms of a
legal
agreement or counterparty relationship.
This has
an impact on what banks should reveal in terms
of information about their customer base, as
well as details on their internal
arrangements, for instance methodologies used,
parameter estimates, data etc. The Committee
believes that the requirements set out below
strike an appropriate balance between
the need for meaningful disclosure and the
protection of proprietary and confidential
information. In exceptional cases, disclosure
of certain items of information required by
Pillar 3 may prejudice seriously the position
of the bank by making public information that
is either proprietary or confidential in
nature.
In such
cases, a bank need not disclose those specific
items, but must disclose more general
information about the subject matter of the
requirement, together with the fact that, and
the reason why, the specific items of
information have not been disclosed. This
limited exemption is not intended to conflict
with the disclosure requirements under the
accounting standards.
II. The
disclosure requirements (121)
820. The
following sections set out in tabular form the
disclosure requirements under
Pillar 3.
Additional definitions and explanations are
provided in a series of footnotes.
(121) In this section of
this Framework, disclosures marked with an
asterisk are conditions for use of a
particular approach or methodology for the
calculation of regulatory capital.
A. General
disclosure principle
821. Banks
should have a formal disclosure policy
approved by the board of directors
that
addresses the bank’s approach for determining
what disclosures it will make and the
internal
controls over the disclosure process. In
addition, banks should implement a process
for
assessing the appropriateness of their
disclosures, including validation and
frequency of
them.
B. Scope of
application
822.
Pillar 3 applies at the top consolidated level
of the banking group to which this
Framework
applies (as indicated above in Part 1: Scope
of Application). Disclosures related
to
individual banks within the groups would not
generally be required to fulfil the disclosure
requirements set out below.
An
exception to this arises in the disclosure of
Total and Tier 1 Capital Ratios by the top
consolidated entity where an analysis of
significant bank subsidiaries within the group
is appropriate, in order to recognise the need
for these subsidiaries to comply with this
Framework and other applicable limitations on
the transfer of funds or capital within the
group.
(122) Entity =
securities, insurance and other financial
subsidiaries, commercial subsidiaries,
significant minority equity investments in
insurance, financial and commercial entities.
(123) Following the
listing of significant subsidiaries in
consolidated accounting, e.g. IAS 27.
(124) Following the
listing of subsidiaries in consolidated
accounting, e.g. IAS 31.
(125) May be provided as
an extension (extension of entities only if
they are significant for the consolidating
bank) to the listing of significant
subsidiaries in consolidated accounting, e.g.
IAS 27 and 32.
(126) Surplus capital in
unconsolidated regulated subsidiaries is the
difference between the amount of the
investment in those entities and their
regulatory capital requirements.
(127) See paragraphs 30
and 33.
C. Capital
(128) A capital
deficiency is the amount by which actual
capital is less than the regulatory capital
requirement. Any deficiencies which have been
deducted on a group level in addition to the
investment in such subsidiaries are not to be
included in the aggregate capital deficiency.
(129) See paragraph 31.
(130) See paragraph 30.
(131) Innovative
instruments are covered under the Committee’s
press release,
Instruments
eligible for inclusion in
Tier 1 capital
(27 October 1998).
(132) See paragraph 33.
(133) Representing 50%
of the difference (when expected losses as
calculated within the IRB approach exceed
total provisions) to be deducted from Tier 1
capital.
(134) Including 50% of
the difference (when expected losses as
calculated within the IRB approach exceed
total provisions) to be deducted from Tier 2
capital.
(135) Banks should
distinguish between the separate non-mortgage
retail portfolios used for the Pillar 1
capital calculation (i.e. qualifying revolving
retail exposures and other retail exposures)
unless these portfolios are insignificant in
size (relative to overall credit exposures)
and the risk profile of each portfolio is
sufficiently similar such that separate
disclosure would not help users’ understanding
of the risk profile of the banks’ retail
business.
(136) Capital
requirements are to be disclosed only for the
approaches used.
(137) Including
proportion of innovative capital instruments.
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