The June 2004 International Convergence of Capital Measurement and Capital Standards framework saw the Basel Committee on Banking Supervision expand upon the rules governing minimum capital requirements (Pillar 1) and the supervisory review process (Pillar 2) by drawing up disclosure requirements (Pillar 3) for the first time. These are designed to facilitate complementary use of market mechanisms to achieve prudential objectives. The underlying thinking is that well informed market participants, in their investment and credit decisions, will reward risk-conscious management and effective risk management at credit institutions and, by the same token, penalise riskier behaviour. This gives credit institutions an additional incentive to control their risks and manage them efficiently.
In the wake of the worldwide financial crisis in 2007, disclosure took on far greater significance and has been continually expanded and extended in the intervening years. Since 1 January 2014, the disclosure requirements have been enshrined at the European level in Part Eight of the Capital Requirements Regulation (CRR), meaning that they constitute directly applicable EU law.
The Pillar 3 disclosure requirements relate to the following areas:
- Scope of the capital rules
- Risk management objectives and policies
- Own funds and capital requirements
- Disclosure of individual exposures
- Indicators of global systemic importance
- Unencumbered assets
With a view to improving the transparency surrounding disclosure reports and boosting the comparability of institutions' disclosures across institutions, the present changes specify tabular and template formats and increase the frequency of disclosures in certain areas. The disclosure requirements governed by Part Eight of the CRR apply to all institutions, with proportionality in effect being automatically taken into account by giving due regard to the different activities of institutions and via application of the principle of materiality. In addition, for the time being, the new disclosure rules will initially apply only to large institutions (G-Sll s and O-Sll s). The European Commission’s proposal to amend the CRR includes plans for taking proportionality into account in respect of smaller institutions.