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 introducing disclosure requirements (Pillar 3). 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 governance 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
- Leverage Ratio
With a view to improving the transparency surrounding disclosure reports and boosting the comparability of institutions’ disclosures across institutions, the CRR, amended as part of the EU banking package, has mandated the EBA with developing harmonised disclosure formats in the form of tables and templates. In the process, the frequency of selected types of disclosure has also been increased. In addition, greater account is being taken of the principle of proportionality, in particular regarding the frequency and scope of disclosures. Accordingly large, capital market-oriented institutions have to meet all of the disclosure requirements, while there is relief for other institutions. Disclosure is restricted to the annual publication of a few regulatory metrics for small and non-complex institutions which are non-listed.