Written by:
Simon Hills, Director, Prudential Policy, UK Finance

UK Finance has responded to the Basel Committee on Banking Supervision’s proposals to update the Pillar 3 disclosure requirements.

These are a key element of the banking regulatory architecture and require banks to transparently disclose a range of metrics, such as capital ratios and risk profiles. By perusing individual banks’ Pillar 3 disclosures, investors in banks’ equity and debt instruments can take a fully informed view about the bank’s risk profile – enabling them to make decisions about the appropriate return on capital they should demand.

The updating of the framework was required because the Basel III regulatory framework has recently been finalised, marking the culmination of the reforms to bank capital and liquidity regime instigated in the wake of the global financial crisis. The updating of the framework will require banks to compare their Risk Weighted Assets (RWAs) under the Internal Rating Based (IRB) Approach, with the hypothetical RWA number calculated using the less risk sensitive Standardised Approach (SA). This is needed in order to compute the so called ‘Basel floor’, which has been set at 72.5 per cent and introduced to prevent IRB requirements falling to what some would see as an inappropriately low level. The floor will be phased in, staring at 50 per cent in 2022 and reaching the full 72.5 per cent by 2027.

Other requirements that are being introduced include more granular quantitative disclosure requirements for credit and operational risk, the Credit Valuation Adjustment, asset encumbrance, as well as a qualitative overview of a bank’s risk management processes.

UK Finance is fully committed to supporting full and appropriate transparency as an important lever of market discipline.

But in our response we raised concerns about the granularity of disclosure in relation to both quantitative and qualitative information that it is proposed should be introduced, some elements of which will, in our view, result in the release of sensitive, proprietary information, particularly in relation to operational risk parameters and experiences and CVA hedging strategies and model components.

To alleviate this risk in the area of operational risk in particular, we alternatively proposed an approach that would focus the disclosure on maxima and minima over a ten-year period in addition to the average without requiring disaggregation of thresholds such as €20,000 and €100,000, which may not be meaningful for our larger member banks.

The new proposals require that banks benchmark their IRB RWA requirement against the hypothetical SA. We observed that as there is a range of potential users of Pillar 3 disclosures – investors, analysts and other stakeholders – whose size and sophistication vary, detailed information such as that required by the benchmarking templates, might be useful to only for a small number of analysts, credit rating agencies (CRAs) or sophisticated investors, but might not be so useful for majority of investors, including individual investors.  The costs of preparing such highly granular information are significant and those users such as CRAs receive this information directly from the banks they rate anyway.

So whilst it is important to increase transparency to promote market discipline, and UK Finance supports this whole-heartedly, this is not a cost free activity for banks. Pillar 3 disclosure requirements should deliver appropriate levels of information to the majority of users, without over burdening banks or requiring them to disclose proprietary information. UK Finance looks forward to continuing to engage with the BCBS in this important area to ensure this is the case.

The updating of Pillar 3 disclosure requirements
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