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Summary of "Fostering convergence of Pillar 3 disclosures"

Core Content

The document outlines the findings and feedback from the CEBS (Committee of European Banking Supervisors) on the Pillar 3 disclosures of 25 large European banks as of the end of 2008, in relation to the CRD (Capital Requirements Directive) requirements. It also includes perspectives from both banks and users, as well as recommendations and open issues for future discussion and action.

Main Findings

Diversity in Pillar 3 Disclosures

• There is a broad diversity in the quality and detail of Pillar 3 disclosures among the banks assessed.
• Some banks offer enhanced qualitative and quantitative risk information, while others provide only the minimum required to be compliant.
• Certain required information is missing, which may be due to materiality, proprietary, or confidentiality concerns.
• Lack of explanations for missing information is a common issue.

Complexity and Clarity

• Pillar 3 disclosures involve complex topics, requiring users to become familiar with the Basel II framework.
• Some banks suggest the use of a glossary and clearer explanations of CRD requirements to improve understanding.

Specific Compliance Issues

• Credit Risk: Lack of granularity in exposures, limited back-testing, and unclear internal rating processes.
• Credit Risk Mitigation (CRM): Insufficient information on concentration risk, credit derivative counterparties, and their creditworthiness.
• Counterparty Risk: Missing quantitative data on collateral impact and credit derivative hedges.
• Market Risk: Limited information on model validation, back-testing, and stress testing; lack of detailed procedures for accounting inputs.
• Operational Risk: Minimal detail on methodologies and risk factors.
• Securitisations: Ambiguity in the role of banks, lack of breakdown by exposure types, and insufficient detail on gains/losses and risk weight bands.

Feedback from Banks

Usefulness and Complexity

• Banks noted a gap between the technical nature of the disclosures and the knowledge level of users.
• Limited user inquiries suggest that the information may not be well understood.
• Suggestion to differentiate between user profiles (expert vs. non-expert) was raised.

Implementation Challenges

• Timing issues arose due to the first-time application of Pillar 3 requirements.
• Mismatch between Pillar 3 and regulatory reporting led to system adaptation challenges.
• Some requirements are subject to interpretation or proprietary constraints.

Need for Guidance

• Banks acknowledged the potential benefits of guidance in achieving greater homogeneity.
• However, they expressed concerns about the market-driven nature of Pillar 3 and the risk of excessive prescriptive guidance.
• They suggested that guidance should be non-prescriptive and based on best practices.

Feedback from Users

Form and Frequency

• Users found Pillar 3 disclosures useful but noted issues with consistency and comparability.
• They emphasized the importance of timely publication, ideally aligned with annual reports.
• More frequent disclosures would be beneficial.

Content and Clarity

• Own Funds: Need for more detailed and granular information on hybrid instruments, grandfathering, and deduction rules.
• Credit Risk: Clarification on exposures (before/after CRM, CCF), concentration risk, and credit risk mitigation techniques.
• Equity Risk: Clarification of the link between prudential and accounting figures, with more detailed equity performance data.
• Securitisation: More information on underlying assets and the bank's role in transactions.
• Market Risk: Need to distinguish between specific and general risk, and provide detailed back-testing and stress testing data.
• Operational Risk: More detailed risk factor analysis beyond generic descriptions.
• Interest Rate Risk: Clearer assumptions and sensitivity analyses.
• Liquidity Risk: Greater quantitative and detailed information is expected.

Way Forward

• CEBS aims to foster convergence in Pillar 3 disclosures.
• In 2010, CEBS will reassess Pillar 3 disclosures based on 2009 publications.
• The need for guidance is under reflection but not yet finalized.

Open Issues for Discussion

1. Usefulness of Pillar III Disclosures: Are they considered useful by all stakeholders? Are there areas that are missing or irrelevant?
2. Complexity: Is the complexity of Pillar 3 disclosures a barrier for users and preparers? What is the user profile?
3. Need for Guidance: Should CEBS provide guidance to ensure consistent interpretation and application of CRD? What form should it take (e.g., templates, clarifications)?
4. Disclosure Scope: With upcoming CRD amendments, the scope of Pillar 3 is expected to expand beyond a narrow view of Pillar 1 to include a broader risk profile. How will this affect disclosure design?

Amendments Under Way

• CRD Package No. 3: Expected to be finalized before the end of 2009, with implementation starting on 01.01.2011.
• Key Amendments:
  • Article 145 (3): Credit institutions must disclose additional information to comprehensively convey their risk profile to market participants.
  • Annex II, Part 2:
    • Points 9 and 10: Enhanced requirements on market risk and use of VaR models.
    • Incremental Risk Charge Methodologies: Additional information on daily VaR, stressed VaR, and risk capital charges.
    • Securitisation (Point 14): Strengthened information requirements for the trading book.
    • Remuneration Policy (Point 15): New disclosure requirements on remuneration practices for staff with material risk impact.