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Basel Committee sets out more consistent risk disclosure rules for global banks


Changes to the way in which large banks must report the risks that they hold on their balance sheets will make it easier to compare their financial positions, global regulators have said.

The changes apply to the disclosure requirements under Pillar 3 of the Basel regulatory framework for the most important global banks, and are set out in a report by the Basel Committee on Banking Supervision ('Basel Committee') (70-page / 818KB PDF). The new rules completely replace the existing disclosure regime, which was enhanced in July 2009 to take into account the effects of the global financial crisis, and are based on regulatory requirements currently being introduced under the latest version of the framework, known as 'Basel III'.

"The revised disclosure framework represents an important shift in both the format and granularity of required bank disclosures," said committee chair Stefan Ingves, who is the governor of Sweden's central bank Sveriges Riksbank. "These changes substantially strengthen the disclosure framework and will help users of the disclosure to better understand and assess the measurement of a bank's risk-weighted assets."

The final rules follow a consultation which ran from June to October last year, and will apply from the end of 2016.

Pillar 3 of the Basel framework is designed to promote market discipline and increase confidence about individual banks' exposure to risks and capital levels. It requires large banks to disclose certain information about their regulatory capital and risk exposures on an annual, semi-annual and quarterly basis, depending on the type of data. In some instances, Pillar 3 also requires additional information to be disclosed in order to improve the understanding of underlying risks.

The changes take into account new approaches to measuring credit, market and operational risks and their associated resulting risk-weighted assets and capital requirements, which will be phased in under Basel III between now and 2019. They also address inadequacies in the current framework, which allows banks to use their own internal models when assessing their risk-weighted assets. How different assets are weighted for risk affects how much capital must be held against them under the Basel III rules.

Under the new approach, banks will be forced to use fixed templates when reporting information that is "essential" to the analysis of their regulatory capital requirements, but will have more flexibility when reporting information which is "considered meaningful to the market but not central" to that analysis. Senior management will also be able to include commentary that explains that bank's particular circumstances and risk profile when publishing the required information.

Pillar 3 reports must be published in a standalone, easily identifiable document; although this may be appended to, or form a section of, the bank's overall financial reports providing that it is easily identifiable to users. The report must be published at the same time as the financial report for that period. One or more senior officers of the bank will have to attest in writing that the Pillar 3 disclosures have been prepared in accordance with internal control processes, agreed at the board level.

In its report, the Basel Committee set out five 'guiding principles' that should govern the disclosure process. Disclosures should be clear, comprehensive, meaningful to users, consistent over time and comparable across banks, it said.

"The provision of meaningful information about common key risk metrics to market participants is a fundamental tenet of a sound banking system," the report said. "It reduces information asymmetry and helps promote comparability of banks' risk profiles within and across jurisdictions."

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