On February 28, 2013, the Office of the Superintendent of Financial Institutions (OSFI) released for comment by April 30, 2013, a draft advisory to provide clarification on the implementation of the Basel Committee on Banking Supervision Disclosure Rules (the BCBS Disclosure Rules)1 for all institutions subject to Pillar 3 Disclosure Requirements (the Advisory). These institutions include all banks, bank holding companies, federally regulated trust and loan companies and cooperative retail associations in Canada.
The Advisory builds on OSFI’s November 2007 Advisory on Pillar 3 Disclosure Requirements and clarifies that the new composition of capital public disclosure requirements apply to all institutions, regardless of the size of the institution or whether it is publicly listed.2 The full disclosure requirements are to be implemented by all institutions beginning in Q3 2013 (i.e., July 31, 2013 for institutions with October 31 year-ends, and September 30, 2013 for institutions with December 31 year-ends) with certain modifications to reflect Canadian-specific adjustments. The BCBS Disclosure Rules require that all institutions maintain a "Regulatory Disclosures" section on their public websites. In the interim period (Q1 and Q2 2013), institutions are required to disclose detailed components of the transitional capital ratios as well as the All-in capital ratios; however, starting in Q3 2013, institutions will be required to disclose the full components of the All-in Capital ratios and limited components of the transitional capital ratios. These ratios are discussed further below.
The BCBS Disclosure Rules consist of five main components: (i) All-in Capital Disclosure Template, (ii) Balance Sheet Reconciliation Requirements, (iii) Main Features Template, (iv) Other Disclosure Requirements, and (v) Transitional Capital Template. Please refer to the Advisory for a more detailed breakdown of these components.
All-in Capital Disclosure Template
The All-in Capital Disclosure Template (see Annex 1 of the Advisory) is to be completed by all institutions beginning in the Q3 2013 reporting period.
This template aims to enhance transparency and ensure comparability by disclosing all regulatory adjustments or deductions. It reports the breakdown of an institution’s regulatory capital when the phasing-in of deductions ends on January 1, 2018. OSFI has modified rows 26, 41 and 56 of the template (which provide for "national specific regulatory adjustments" in the calculations of total regulatory adjustments to CET1, Additional Tier 1 and Tier 2 capital) to reflect Canadian-specific adjustments.
Institutions should clearly disclose that they are using the template because they are fully applying the Basel III deductions to calculate the all-in target ratios as per Chapter 1 of OSFI’s Capital Adequacy Requirement Guideline.
Balance Sheet Reconciliation Requirements
The section on the balance sheet reconciliation requirements (see Annex 2 of the Advisory) sets out a three-step approach, which is to be completed and disclosed by all institutions in reporting periods beginning in Q3 2013, to achieve a full reconciliation of all regulatory elements back to the institution’s audited balance sheet (i.e., to address a disconnect that may exist between the numbers used for the calculation of regulatory capital and the numbers used in the audited financial statements). While neither OSFI nor the BCBS Disclosure Rules prescribe a set template for this requirement, Annex 2 of the Advisory sets out an example of the reconciliation for illustrative purposes.
Main Features Template
Basel III requires the completion of a Main Features Template (see Annex 3 of the Advisory), to be disclosed for each outstanding capital instrument, that provides a description of the main features of outstanding regulatory capital instruments. This template, which is to be completed and disclosed by all institutions in reporting periods starting in Q3 2013, was designed to be completed from the time when the Basel III framework came into effect on January 1, 2013 and therefore should also include disclosure relating to instruments that are subject to the transitional arrangements. Institutions are required to keep this template up to date, and reports should be updated and made publicly available whenever an institution issues or repays a capital instrument or if there is a redemption, conversion or other material change in the nature of an existing capital instrument.
Other Disclosure Requirements
The section on other disclosure requirements mandates institutions to make the full terms and conditions of all capital instruments available on their websites. It also requires institutions that disclose ratios involving components of regulatory capital (i.e., ratios that are not defined in BCBS documents such as "Equity Tier 1" or "Tangible Common Equity" ratios) to provide a comprehensive explanation of the way these ratios are calculated.
Transitional Capital Template
The Transitional Capital Template (see Annex 4 of the Advisory) is a modified version of the All-in Capital Disclosure Template described above that discloses the components of capital that are benefiting from transitioning, and aims to ensure that disclosure during the transitional period is consistent and comparable across institutions in different jurisdictions. Since institutions are required to disclose the All-in Capital Disclosure Template beginning in Q3 2013, OSFI has modified the Transitional Template to include only CET1, Tier 1 and Total capital ratios and their components, and will only require this template to be completed and disclosed by all institutions until the end of the Q4 2017 reporting period.