In March 2016 the Basel Committee published a consultation document in which it proposes Pillar 3 disclosure requirements for the Total Loss Absorbing Capacity standard (TLAC). These requirements may also become applicable to the MREL requirement in the future. The Basel Committee further wants to change the operational risk framework, which may lead to higher minimum capital requirements and requires disclosure of historical loss data. Finally, the Basel Committee proposes to consolidate all existing Pillar 3 disclosure requirements, providing a clearer overview. Stakeholders can submit comments to the consultation by 10 June 2016.
In November 2015, the Financial Stability Board issued a Total Loss Absorbing Capacity standard (TLAC) for global systemically important banks. The Basel Committee has now suggested in a consultation document that TLAC should be included in the Pillar 3 disclosure framework, which includes disclosures on the bail-in waterfall. The TLAC standard – which combines a common minimum capital requirement with an individual requirement – does not have direct effect and therefore needs to be implemented by the various jurisdictions. In the EU, a similar minimum requirement of own funds and eligible liabilities (MREL) has been implemented in the Bank Recovery & Resolution Directive (BRRD). The MREL is set for each individual bank and has a Pillar 2 character. As Pillar 3 disclosures apply to Pillar 1 requirements and MREL is a requirement currently not covered by the CRR disclosure requirements, no disclosure requirements currently exist for MREL.
It is unclear how the TLAC will be implemented in the EU. If it is implemented as a ‘Pillar 1′ type of requirement, the disclosure requirements in the CRR will be updated to reflect the final versions of the Basel Committee’s disclosure templates and will include TLAC as one of the disclosures. If the TLAC is implemented as a ‘Pillar 2′ type of firm specific requirement, currently no disclosure requirements would apply. This may make it difficult to compare banks in the EU with non-EU banks that disclose their full TLAC. Therefore it is to be expected that MREL, even as a ‘Pillar 2′ type of requirement, will also have to be disclosed. This is currently being analysed by the European Banking Authority (EBA). According to a lecture published on the EBA’s website, last week Andrea Enria, Chairperson of the EBA, indicated that the EBA is working on the implementation of the Basel Committee’s Pillar 3 requirements. In the same lecture he raised the question whether supervisory decisions on Pillar 2 requirements, including those on MREL, should be disclosed. Pursuant to article 45(19)(n) BRRD, the EBA also has to submit a report to the European Commission by 31 October 2016, including on whether MREL disclosure requirements are deemed appropriate. It is likely that such transparency will be required for MREL even if this remains a ‘Pillar 2′ type of requirement.
The suggested amendments to the Pillar 3 disclosures on the operational risk framework mainly arise from amendments to the framework suggested in the Basel Committee’s consultation document ‘Standardised Measurement Approach for operational risk‘. In this document, the Basel Committee suggests withdrawing the Advanced Measurement Approach and introducing the Standardised Measurement Approach for operational risk. This framework would offer a standardised approach combined with a bank-specific, risk-sensitive measure. Historical loss data are considered relevant when predicting future losses. Therefore, the Pillar 3 disclosure consultation document suggests disclosure of historical data going back up to nine years (T-9). The Basel Committee has acknowledged that the new framework could lead to higher minimum capital requirements for some banks. Comments need to be submitted by 3 June 2016. The new disclosure requirements and in particular the disclosure of historical loss data could be burdensome on banks having to comply with this requirement.
The Basel Committee also intends to consolidate all existing and new disclosure requirements. This consolidation, in addition to several amendments in frequency and format, relates to the following documents:
- Composition of capital disclosure requirements (June 2012)
- Global systemically important banks: updated assessment methodology and the higher loss absorbency requirement (July 2013)
- Basel III: A global regulatory framework for more resilient banks and banking systems – revised version (June 2011) – section dealing with the geographical distribution of credit exposures subject to the countercyclical buffer
- Basel III leverage ratio framework and disclosure requirements(January 2014)
- Liquidity coverage ratio disclosure standards (January 2014)
- Net Stable Funding Ratio disclosure standards (June 2015)
- Pillar 3 disclosure requirements for remuneration (July 2011).