Basel - II - Market Discipline (Third Pillar)

BASEL- II - Market Discipline (Third Pillar)
- RBI Guidelines (April 2007)

A) Introduction
- Complementary to other two pillars i.e. Minimum Capital Requirement

and Supervisory Review Process
- AIM : To encourage market discipline through a set of disclosure
requirements so as to enable market participants like investors to have
information about banks risk exposures, risk assessment processes,
capital and capital adequacy position besides Scope of Application
- Disclosures should be consistent with the way senior management of
bank and Board of Directors assess and manage various risks of the
Bank.
Dr K Satyanarayana, NIBM, Pune
B) Achieving Appropriate Disclosure

- Desirable to have a common framework for all banks so as to achieve
consistent, comprehensive and comparable disclosure standards.
- Market discipline can contribute to safe
environment
and
sound banking
- Effective from 31-3-2008 / 31-3-2009

- Non-compliance with the prescribed disclosures shall attract in addition
to general intervention, penalty including financial though not directly in
the form of additional capital:
e.g. denying a legitimate lower risk weight or specific methodology
under Pillar-I
C) Interaction with Accounting Disclosures
- To ensure that such disclosure requirements do not clash with:
Accounting Standards
Proprietary information disclosure which may undermine banks

competitive position in products, systems etc. I.e. rendering
investment in such products & systems less valuable to the bank
Obligation to maintain customers confidentiality or such other

terms of legal agreement or counterparty relationship
D) Materiality
- Materiality concept shall be the guiding principle of disclosure to decide
upon the need or relevance of disclosure
Information would be regarded as material if its omission or mis-statement
could change or influence the assessment or decision of a user relying on
that information for the purpose of making economic decisions
- Such definition is consistent with international accounting standards as
well as national accounting framework
RBI advocates user test as bench mark for achieving sufficient
disclosure threshold levels in this context
User test is whether a user of financial information would consider the
item to be material or not.
RBI has also prescribed materiality thresholds for certain limited
disclosures
- Banks are encouraged to make disclosures even below the specified
thresholds also.
E) Frequency of Disclosures
- Quantitative and Qualitative disclosures as on March end each year
along with annual financial statements making them available in the
annual reports and websites.
- Banks with capital funds of Rs. 100 crores and above should make
certain interim quantitative disclosures on a stand-alone basis through
their websites as at the end of September each year.
- However qualitative disclosures that provide a general summary of
banks risk management objectives and policies, reporting system,
definitions etc. may be done only on annual basis.
- In tune with the risk sensitivity of Basel II and also general trend of
more frequent reporting in capital markets, all banks with a capital
funds of Rs. 500 crores and above and their significant bank
subsidiaries must disclose on quarterly basis the following :
Tier I Capital
Total Capital
Total Required Capital
Tier I Ratio
Total Capital Adequacy Ratio
- Website disclosures should be under the title Basel II disclosures with a

link to home page prominently.
- Each of Capital Adequacy disclosures pertaining to a financial year
should be available on the website until disclosure of third subsequent
annual (March end) disclosure is made.
e.g. Disclosure of financial year ending March 31, 2009 (i.e.

June/September/December 2008 and March 2009) should be
retained in the website until disclosure as on March 2012.
F) Need for proper validation of disclosures :

- No need for formal audit or external audit of Pillar III
disclosures. However information disclosed shall be consistent
with :
Audited Financial Statements
Systems of Internal scrutiny, verification etc.
Management discussion and analysis after sufficient scrutiny
Internal control assessments
If there is any stand alone report or any other part of website not
subject to the above validation regime, then management
should ensure appropriate verification in accordance with
general disclosure principle.
G) General disclosure principle :

A formal disclosure policy to be duly approved by banks Board
covering :
- Approach to determine what should be disclosed.
- Disclosure process including internal control over such process.
- System of assessing appropriateness of disclosures including
validation and frequency of such disclosures.
H) Scope of application of Pillar III disclosures

- All those banks required to adopt Basel II i.e. ASCBs (except
RRBs and LABs) both solo as well as consolidated as the case
may be.
- In other words exclude RRBs, LABs, insurance companies and
companies whose business is not financial services in case of
consolidated entity.
- In consolidated case, disclosures related to individual banks
within a group would not generally be required to be made by
parent bank except :
Total and Tier I ratios of significant subsidiaries so as to reflect
possible implications or limitations on the transfer of funds or
capital within the group.
Individual banks need to make Pillar III disclosures on a stand
alone basis when they are not the top consolidated entity in the
banking group.
I) What market wants to know?

- The risks to which banks are exposed to :
Credit Risk, Market Risk, IRR in Banking Book and
Operational Risk
- The techniques that banks use to identify, measure, monitor and

control those risks.
- Risk hedging and or mitigation (especially credit risk) routes,
including assets securitisation which alters the risk profile of a
bank.
- Where applicable, separate disclosures are to be set out for
banks using different approaches to the assessment of
regulatory capital.
J) General Qualitative Disclosure Requirement

Under general qualitative disclosure requirement banks are expected to
indicate their risk management objectives and policies covering :
- Strategies and processes
- The structure and organisation of the relevant risk management
function.
- The scope and nature of risk reporting and or measurement
system.
- Policies for hedging and or mitigating risk and strategies and
processes for monitoring the continuing effectiveness of
hedges/mitigants.
Information provided especially for credit risk need not necessarily be

based on information prepared for regulatory purposes.
Disclosures on
information on :
the
capital
assessment
techniques
shall
- The specific nature of exposures

- The means of capital assessment
- The data to assess the reliability of the information disclosed.
give
K) List of Prescribed Formats for Disclosures
1) Table DF1 :
Scope of application
2) Table DF2 :
Capital structure
3) Table DF3 :
Capital adequacy
4)
Table DF4 : Credit risk (including equities) general

disclosures for all banks
5) Table DF5 :
Credit Risk : Disclosures for portfolios

subject to the standardised approach
5) Table DF6 :
Credit risk mitigation : disclosures for

standardised approaches
List of Prescribed Formats for Disclosures

7) Table DF7 :
Securitisation : Disclosure for standardised

approach
8) Table DF8 :
Market risk in trading book : Disclosure for

banks using the standardised duration
approach
9) Table DF9 :
Operational risk
10) Table DF10 :
Interest rate risk in the banking book
L) Prescribed Formats for Disclosures

1) Table DF1 :
Qualitative :
Disclosures
Scope of Application
a) Name of the top bank in the group to which
the framework applies
b) An outline of differences in the basis of

consolidation for accounting and regulatory
purposes with a brief description of the
entities* within the group that are:
Fully consolidated (As-21 i.e. subsidiaries)
Prorata
consolidated
(As27-J.V)
for
accounting
Given a deduction treatment
Neither consolidated nor deducted (eg.
where the investment is risk weighted).
______________________
* securities, insurance and other financial subsidiaries, commercial subsidiaries,
significant minority equity investments in insurance, financial and commercial
entities.
Quantitative : c) Aggregate amount of capital deficiencies** in all

Disclosures
subsidiaries not included in the consolidation that
are deducted and the names of such subsidiaries
d) The aggregate amounts (e.g. : current book value)
of the banks total interest in the insurance entities
which are risk weighted as well as their name,
their country of incorporation of residence, the
proportion of ownership interest and if different,
the proportion of voting power in these entities. In
addition, indicate the quantitative impact on
regulatory capital of using this method versus
using the deduction.
_________________________
** A capital deficiency is the amount by which actual capital is less than
the regulatory capital requirement. Any deficiencies which have been
deducted on a group level in addition to investment in such
subsidiaries are not to be included in the aggregate capital deficiency.
Prescribed Formats for Disclosures

2) Table DF2
Capital Structure
Qualitative :
a) Summary information on the terms and

conditions of the main features of capital
instruments and especially Tier I and
upper Tier II.
Quantitative:
b) Total amount of Tier I Capital (of which)

Paid up share capital
Reserves
Innovative Instruments
(eg. : perpetual debt)
Other capital instruments
Deductions like goodwill, investments
in subsidiaries etc. from Tier I
2) Table DF2 (contd.):

Quantitative:
Capital Structure
c) Total amount of Tier II capital
Net of deductions from Tier II
d) Debt capital instruments eligible for upper
Tier II
Total amount outstanding
Of which raised in current year
Amount eligible to be reckoned as capital
funds
e) Subordinate debt eligible for inclusion
in lower Tier II capital
Total amount outstanding
Of which raised during current year
Amount eligible to be reckoned as
capital funds
f) Other deductions from capital if any
g) Total Eligible Capital

3) Table DF3
Capital Structure
Qualitative:
a) A summary of discussion of banks

approach to assessing the adequacy of
its capital to support current and future
activities
Quantitative:
b) Capital requirements for credit risk

Portfolios subject to standardised
approach
Securitisation exposures

3) Table DF3 (contd.) :
Quantitative:
Capital Structure
c) Capital requirements for Market Risk :
Standardised Duration Approach
Interest Rate Risk
FEX Risk including gold
Equity Risk
d) Capital requirement for Operational
Risk :
Basic Indicator Approach
e) Total and Tier I Capital Ratio

For the top consolidated group
For significant bank subsidiaries (stand
alone or sub-consolidated depending on
how the framework is applied).

4) Table DF4
Credit Risk : General disclosures for all

banks
Qualitative
a) The general qualitative disclosure

requirement with respect to credit risk,
including :
Definitions of past due and impaired (for

accounting purposes);
Discussion of the banks credit risk
management policy;

Quantitative

banks
b) Total gross credit risk exposures1 ,
Fund based and non-fund based2,
separately.
c) Geographic distribution of exposures3,
Fund based and non-fund based
separately
Overseas
Domestic
1.
2.
3.
That is outstanding, after accounting offsets in accordance with the applicable

accounting regime and without taking into account the effects of credit risk
mitigation techniques, eg. Collateral and netting.
At actuals, before application of CCFs.
That is, on the same basis as adopted for Segment Reporting adopted for
compliance with AS 17.

Quantitative

banks
d) Industry4 type distribution of

exposures, fund based and non-fund
based separately
e) Residual contractual maturity
breakdown of assets5,
4.
5.
The industry-wise break-up may be provided on the same lines as under DSB
returns at present. If the exposure to any particular industry is more than 5%
of the gross credit exposure as computed under (b) above it should be
disclosed separately.
Banks shall use the same maturity bands as used for reporting positions in
the ALM returns.

Quantitative

banks
f) Amount of NPAs (Gross)

Substandard
Doubtful 1
Doubtful 2
Doubtful 3
Loss
g) Net NPAs
h) NPA Ratio
Gross NPAs to gross advances
Net NPAs to net advances

Quantitative

banks
i) Movement of NPAs (Gross)

Opening balance
Additions
Reductions
Closing balance
j) Movement of provisions for NPAs
Opening balance
Provisions made during the period
Write-off/write-back of excess
provisions
Closing balance

Quantitative

banks
k) Amount of Non-Performing Investments

l) Movement of provisions for depreciation
on investments
Opening balance
Provisions made during the period
Write-off/write-back of excess
provisions
Closing balance

5) Table DF5
Credit Risk : disclosures for portfolios

Qualitative
a) For portfolios under the standardised

approach
Names of credit rating agencies used,
plus reasons for any changes;
Types of exposure for which each
agency is used; and
A description of the process used to
transfer public issue ratings onto
comparable assets in the banking
book;

Quantitative
Credit Risk : disclosures for portfolios

b) For exposure amounts defined in DF4

after risk mitigation subject to the
standardised approach, amount of a
banks outstandings (rated and unrated)
in the following major risk bucket, as well
as those that are deducted;
Below 100% risk weight
100% risk weight
More than 100% risk weight
Deducted

6) Table DF6
Qualitative
: Credit Risk Mitigation : Disclosures for standardised

approaches1
a) The general qualitative disclosure requirement

with respect to credit risk mitigation including :
Policies and processes for collateral
valuation and management;
A description of the main types of collateral
taken by the bank;
The main types of guarantor counterparty and their creditworthiness; and
Information about (market or credit) risk
concentrations within the mitigation taken
_____________________
1.
At a minimum, banks must give the disclosures below in relation to credit risk mitigation
that has been recognised for the purposes of reducing capital requirements under the
framework. Where relevant, banks are encouraged to give further information about
mitigants that have not been recognised for that purpose.

Quantitative
Credit Risk Mitigation : Disclosures for

standardised approaches
b) For disclosed credit risk portfolio under
the standardised approach, the total
exposure that is covered by :
Eligible financial collateral after the

application of haircuts.

7) Table DF7
Qualitative
Disclosures

approach
a)
General Qualitative Disclosure including

discussion of :
The banks objectives in relation to
securitisation activity including the extent
to which these activities transfer credit risk
of the underlying securitised exposures
away from the bank to other entities.
The roles played by the bank in the
securitisation process (i.e. as originator,
investor, servicer, provider of credit
enhancement, liquidity provider, swap
provider) and an indication of the extent of
banks involvement in each of them.
The regulatory capital approach that the
bank follows for its securitisation activities.


approach
Qualitative
b) Summary of the banks accounting
Disclosures (contd.):
policies for securitisation activities
including :
Recognition of gain on sale
Key assumptions for valuing retained
interests including any significant
changes since the last reporting
period and the impact of such
changes
c) Names of ECAIs used for securitisation
and the types of securitisation exposure for
which each agency is used.

Quantitative
Disclosures

approach
d) The total outstanding exposures
securitised by the bank and subject to
the securitisation framework by
exposure type (eg. credit cards, home
equity, auto, etc.). Securitisation
transactions in which the originating
bank does not retain any securitisation
exposure should be shown separately
but need only be reported for the year
of inception.

7)
Table DF7 (contd.):

approach
Quantitative
Disclosures
e) For exposures securitised by the bank and

subject to the securitisation framework where
relevant, banks are encouraged to differentiate
between exposures resulting from activities in
which they act only as sponsors, and
exposures that result from all other bank
securitisation activities that are subject to
securitisation framework.
Amount of impaired/past due assets securitised
Losses recognised by the bank during the
current period broken down by exposure type
(eg.: wirteoffs/provisions (if the assets remain on
the banks balance sheet or write-downs of 1/0
strips and other residual interests).

7)
Table DF7 (contd.):

approach
Quantitative
Disclosures
f) Aggregate amount of securitisation exposures

retained or purchased (which include but are
not restricted to securities, liquidity facilities,
other commitments and credit enhancements
such as 1/0 strips, cash collateral amounts and
other subordinated assets) broken down by
exposure type.
g) Aggregate amount of securitisation exposures

retained or purchased broken down into meaningful
number of risk weight bands. Exposures that have
been deducted entirely from Tier I capital, credit
enhancing 1/0, deducted from total capital and
other exposures deducted from total capital should
be disclosed separately by type of underlying
exposure type.

7)
Table DF7 (contd.):

approach
Quantitative
Disclosures
h) Summary of securitisation activity presenting

a comparative position for two years as part
of the notes on accounts to the balance sheet :
Total number and book value of loan assets

securitised by type of underlying assets.
Sale consideration received for the securitised
assets and gain/loss on sale on account of
securitisation.
Form and quantum (outstanding value) of
services provided by way of credit
enhancement, liquidity support, post
securitisation asset servicing etc.

8) Table DF8
Market risk in trading book : disclosure for

banks using the standardised duration
approach.
Qualitative
a) The general qualitative disclosure

requirement for market risk including the
portfolios covered by the standardised
approach.
Quantitative
b) The capital requirements for :
Interest rate risk;

Equity position risk;
Foreign exchange risk;

9) Table DF9
Qualitative
10) Table DF10

(IRRBB)
Qualitative
Disclosures
a) The general qualitative requirement

including the nature of IRRBB and key
assumptions, including assumptions
regarding loan prepayments and
behaviour of non-maturity deposits and
frequency of IRRBB measurement
Operational Risk
In addition to the general qualitative
disclosure requirement, the approaches
for operational risk capital assessment
for which the bank qualifies.

10) Table DF10
Quantitative
Disclosures

(IRRBB)
b) The increase or decline in earnings and

economic value (or relevant measure
used by management) for upward and
downward rate shocks according to
managements method for measuring
IRRBB, broken down by currency
(where the turnover is more than 5% of
the total turnover).

Basel - II - Market Discipline (Third Pillar)

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Basel - II - Market Discipline (Third Pillar)

Uploaded by

Copyright:

Available Formats

BASEL- II - Market Discipline (Third Pillar)

- RBI Guidelines (April 2007)

- Complementary to other two pillars i.e. Minimum Capital Requirement

Dr K Satyanarayana, NIBM, Pune

B) Achieving Appropriate Disclosure

- Effective from 31-3-2008 / 31-3-2009

Dr K Satyanarayana, NIBM, Pune

C) Interaction with Accounting Disclosures

- To ensure that such disclosure requirements do not clash with:

Proprietary information disclosure which may undermine banks

Obligation to maintain customers confidentiality or such other

Dr K Satyanarayana, NIBM, Pune

Dr K Satyanarayana, NIBM, Pune

- Website disclosures should be under the title Basel II disclosures with a

e.g. Disclosure of financial year ending March 31, 2009 (i.e.

Dr K Satyanarayana, NIBM, Pune

F) Need for proper validation of disclosures :

Systems of Internal scrutiny, verification etc.

Management discussion and analysis after sufficient scrutiny

Internal control assessments

Dr K Satyanarayana, NIBM, Pune

G) General disclosure principle :

Dr K Satyanarayana, NIBM, Pune

H) Scope of application of Pillar III disclosures

I) What market wants to know?

- The techniques that banks use to identify, measure, monitor and

Dr K Satyanarayana, NIBM, Pune

J) General Qualitative Disclosure Requirement

Dr K Satyanarayana, NIBM, Pune

Information provided especially for credit risk need not necessarily be

- The specific nature of exposures

Dr K Satyanarayana, NIBM, Pune

K) List of Prescribed Formats for Disclosures

Table DF4 : Credit risk (including equities) general

Credit Risk : Disclosures for portfolios

Credit risk mitigation : disclosures for

Dr K Satyanarayana, NIBM, Pune

List of Prescribed Formats for Disclosures

Securitisation : Disclosure for standardised

Market risk in trading book : Disclosure for

10) Table DF10 :

Interest rate risk in the banking book

Dr K Satyanarayana, NIBM, Pune

L) Prescribed Formats for Disclosures

b) An outline of differences in the basis of

Quantitative : c) Aggregate amount of capital deficiencies** in all

Prescribed Formats for Disclosures

a) Summary information on the terms and

b) Total amount of Tier I Capital (of which)

Dr K Satyanarayana, NIBM, Pune

Prescribed Formats for Disclosures

2) Table DF2 (contd.):

Dr K Satyanarayana, NIBM, Pune

Prescribed Formats for Disclosures

a) A summary of discussion of banks

b) Capital requirements for credit risk

Dr K Satyanarayana, NIBM, Pune

Prescribed Formats for Disclosures

e) Total and Tier I Capital Ratio

Prescribed Formats for Disclosures

Credit Risk : General disclosures for all

a) The general qualitative disclosure

Dr K Satyanarayana, NIBM, Pune

Definitions of past due and impaired (for