Integration of Pillar 3 Disclosures into Regulatory Reporting: New Challenges and Opportunities

The Basel Committee’s revised Pillar 3 framework of 2015 was intended to address shortcomings in the consistency and comparability of firms’ regulatory disclosures. Introducing standardised disclosure requirements under a tabular format for qualitative information and more granular disclosure requirements for quantitative information, the Committee aimed to improve the comparability of institutions’ disclosures across firms, jurisdictions and over time.

While the framework has been implemented in the EU through Part Eight of the Capital Requirements Regulation (CRR) in full, information disclosed by different firms across the EU has generally remained heterogeneous with material discrepancies and inconsistencies in terms of the formats used for disclosures, the degree of granularity of the disclosed information and the specific information disclosed by each firm. This is because most of the quantitative and qualitative disclosure requirements have been dispersed across different legal texts and guidelines instead of having implemented through a single, comprehensive and uniform framework. While the 2013 CRR mandated the European Banking Authority (EBA) to specify uniform Pillar 3 disclosure formats, this covered only a limited number of specific areas such as capital, leverage and asset encumbrance, leaving the format of the disclosures in many others areas to firms' discretion.

Aiming to address these issues, policy-makers in the EU made a firm commitment to overhaul the current disclosure requirements under the revised CRR (CRR II), which was published in the Official Journal of the EU in June 2019. The EBA is currently in the process of preparing a more comprehensive and standardised Pillar 3 regime, developing comprehensive Implementing Technical Standards (ITS) as per its mandate under Article 434 of the CRR II to introduce uniform formats and associated instructions for disclosure requirements. Aiming to improve the consistency between the reporting and disclosure requirements with a view to facilitate firms' compliance with these requirements, the EBA launched two parallel consultations with respect to ITS on revised supervisory reporting and draft public disclosures in October 2019. The EBA’s proposals have important implications for the industry as they set out a major revision of the current Pillar 3 and regulatory reporting frameworks in the EU. The consultation on revised supervisory reporting aims to keep the reporting requirements in line with changes in the regulatory framework and with the evolving needs for National Competent Authorities' risk assessments. It focuses on the CRR II and Backstop Regulation, proposing changes to different areas of supervisory reporting, including own funds, credit risk, counterparty credit risk, large exposures, leverage ratio, the Net Stable Funding Ratio and FINREP. The consultation on the draft ITS on public disclosures, on the other hand, aims to implement regulatory changes introduced by the CRR II, optimise the current Pillar 3 policy framework and to align the disclosure framework with international standards. Proposals introduce a comprehensive set of disclosure templates, tables and related instructions in order to ensure alignment and consistency with the Basel Committee’s updated Pillar 3 framework.

One of the EBA's key proposals is to introduce a number of all-inclusive regulatory disclosure products, including the comprehensive draft ITS on institutions’ public disclosures, which are applicable to all firms subject to the Pillar 3 disclosure requirements under Part Eight of the CRR.  Given they provide the practical tools and framework for institutions to comply with the revised disclosure requirements under the CRR II, the EBA's proposals are to be welcome by the industry. Proposing to replace the Pillar 3 disclosure templates and tables included in the regulatory products and guidelines, the EBA's draft ITS sets out to optimise the Pillar 3 policy framework by providing a single comprehensive package. The EBA expects this not only to ease the firms' compliance burden with respect to the Pillar 3 regime but also to improve transparency of financial and non-financial information for the stakeholders.

More specifically, with its proposed PIllar 3 disclosures regime, the EBA aims to align CRR II with the Basel Committee’s revised Pillar 3 framework. The EBA not only proposes the disclosure templates to fully reflect CRR II disclosure requirements and to broadly align them with the Basel standards, but also to make the necessary adjustments to reflect the EU regulatory specificities where fully mirroring the Basel templates one-to-one is not feasible. However, given the differences in the Basel standards and CRR II regulation, this also means that not all information covered by the Basel disclosure templates can be included in the EBA templates and that identical items/rows will not necessarily have the same row numbers. This appears to be the only downside of the proposed framework.

The discrepancy between the Basel Pillar 3 disclosure templates and the proposed EBA templates may render it difficult to make a one-to-one comparison. For instance, in the case of global banking groups with overseas entities, stakeholders may find it challenging to make a direct comparison of the disclosed information by two entities located in an EU and non-EU jurisdictions. Although the EBA has proposed a continuous numbering system to ensure related templates remain easy to populate and to read by stakeholders, it is very likely that the discrepancies between the ordering and numbering of information items and rows in the two templates will cause teething troubles at the beginning stages of the new regime.

Taking into account the commonalities of the regulatory information that firms are required to report to their supervisors and the information that they have to disclose in the interest of investors and external stakeholders, another key proposal of the EBA is to integrate Pillar 3 disclosure requirements into regulatory reporting requirements. This represents a radical transformation in the current Pillar 3 and regulatory reporting regimes. Given implementation of this objective ultimately requires one-to-one mapping between the quantitative disclosure templates and regulatory requirements, the EBA has conveniently introduced a "mapping tool”.This tool is intended for informative purposes only and is not part of the draft ITS. The EBA published this as an accompanying document to make it easier for firms to populate the quantitative disclosure templates.

The EBA's mappting tool conveniently includes a comprehensive set of excel files that provides the mapping of most of the quantitative disclosure templates with the relevant reporting data points. But given qualitative information has a flexible format, mapping the financial disclosure tables with non-financial information will be challenging. For instance, under its 2016 guildelines on Pillar 3 disclosures, the EBA does not prescribe a set format for the presentation of qualitative information although it introduced an optional tabular format. Firms are not required to use the EBA's format but are required to ensure that the level of granularity between their own format and the format in these guidelines are "similar". This flexibility with respect to the disclosure of qualitative information could lead to complication in terms of mapping the quantitative disclosure templates and regulatory requirements. However, if successful, integration of Pillar 3 disclosures into regulatory reporting should still improve the quality of the disclosed information and reduce the related compliance burden for firms. In particular, standardisation of formats and definitions would improve consistency between the reporting and Pillar 3 disclosure requirements, while helping firms remain compliant with both frameworks.

Turning to CRR II, the new regime introduces definitions of ‘small and less complex institutions’ and ‘large institutions’ for greater proportionality, depending on their size and complexity and on whether they are listed or non-listed institutions. In line with these definitions, small and non-complex institutions’ disclosures will need to consist of key metrics, while large and listed institutions will be required to disclose more detailed information. Proportionality will also be reflected in the frequency of disclosures as well as in disclosure formats to ensure that sufficient information is conveyed to assess the risk profiles of different firms. The EBA is also expected to introduce thresholds to trigger additional disclosures for large banks based on their risk profiles, whereas large institutions that have issued securities that are admitted to trading on a regulated market of any EU Member State are required to disclose information on Environmental, Social and Governance risks from 28 June 2022 as part of the EBA's sustainable finance action plan. 

These concurrent developments represent a step change in the Pillar 3 and regulatory reporting regimes in the EU. On 21 November 2019, the EBA published a roadmap, which provides an overview of the strategy that it is planning to implement in the short and medium term, and the timeline, process and deliverables that it is deploying for this purpose. According to this roadmap, new disclosure rules will mostly be taking effect from June 2021. However, firms should perceive this as an ongoing endeavour rather than yet another one-off implementation challenge given the EBA is expected to review and amend as necessary the disclosures on credit risk once the credit risk standardised approach regulatory framework is revised following the implementation of Basel III. The EBA is also expected to conduct an extensive review of the market risk disclosures included in the relevant ITS once the Fundamental Review of the Trading Book is finalised. So firms will need to remain vigilant for further regulatory developments in this area for the foreseeable future.