Finalized Basel III Framework

In December 2017, the Basel Committee on Banking Supervision (BCBS) completed its journey of finalizing Basel III post-crisis regulatory reforms. The reforms, originally introduced in 2010 in the aftermath of the GFC, underwent multiple phases of discussions and negotiations, before finally rolled out for implementation with deadlines leading up to the 3rd decade of the century.

Following-up on the major changes and updates introduced in Basel III, the Basel Committee also took a phased approach in revising the Pillar III disclosure requirements to better align with newly introduced as well as revised approaches.

Since the introduction of Pillar III disclosure requirements in Basel II in 2004, BCBS largely brought in changes in 3 phases commonly referred as:

Phase 1 - January 2015 Standards
The first phase mainly focused on ensuring comparability and consistency in disclosures by banks across the board. It achieved so by introducing a hierarchical disclosure regime where the quantitative reporting forms surrounding capital adequacy were fixed to ensure consistency and comparability across banks, whereas for disclosures important for markets were kept flexible. This approach also allowed room to accommodate management commentary on bank’s particular circumstances and risk profile.

Phase 2 - March 2017 Standards
Phase 2 of Pillar III brought consolidation of all the newly introduced risk measures in Basel III (and beyond) namely; disclosures surrounding composition of capital, the leverage ratio, the liquidity ratios, the indicators for determining globally systemically important banks, the counter-cyclical capital buffer, interest rate risk in the banking book as well as disclosures pertaining to remunerations. This phase also incorporated the revised market risk framework alongside the introduction of dashboard type disclosure templates to capture summary of banks’ key prudential metrics depicting its prudential position and key RWA break-ups across asset classes and adopted computational approaches.

Phase 3 - December 2018 Standards
After the finalization of Basel III norms in December 2017, the committee revised Pillar 3 disclosure requirements to reflect the underlying updates. Barring the minimum changes expected due to RWA computation approaches across asset classes and revisions to other risk measures; the newly revised Pillar 3 disclosure requirements also showcased the following glaring inclusions:
disclosure of bank’s encumbered and unencumbered assets
introduction of capital distribution constraints to portray clearer picture of bank’s capital position.

In this paper, we dive deeper into the recently introduced wave of changes in Phase 3.

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