Pillar 3: Market Discipline

The purpose of pillar three is to complement the minimum capital requirements of pillar one and the supervisory review process addressed in pillar two. The Committee has sought to encourage market discipline by developing a set of disclosure requirements that allow market participants to assess key information about a bank's risk profile and level of capitalisation. The Committee believes that public disclosure is particularly important with respect to the New Accord where reliance on internal methodologies will provide banks with greater discretion in determining their capital needs. By bringing greater market discipline to bear through enhanced disclosures, pillar three of the new capital framework can produce significant benefits in helping banks and supervisors to manage risk and improve stability.

Over the past year, the Committee has engaged various market participants and supervisors in a dialogue regarding the extent and type of bank disclosures that would be most useful. The aim has been to avoid potentially flooding the market with information that would be hard to interpret or to use in understanding a bank's actual risk profile. After taking a hard look at the disclosures proposed in its second consultative package on the New Accord, the Committee has since scaled back considerably the requirements, particularly those relating to the IRB approaches and securitisation.

The Committee is aware that supervisors may have different legal avenues available in having banks satisfy the disclosure requirements. The various means may include public disclosures deemed necessary on safety and supervision grounds or information that must be disclosed in regulatory reports. The Committee recognises that the means by which banks will be expected to share information publicly will depend on the legal authority of supervisors.

Another important consideration has been the need for the Basel II disclosure framework to align with national accounting standards. Considerable efforts have been made to ensure that the disclosure requirements of the New Accord focus on bank capital adequacy and do not conflict with broader accounting disclosure standards with which banks must comply. This has been accomplished through a strong and co-operative dialogue with accounting authorities. Going forward, the Committee will look to strengthen these relationships given that the continuing work of accounting authorities may have implications for the disclosures required in the New Accord. With respect to potential future modifications to the capital framework itself, the Committee intends to also consider the impact of such changes on the amount of information a bank should be required to disclose.