Pillar 3 reconciliation: improving banks’ reporting discipline

17 November 2022

The Basel Committee on Banking Supervision has developed an internationally agreed set of measures that aims to strengthen the regulation, supervision, and risk management of the banking sector, known as Basel III. It consists of three main pillars: minimum capital requirements (Pillar 1), supervisory review (Pillar 2) and market discipline (Pillar 3). Pillar 3 of the Basel framework aims to promote market discipline through disclosure requirements for banks. This means that banks must disclose certain qualitative and quantitative information publicly on a regular basis, either as part of their financial reports or in separate Pillar 3 reports.

Following its mandate, the European Banking Authority (EBA) has developed implementing technical standards (ITS) on disclosure that provide uniform templates and tables which banks can use to report information in a comparable and consistent manner. The ITS takes into account revisions made to the Pillar 3 disclosure framework and to the Capital Requirements Regulation (CRR).

Under the framework the ECB is responsible for assessing banks’ compliance with the Pillar 3 disclosure requirements. To do so the ECB performs inter alia an annual reconciliation exercise where it compares banks’ published Pillar 3 information and data that is reported to the supervisors. Where the ECB identifies misalignments between the two datasets, it asks banks to correct the information, which ultimately improves the quality of the disclosed data. The content of this reconciliation exercise varies annually depending on changes in regulation, in the risk environment for banks and in the supervisory priorities of European banking supervision.

In 2022, the exercise focused on the following data: solvency, leverage, liquidity coverage and net stable funding ratios. It also looked at selected disclosure templates covering counterparty credit risk (CCR). CCR is the risk arising from the possibility that the counterparty to a derivative or repurchase and lending agreement may default while these transactions still have a positive value for the bank (i.e. are “in-the-money”). Since the global financial crisis, it has been one of the key financial risks banks face, as it can not only cause the failure of one bank, but also pose significant systemic risk.

The exercise resulted in notable improvements in the consistency between regulatory reporting and selected Pillar 3 information (see table 1). Overall, the ECB assessed 108 banks, 55 of which re-published their Pillar 3 reports and 25 re-submitted supervisory reporting data to correct for discrepancies. The ECB flagged the remaining 29 banks with mismatches in the Accompanying note to the 2021 Selected Pillar 3 information.

While the ECB keeps track of the number of mismatches between banks’ data reported to supervisors and their public disclosures, it also inquires about the reason. The most common issues causing mismatches in the last year were as follows:

• Methodological issues: Some banks that disclosed the template EU CCR1 included exposures to central counterparties, while this type of exposure should be excluded. Some banks used a wrong methodology for the liquidity coverage ratio by disclosing it as point-in-time instead of the average of the previous 12 months’ values. And some banks did not disclose or report the overall capital requirement or the overall leverage ratio requirement in the key metrics template.
• Missing submissions: Some banks disclosed final figures in their Pillar 3 disclosure but did not resubmit the underlying supervisory reporting data, or vice versa.
• Formatting issues: Some banks disclosed the templates in the wrong format, e.g. by merging columns that should not be merged or by omitting rows from the disclosed templates.

This shows that while underlying causes of mismatches might not be dangerous from a supervisory perspective, they are avoidable. This is why the ECB assesses banks’ compliance with regulatory disclosure requirements on a regular basis. After each reconciliation exercise it also publishes the Selected Pillar 3 information, which allow for bank-level comparisons of key risk metrics and selected disclosure information. The ECB will continue this exercise in the future to promote market discipline and to improve the consistency and comparability of information disclosed by banks.