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 bank‟s 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

Dr K Satyanarayana, NIBM, Pune

C) Interaction with Accounting Disclosures

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

Accounting Standards

Proprietary information disclosure which may undermine bank‟s
competitive position in products, systems etc. I.e. rendering
investment in such products & systems less valuable to the bank

Obligation to maintain customer‟s confidentiality or such other
terms of legal agreement or counterparty relationship

Dr K Satyanarayana, NIBM, Pune

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.D) Materiality . Dr K Satyanarayana. • RBI has also prescribed materiality thresholds for certain limited disclosures . NIBM.Banks are encouraged to make disclosures even below the specified thresholds also.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” . Pune .

However qualitative disclosures that provide a general summary of bank‟s risk management objectives and policies. . all banks with a capital funds of Rs. NIBM. Pune . reporting system. . 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.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. 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 Dr K Satyanarayana. . definitions etc.Banks with capital funds of Rs. 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.

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.Website disclosures should be under the title Basel II disclosures with a link to home page prominently.. e. Disclosure of financial year ending March 31.e. Pune . NIBM. .g. June/September/December 2008 and March 2009) should be retained in the website until disclosure as on March 2012. 2009 (i. Dr K Satyanarayana.

NIBM. Dr K Satyanarayana.F) Need for proper validation of disclosures : .No need for formal audit or external audit of Pillar III disclosures. 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. However information disclosed shall be consistent with : Audited Financial Statements • Systems of Internal scrutiny. then management should ensure appropriate verification in accordance with general disclosure principle. Pune .

NIBM. .Disclosure process including internal control over such process. .G) General disclosure principle : • A formal disclosure policy to be duly approved by bank‟s Board covering : . Dr K Satyanarayana. Pune .System of assessing appropriateness of disclosures including validation and frequency of such disclosures.Approach to determine what should be disclosed.

ASCBs (except RRBs and LABs) both solo as well as consolidated as the case may be.In other words exclude RRBs. 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.In consolidated case.H) Scope of application of Pillar III disclosures . Dr K Satyanarayana. Pune . • 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. .e. insurance companies and companies whose business is not financial services in case of consolidated entity. .All those banks required to adopt Basel II i. LABs. NIBM.

Risk hedging and or mitigation (especially credit risk) routes.The risks to which banks are exposed to : • Credit Risk. measure. .The techniques that banks use to identify. Dr K Satyanarayana. Pune . monitor and control those risks.I) What market wants to know? . IRR in Banking Book and Operational Risk . Market Risk. .Where applicable. NIBM. separate disclosures are to be set out for banks using different approaches to the assessment of regulatory capital. including assets securitisation which alters the risk profile of a bank.

The scope and nature of risk reporting and or measurement system.Strategies and processes . . NIBM.The structure and organisation of the relevant risk management function. Dr K Satyanarayana. . Pune .Policies for hedging and or mitigating risk and strategies and processes for monitoring the continuing effectiveness of hedges/mitigants.J) General Qualitative Disclosure Requirement • Under general qualitative disclosure requirement banks are expected to indicate their risk management objectives and policies covering : .

The means of capital assessment . Pune give . • Disclosures on information on : the capital assessment techniques shall .• Information provided especially for credit risk need not necessarily be based on information prepared for regulatory purposes.The data to assess the reliability of the information disclosed. Dr K Satyanarayana.The specific nature of exposures . NIBM.

Pune . NIBM.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 Dr K Satyanarayana.

NIBM. Pune .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 Dr K Satyanarayana.

financial and commercial entities. NIBM.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. where the investment is risk weighted).e. significant minority equity investments in insurance.V) for accounting • Given a deduction treatment • Neither consolidated nor deducted (eg. Dr K Satyanarayana. ______________________ * securities. insurance and other financial subsidiaries. commercial subsidiaries. subsidiaries) • Prorata consolidated (As27-J. Pune .

the proportion of ownership interest and if different. Dr K Satyanarayana. Pune . 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. the proportion of voting power in these entities. their country of incorporation of residence. NIBM.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. _________________________ ** A capital deficiency is the amount by which actual capital is less than the regulatory capital requirement.g. indicate the quantitative impact on regulatory capital of using this method versus using the deduction. : current book value) of the bank‟s total interest in the insurance entities which are risk weighted as well as their name. In addition.

Pune . investments in subsidiaries etc. from Tier I Dr K Satyanarayana. NIBM.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. : perpetual debt) • Other capital instruments • Deductions like goodwill. Quantitative: b) Total amount of Tier I Capital (of which) • Paid up share capital • Reserves • Innovative Instruments (eg.

NIBM.): 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 Dr K Satyanarayana. Pune .Prescribed Formats for Disclosures 2) Table DF2 (contd.

NIBM. Pune .Prescribed Formats for Disclosures 3) Table DF3 : Capital Structure Qualitative: a) A summary of discussion of bank‟s 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 Dr K Satyanarayana.

Pune .Prescribed Formats for Disclosures 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). NIBM. Dr K Satyanarayana.

Discussion of the bank‟s credit risk management policy.Prescribed Formats for Disclosures 4) Table DF4 : Credit Risk : General disclosures for all banks Qualitative : a) The general qualitative disclosure requirement with respect to credit risk. Pune Definitions of past due and impaired (for accounting purposes). NIBM. including : • • Dr K Satyanarayana. .

) : Quantitative : Credit Risk : General disclosures for all banks b) Total gross credit risk exposures1 . 2. That is outstanding. separately. after accounting offsets in accordance with the applicable accounting regime and without taking into account the effects of credit risk mitigation techniques. eg. Fund based and non-fund based2. At actuals. Dr K Satyanarayana.Prescribed Formats for Disclosures 4) Table DF4 (contd. c) Geographic distribution of exposures3. Fund based and non-fund based separately • Overseas • Domestic 1. NIBM. Collateral and netting. on the same basis as adopted for Segment Reporting adopted for compliance with AS 17. That is. Pune . before application of CCFs. 3.

fund based and non-fund based separately e) Residual contractual maturity breakdown of assets5. 4. Pune .Prescribed Formats for Disclosures 4) Table DF4 (contd. NIBM. Dr K Satyanarayana. 5. 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.) : Quantitative : Credit Risk : General disclosures for all banks d) Industry4 type distribution of exposures. The industry-wise break-up may be provided on the same lines as under DSB returns at present. Banks shall use the same maturity bands as used for reporting positions in the ALM returns.

NIBM. Pune .Prescribed Formats for Disclosures 4) Table DF4 (contd.) : Quantitative : Credit Risk : General disclosures for all 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 Dr K Satyanarayana.

) : Quantitative : Credit Risk : General disclosures for all 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 Dr K Satyanarayana. NIBM.Prescribed Formats for Disclosures 4) Table DF4 (contd. Pune .

NIBM. Pune .) : Quantitative : Credit Risk : General disclosures for all 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 Dr K Satyanarayana.Prescribed Formats for Disclosures 4) Table DF4 (contd.

• Types of exposure for which each agency is used. Dr K Satyanarayana. and • A description of the process used to transfer public issue ratings onto comparable assets in the banking book. Pune . plus reasons for any changes.Prescribed Formats for Disclosures 5) Table DF5 : Credit Risk : disclosures for portfolios subject to the standardised approach Qualitative : a) For portfolios under the standardised approach • Names of credit rating agencies used. NIBM.

) : Quantitative Dr K Satyanarayana. amount of a bank‟s outstandings (rated and unrated) in the following major risk bucket.Prescribed Formats for Disclosures 5) Table DF5 (contd. • Below 100% risk weight • 100% risk weight • More than 100% risk weight • Deducted . Pune : Credit Risk : disclosures for portfolios subject to the standardised approach b) For exposure amounts defined in DF4 after risk mitigation subject to the standardised approach. NIBM. as well as those that are deducted.

• A description of the main types of collateral taken by the bank. • The main types of guarantor counterparty and their creditworthiness. Dr K Satyanarayana. 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. Pune .Prescribed Formats for Disclosures 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. banks are encouraged to give further information about mitigants that have not been recognised for that purpose. Where relevant. NIBM. and • Information about (market or credit) risk concentrations within the mitigation taken _____________________ 1. : At a minimum.

) : 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 : • Dr K Satyanarayana. NIBM. . Pune Eligible financial collateral after the application of haircuts.Prescribed Formats for Disclosures 6) Table DF6 (contd.

e. • The regulatory capital approach that the bank follows for its securitisation activities. investor. • The roles played by the bank in the securitisation process (i.Prescribed Formats for Disclosures 7) Table DF7 Qualitative Disclosures Dr K Satyanarayana. servicer. as originator. swap provider) and an indication of the extent of bank‟s involvement in each of them. provider of credit enhancement. liquidity provider. . Pune : Securitisation : Disclosure for standardised approach : a) General Qualitative Disclosure including discussion of : • The bank‟s 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. NIBM.

Dr K Satyanarayana. NIBM. Pune .): Securitisation : Disclosure for standardised approach Qualitative b) Summary of the bank‟s 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.Prescribed Formats for Disclosures 7) Table DF7 (contd.

credit cards. home equity. 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.). NIBM. . auto.Prescribed Formats for Disclosures 7) Table DF7 (contd. etc.): Quantitative Disclosures Dr K Satyanarayana. Pune : Securitisation : Disclosure for standardised approach d) The total outstanding exposures securitised by the bank and subject to the securitisation framework by exposure type (eg.

• Amount of impaired/past due assets securitised • Losses recognised by the bank during the current period broken down by exposure type (eg.Prescribed Formats for Disclosures 7) Table DF7 (contd. banks are encouraged to differentiate between exposures resulting from activities in which they act only as sponsors.: wirteoffs/provisions (if the assets remain on the bank‟s balance sheet or write-downs of 1/0 strips and other residual interests).): Securitisation : Disclosure for standardised approach Quantitative Disclosures e) For exposures securitised by the bank and subject to the securitisation framework where relevant. NIBM. Dr K Satyanarayana. Pune : . and exposures that result from all other bank securitisation activities that are subject to securitisation framework.

credit enhancing 1/0. Pune . cash collateral amounts and other subordinated assets) broken down by exposure type. Exposures that have been deducted entirely from Tier – I capital.Prescribed Formats for Disclosures 7) Table DF7 (contd. Dr K Satyanarayana.): Securitisation : Disclosure for standardised approach Quantitative Disclosures f) Aggregate amount of securitisation exposures retained or purchased (which include but are not restricted to securities. NIBM. liquidity facilities. deducted from total capital and other exposures deducted from total capital should be disclosed separately by type of underlying exposure type. other commitments and credit enhancements such as 1/0 strips. : g) Aggregate amount of securitisation exposures retained or purchased broken down into meaningful number of risk weight bands.

Prescribed Formats for Disclosures 7) Table DF7 (contd. Dr K Satyanarayana.): Securitisation : Disclosure for standardised 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. NIBM. liquidity support. • Form and quantum (outstanding value) of services provided by way of credit enhancement. post securitisation asset servicing etc. • Sale consideration received for the securitised assets and gain/loss on sale on account of securitisation. Pune .

• Foreign exchange risk. Pune .Prescribed Formats for Disclosures 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. NIBM. Dr K Satyanarayana.

including assumptions regarding loan prepayments and behaviour of non-maturity deposits and frequency of IRRBB measurement Dr K Satyanarayana. the approaches for operational risk capital assessment for which the bank qualifies. NIBM. .Prescribed Formats for Disclosures 9) Table DF9 : Qualitative : 10) Table DF10 : Interest rate risk in the banking book (IRRBB) Qualitative Disclosures : a) The general qualitative requirement including the nature of IRRBB and key assumptions. Pune Operational Risk In addition to the general qualitative disclosure requirement.

Pune : Interest rate risk in the banking book (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 management‟s method for measuring IRRBB. . broken down by currency (where the turnover is more than 5% of the total turnover).Prescribed Formats for Disclosures 10) Table DF10 Quantitative Disclosures Dr K Satyanarayana. NIBM.