Disclosure needed for market discipline under Basel II

If consistent, risk focused, and sufficiently detailed, the supplementary information that banks will need to provide beginning next year to meet Pillar 3 disclosure requirements under the Basel II accord should promote greater market discipline, Standard & Poor’s Ratings Services said in a report just published, titled “Greater Basel II Pillar 3 Disclosure Would Enhance Transparency And Comparability In The Global Banking Sector.”

A regulatory objective of the third pillar is to encourage banks to disclose more about their risk profile and internal measurement systems (including assumptions of probability of default, exposure at default, and loss-given-default) to complement the increased reliance on internal bank-specific information to assess capital requirements.

“The enhanced transparency regarding material risks that Pillar 3 should bring about would allow market participants to establish their own independent opinions vis-à-vis risk profiles of individual banks,” said Standard & Poor’s credit analyst Bernard de Longevialle.

The provision of additional quantitative elements as called for under Pillar 3 would enhance transparency and promote comparative analysis among banks in the more than 100 countries where Basel II will be implemented in the near future. It would also facilitate the implementation of Standard & Poor’s risk-adjusted capital framework, which takes as a starting point the information to be disclosed under Pillar 3 and probes further.

“We intend to leverage systematically on Basel II disclosure requirements to refine our own risk-adjusted capital measures and develop a comprehensive framework that will facilitate comparison of banks’ capitalization levels, a key factor in bank ratings,” said Standard & Poor’s credit analyst Elie Hériard Dubreuil.