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Basel II Capital Accord
Notice of Proposed Rulemaking (NPR)
Preamble - VII. Disclosure
September 5, 2006 Skip repetitive navigation

Adoption of Common Appendix--Agency-Specific Text
Signature Pages
1.  Overview

The agencies have long supported meaningful public disclosure by banks with the objective of improving market discipline. The agencies recognize the importance of market discipline in encouraging sound risk management practices and fostering financial stability.

Pillar 3 of the New Accord, market discipline, complements the minimum capital requirements and the supervisory review process by encouraging market discipline through enhanced and meaningful public disclosure. These proposed public disclosure requirements are intended to allow market participants to assess key information about an institution's risk profile and its associated level of capital.

The agencies view public disclosure as an important complement to the advanced approaches to calculating minimum regulatory risk-based capital requirements, which will be heavily based on internal systems and methodologies. With enhanced transparency of the advanced approaches, investors can better evaluate a bank's capital structure, risk exposures, and capital adequacy. With sufficient and relevant information, market participants can better evaluate a bank's risk management performance, earnings potential and financial strength.

Improvements in public disclosures come not only from regulatory standards, but also through efforts by bank management to improve communications to public shareholders and other market participants. In this regard, improvements to risk management processes and internal reporting systems provide opportunities to significantly improve public disclosures over time. Accordingly, the agencies strongly encourage the management of each bank to regularly review its public disclosures and enhance these disclosures, where appropriate, to clearly identify all significant risk exposures – whether on- or off-balance sheet – and their effects on the bank's financial condition and performance, cash flow, and earnings potential.

Comments on ANPR

Some commenters to the ANPR indicated that the proposed disclosures were burdensome, excessive, and overly prescriptive. Other commenters believed that the information provided in the disclosures would not be comparable across banks because each bank will use distinct internal methodologies to generate the disclosures. These commenters also expressed concern that some disclosures could be misinterpreted or misunderstood by the public.

The agencies believe, however, the required disclosures would enable market participants to gain key insights regarding a bank's capital structure, risk exposures, risk assessment processes, and ultimately, the capital adequacy of the institution. Some of the proposed disclosure requirements will be new disclosures for banks. Nonetheless, the agencies believe that a significant amount of the proposed disclosure requirements are already required by or consistent with existing GAAP, SEC disclosure requirements, or regulatory reporting requirements for banks.

2.  General requirements

The public disclosure requirements would apply to the top-tier legal entity that is a core or opt-in bank within a consolidated banking group (that is, the top-tier BHC or DI that is a core or opt-in bank). In general, DIs that are a subsidiary of a BHC or another DI would not be subject to the disclosure requirements82 except that every DI must disclose total and tier 1 capital ratios and their components, similar to current requirements. If a DI is not a subsidiary of a BHC or another DI that must make the full set of disclosures, the DI must make these disclosures.

The risks to which a bank is exposed and the techniques that it uses to identify, measure, monitor, and control those risks are important factors that market participants consider in their assessment of the institution. Accordingly, each bank that is subject to the disclosure requirements must have a formal disclosure policy approved by the board of directors that addresses the institution's approach for determining the disclosures it should make. The policy should address the associated internal controls and disclosure controls and procedures. The board of directors and senior management would be expected to ensure that appropriate verification of the disclosures takes place and that effective internal controls and disclosure controls and procedures are maintained.

A bank should decide which disclosures are relevant for it based on the materiality concept. Information would be regarded as material if its omission or misstatement could change or influence the assessment or decision of a user relying on that information for the purpose of making investment decisions.

To the extent applicable, a bank would be able to fulfill its disclosure requirements under this proposed rule by relying on disclosures made in accordance with accounting standards or SEC mandates that are very similar to the disclosure requirements in this proposed rule. In these situations, a bank would explain material differences between the accounting or other disclosure and the disclosures required under this proposed rule.


Consistent with longstanding requirements in the United States for robust quarterly disclosures in financial and regulatory reports, and considering the potential for rapid changes in risk profiles, the agencies would require that quantitative disclosures be made quarterly. However, qualitative disclosures that provide a general summary of a bank's risk management objectives and policies, reporting system, and definitions may be disclosed annually, provided any significant changes to these are disclosed in the interim. The disclosures must be timely, that is, must be made no later than the reporting deadlines for regulatory reports (for example, FR Y-9C) and financial reports (for example, SEC Forms 10-Q and 10-K). When these deadlines differ, the later deadline would be used.

In some cases, management may determine that a significant change has occurred, such that the most recent reported amounts do not reflect the bank's capital adequacy and risk profile. In those cases, banks should disclose the general nature of these changes and briefly describe how they are likely to affect public disclosures going forward. These interim disclosures should be made as soon as practicable after the determination that a significant change has occurred.

Location of disclosures and audit/certification requirements

The disclosures would have to be publicly available (for example, included on a public website) for each of the last three years (that is, twelve quarters) or such shorter time period since the bank entered its first floor period. Except as discussed below, management would have some discretion to determine the appropriate medium and location of the disclosures required by this proposed rule. Furthermore, banks would have flexibility in formatting their public disclosures, that is, the agencies are not specifying a fixed format for these disclosures.

Management would be encouraged to provide all of the required disclosures in one place on the entity's public website. The public website address would be reported in a regulatory report (for example, the FR Y-9C).83

Disclosure of tier 1 and total capital ratios must be provided in the footnotes to the year-end audited financial statements.84 Accordingly, these disclosures must be tested by external auditors as part of the financial statement audit. Disclosures that are not included in the footnotes to the audited financial statements would not be required to be subject to external audit reports for financial statements or internal control reports from management and the external auditor. However, due to the importance of reliable disclosures, the agencies would require the chief financial officer to certify that the disclosures required by the proposed rule are appropriate and that the board of directors and senior management are responsible for establishing and maintaining an effective internal control structure over financial reporting, including the information required by this proposed rule.

Proprietary and confidential information

The agencies believe that the proposed requirements strike an appropriate balance between the need for meaningful disclosure and the protection of proprietary and confidential information.85 Accordingly, the agencies believe that banks would be able to provide all of these disclosures without revealing proprietary and confidential information. However, in rare cases, disclosure of certain items of information required in the proposed rule may prejudice seriously the position of a bank by making public information that is either proprietary or confidential in nature. In such cases, a reporting bank may request confidential treatment for the information if the bank believes that disclosure of specific commercial or financial information in the report would likely result in substantial harm to its competitive position, or that disclosure of the submitted information would result in unwarranted invasion of personal privacy.

Question 61: The agencies seek commenters' views on all of the elements proposed to be captured through the public disclosure requirements. In particular, the agencies seek comment on the extent to which the proposed disclosures balance providing market participants with sufficient information to appropriately assess the capital strength of individual institutions, fostering comparability from bank to bank, and reducing burden on the banks that are reporting the information.

3.  Summary of specific public disclosure requirements

The public disclosure requirements are comprised of 11 tables that provide important information to market participants on the scope of application, capital, risk exposures, risk assessment processes, and, hence, the capital adequacy of the institution. Again, the agencies note that the substantive content of the tables is the focus of the disclosure requirements, not the tables themselves. The table numbers below refer to the table numbers in the proposed rule.

Table 11.1 disclosures, Scope of Application, include a description of the level in the organization to which the disclosures apply and an outline of any differences in consolidation for accounting and regulatory capital purposes, as well as a description of any restrictions on the transfer of funds and capital within the organization. These disclosures provide the basic context underlying regulatory capital calculations.

Table 11.2 disclosures, Capital Structure, provide information on various components of regulatory capital available to absorb losses and allow for an evaluation of the quality of the capital available to absorb losses within the bank.

Table 11.3 disclosures, Capital Adequacy, provide information about how a bank assesses the adequacy of its capital and require that the bank disclose its minimum capital requirements for significant risk areas and portfolios. The table also requires disclosure of the regulatory capital ratios of the consolidated group and each DI subsidiary. Such disclosures provide insight into the overall adequacy of capital based on the risk profile of the organization.

Tables 11.4, 11.5, and 11.7 disclosures, Credit Risk, provide market participants with insight into different types and concentrations of credit risk to which the bank is exposed and the techniques the bank uses to measure, monitor, and mitigate those risks. These disclosures are intended to enable market participants to assess the credit risk exposures under the IRB framework, without revealing proprietary information or duplicating the supervisor's fundamental review of the bank's IRB framework. Table 11.6 provides the disclosure requirements related to credit exposures from derivatives. This table was added as a supplement to the public disclosures initially in the New Accord as a result of the BCBS's additional efforts to address certain exposures arising from trading activities. See the July 2005 BCBS publication entitled "The Application of Basel II to Trading Activities and the Treatment of Double Default Effects."

Table 11.8 disclosures, Securitization, provide information to market participants on the amount of credit risk transferred and retained by the organization through securitization transactions and the types of products securitized by the organization. These disclosures provide users a better understanding of how securitization transactions impact the credit risk of the bank.

Table 11.9 disclosures, Operational Risk, provide insight into the bank's application of the AMA for operational risk and what internal and external factors are considered in determining the amount of capital allocated to operational risk.

Table 11.10 disclosures, Equities, provide market participants with an understanding of the types of equity securities held by the bank and how they are valued. The table also provides information on the capital allocated to different equity products and the amount of unrealized gains and losses.

Table 11.11 disclosures, Interest Rate Risk in Non-Trading Activities, provide information about the potential risk of loss that may result from changes in interest rates and how the bank measures such risk.

4.  Regulatory reporting

In addition to the public disclosures that would be required by the consolidated banking organization subject to the advanced approaches, the agencies would require certain additional regulatory reporting from BHCs, their subsidiary DIs, and DIs applying the advanced approaches that are not subsidiaries of BHCs. The agencies believe that the reporting of key risk parameter estimates by each DI applying the advanced approaches will provide the primary Federal supervisor and other relevant supervisors with data important for assessing the reasonableness and accuracy of the institution's calculation of its minimum capital requirements under this rule and the adequacy of the institution's capital in relation to its risks. This information would be collected through regulatory reports. The agencies believe that requiring certain common reporting across banks will facilitate comparable application of the proposed rules.

In this regard, the agencies published for comment elsewhere in today's Federal Register a package of proposed reporting schedules. The package includes a summary schedule with aggregate data that would be available to the general public. It also includes supporting schedules that would be viewed as confidential supervisory information. These schedules are broken out by exposure category and would collect risk parameter and other pertinent data in a systematic manner. The agencies also are exploring ways to obtain information that would improve supervisors' understanding of the causes behind changes in risk-based capital requirements. For example, certain data would help explain whether movements are attributable to changes in key risk parameters or other factors. Under the proposed rule, banks would begin reporting this information during their parallel run on a confidential basis. The agencies will share this information with each other for calibration and other analytical purposes. Question 62: Comments on regulatory reporting issues may be submitted in response to this NPR as well as through the regulatory reporting request for comment noted above.


  1. The bank regulatory reports and Thrift Financial Reports will be revised to collect some additional Basel II-related information, as described below in the regulatory reporting section.  Return to text
  2. Alternatively, banks would be permitted to provide the disclosures in more than one place, as some of them may be included in public financial reports (for example, in Management's Discussion and Analysis included in SEC filings) or other regulatory reports (for example, FR Y-9C Reports). The agencies would require such banks to provide a summary table on their public website that specifically indicates where all the disclosures may be found (for example, regulatory report schedules, pages numbers in annual reports).  Return to text
  3. These ratios are required to be disclosed in the footnotes to the audited financial statements pursuant to existing GAAP requirements in Chapter 17 of the "AICPA Audit and Accounting Guide for Depository and Lending Institutions: Banks, Savings institutions, Credit unions, Finance companies and Mortgage companies."  Return to text
  4. Proprietary information encompasses information that, if shared with competitors, would render a bank's investment in these products/systems less valuable, and, hence, could undermine its competitive position. Information about customers is often confidential, in that it is provided under the terms of a legal agreement or counterparty relationship.  Return to text