Office of the Superintendent of Financial Institutions
The Basel Committee on Banking Supervision published an updated version of
Basel II: International Convergence of Capital Measurement and Capital
Standards: A Revised Framework - Comprehensive Version (the Basel II
framework) in June 2006. The third pillar of this framework describes the
disclosure requirements for institutions. This advisory provides
additional clarification on the implementation of these requirements for
federally regulated deposit-taking institutions.
As Pillar 3 is an important part of the Basel II framework, the Pillar 3
disclosure requirements apply, as appropriate, to all institutionsFootnote 1 implementing the Basel II framework. As
per paragraph 822 of the Basel II framework, institutions are expected to
disclose tier 1 and total capital for certain significant subsidiaries.
OSFI does not plan to provide a specific definition of significant
subsidiaries; rather, institutions should be guided by market expectations
to determine the disclosure for subsidiaries.
Institutions should note that the content of the disclosures, particularly
the qualitative requirements, are tailored to the nature, size, and
complexity of the institution. Thus, smaller and/or less complex
institutions will only need to disclose relevant parts of the Pillar 3
requirements. Institutions should refer to paragraphs 817 and 819 of the
Basel II framework, which address the issues of materiality and
proprietary information in the context of the Pillar 3 disclosures.
Additionally, and consistent with the application of the Annual
Disclosure Requirements Guideline (D-1), the Pillar 3 disclosure
requirements do not apply to subsidiaries that are federally regulated
deposit-taking institutions where:
deposit liabilities are fully guaranteed by the parent and the parent
is a federally regulated deposit-taking institution that meets the
annual disclosure requirements; or
liabilities are fully guaranteed by the parent and the parent is a
deposit-taking institution whose debt instruments are rated not less
than “investment grade” by a widely- recognized rating agency.
As well, OSFI will allow some flexibility with respect to disclosures made
by foreign bank subsidiaries whose parent is subject to disclosure
requirements under Basel II. If the foreign bank subsidiary is not exempt
from making the Pillar 3 disclosures as per the above criteria, there is
an ability to apply to OSFI to be exempt from the Pillar 3 disclosures
based on the disclosures of its parent institution.
Institutions are required to disclose information that is relevant to
their activities and their chosen Basel II approaches. For example,
institutions implementing the Standardized Approach to credit risk are
required to make those disclosures associated with the Standardized
Approach. Institutions should refer to the tables contained in Part 4 of
the Basel II framework (www.bis.org) to
determine which requirements are applicable to their institution.
As part of the Pillar 3 requirements, bank holding companies are required
to disclose the amount of surplus capital in life insurance subsidiaries
included in total capital. In addition, as leverage is a key factor that
markets monitor to assess financial strength, bank holding companies
should provide information on their amount of debt in relation to total
Although the Basel II framework requires that most disclosure be made on a
semi-annual basis, the frequency of the quantitative disclosures made by
Canadian institutions should align with financial reporting in Canada.
Therefore, institutions are required to make quantitative disclosures on a
quarterly basis. Qualitative disclosures (e.g., general information on an
institution’s risk management objectives and policies) can be made on an
annual basis. For smaller, less complex institutions with stable risk
profiles, annual reporting may be acceptable for all disclosures, both
quantitative and qualitative. When an institution publishes information on
an annual basis only, it should include sufficient information to support
this frequency of disclosure.
As the Pillar 3 disclosures provide information related to the Basel II
framework, these disclosuresFootnote 2 should
be made once the new framework has been implemented (i.e., beginning of
fiscal 2008). OSFI encourages institutions to begin disclosing information
under Pillar 3, particularly the quantitative disclosures, in Q1 2008.
However, OSFI will allow some flexibility throughout 2008 and require
institutions to meet all Pillar 3 disclosure requirements using fiscal
year-end 2008 data. These disclosures should be made within a reasonable
timeframe following fiscal year-end (e.g., at the same time as the release
of detailed 2008 financial results).
As per the Basel II framework, all institutions are required to make the
Pillar 3 disclosures to the public. However, Pillar 3 disclosures are not
required to be audited by external auditors unless otherwise required by
another authority (e.g., accounting standards, securities regulations).
For those disclosures that are not mandatory under accounting or other
requirements, OSFI will allow institutions discretion on the location of
the Pillar 3 disclosures (e.g., annual report, quarterly report, Web site,
etc.). Nevertheless, institutions are encouraged to provide all related
information in one location to the extent possible.
OSFI expects institutions to comply with the Pillar 3 requirements. Issues
of non-compliance will be addressed on a case-by-case basis through
bilateral discussions with institutions. To aid in the identification of
non-compliance, institutions implementing an internal-ratings based (IRB)
approach to credit risk are required to submit a roadmap that identifies
whether the Pillar 3 requirements have been met and indicates the
frequency and location of these disclosures. In instances where
disclosures are not made, explanations should be provided.
OSFI has developed a roadmap templateFootnote 3
to be completed by institutions. However, OSFI will allow institutions to
submit information in another format, provided all of the above
information is included in the submission to OSFI. The roadmap (or
equivalent information) should be submitted after the Pillar 3 disclosures
have been published (i.e., following fiscal year-end 2008). Institutions
implementing an IRB approach should submit to OSFI a sample or mock-up of
the planned Pillar 3 disclosures. This should be submitted two quarters
prior to the disclosures being made public.
Banks and bank holding companies
to which the Bank Act applies and federally regulated trust or
loan companies to which the Trust and Loan Companies Act applies
are collectively referred to as “institutions”.
Return to footnote 1 referrer
Any of the Pillar 3 disclosures
required by another authority (e.g. accounting standards), should be
disclosed as required by that authority.
Return to footnote 2 referrer
OSFI’s Pillar 3 Roadmap is
available at www.osfi-bsif.gc.ca.
Return to footnote 3 referrer