TWN Info Service on Finance and Development (July11/02)
11 July 2011
Third World Network
BCBS issues disclosure requirements for remuneration
Published in SUNS #7183 dated 5 July 2011
Geneva, 4 Jul (Kanaga Raja) -- The Basel Committee on Banking Supervision
(BCBS) has issued its final Pillar 3 disclosure requirements for remuneration,
aimed at supporting effective market discipline by allowing market participants
to assess the quality of a bank's compensation practices and the incentives
towards risk-taking that they support.
According to a BCBS press release, the Committee's Pillar 3 disclosure
requirements add greater detail to the guidance on this topic that was
included in the supplemental Pillar 2 guidance issued by the Committee
in July 2009.
[The Basel-II guidelines have three pillars. The first relates to the
minimum capital requirements. The second addresses supervisory review
and regulatory responses to the first pillar requirements. The third
pillar is aimed at supplementing regulations through market disciplines
by requiring lenders to publicly provide details of their risk management
activities, risk rating processes, and risk distribution. As in respect
of the other BCBS requirements, those now issued for Pillar 3 have to
be adopted and implemented by national authorities through appropriate
national rules and regulations. - SUNS]
The proposals under Pillar 3, says BCBS, cover the main components of
sound remuneration practices and take full account of the Financial
Stability Board's Principles for Sound Compensation Practices and their
related Implementation Standards.
According to the BCBS document which was released on 1 July 2011, in
July 2009, as part of its Enhancements to the Basel II framework, the
Basel Committee on Banking Supervision introduced supplemental Pillar
2 guidance to address a number of risk management weaknesses revealed
during the financial crisis that began in 2007.
In this context, the Committee notably incorporated within Pillar 2
the Financial Stability Board's Principles for Sound Compensation Practices,
which were issued in April 2009 to improve compensation practices and
strengthen supervision in this area.
In its Peer Review Report on Compensation (March 2010), the Financial
Stability Board (FSB) noted differences in the existing disclosure requirements
on compensation across jurisdictions and noted that these differences
could hamper the comparability of the disclosed facts and, as a consequence,
the effectiveness of disclosure as a whole.
Accordingly, to promote greater convergence of disclosure on compensation,
the FSB made the following recommendation: Recommendation 8: "The
Basel Committee in consultation with the FSB should consider incorporating
disclosure requirements for compensation into Pillar 3 of Basel II,
to add greater specificity to the current requirements for compensation
disclosure under Pillar 2, by the end of 2010."
The Pillar 3 disclosure requirements proposed by the Basel Committee
respond to this recommendation, said BCBS.
"The Committee believes that these additional Pillar 3 requirements
on remuneration will support effective market discipline and will allow
market participants to assess the quality of the compensation practices
and the quality of support for a firm's strategy and risk posture."
The requirements have been designed to be sufficiently granular and
detailed to allow meaningful assessments by market participants of a
bank's compensation practices, while not requiring disclosure of sensitive
or confidential information, it adds.
According to the BCBS document, the Committee's additional Pillar 3
disclosure requirements on remuneration cover the main components of
sound compensation practices, consistent with paragraphs 86 to 92 of
the Supplemental Pillar 2 Guidance issued in July 2009 and the corresponding
As a result, banks will be requested to disclose qualitative and quantitative
information about their remuneration practices and policies covering
the following areas:
-- The governance/committee structures (paragraph 86);
-- The design/operation of remuneration structure, frequency of review
-- The independence of remuneration for risk/compliance staff (paragraph
-- The risk adjustment methodologies (paragraph 89);
-- The link between remuneration and performance (paragraph 90);
-- The long-term performance measures (deferral, malus, clawback - paragraph
-- The types of remuneration (cash/equity, fixed/variable - paragraph
According to the document, the disclosure requirements for remuneration
should be incorporated into the Pillar 3 disclosure of banks. Unless
specifically noted, the general principles and rules governing Pillar
The Basel Committee expects banks to comply with these requirements
from 1 January 2012.
As to the scope of application, the document says that it is recognised
that there is a broad spectrum of banks that are subject to Basel II
and that the proposed disclosures may not be relevant for all such banks
or for all their business lines.
In certain jurisdictions, banks subject to Basel II may not be of sufficient
size to have a separate Remuneration Committee, or may not have resources
to implement a fully functional deferral and performance adjustment
Pillar 3 remuneration disclosure requirements therefore may include
thresholds of materiality or proportionality, based on those already
applying to existing Pillar 3 disclosures, says BCBS.
This may have two aspects: whether the bank as a whole is exempt fully
or partly from disclosure, depending on the risk profile of the bank;
and whether certain types of disclosure may be exempted on grounds that
the information is not material, or is proprietary or confidential.
As to the method and frequency of disclosure, BCBS says that banks will
be expected to publish the disclosures on an annual basis at a minimum.
Banks should aim to publish as soon as practicable after the information
Banks will be expected as far as possible to disclose the requested
information on remuneration on one site or in one document. Banks may
however refer to a different site or document:
-- if an equivalent disclosure has already been made under an accounting
or listing requirement relating to the same time period (in such cases,
the bank's regulator will have discretion to recognise the existing
disclosures that are acceptable);
-- or to indicate where additional information (not explicitly required
under Pillar 3) may be found.
In such cases, the bank must ensure that access to the site or document
is readily available and public.
According to the document, to improve clarity of disclosure, supervisors
may request the information to be disclosed:
-- in table and/or chart format.
-- for previous years as well as the current reporting year (where providing
quantitative historical baselines aids interpretation, supervisors should
request that quantitative information for previous years be shown, although
this requirement may be waived during the first year and banks may be
permitted to report historical data only as far back as the first year
of application of these requirements).
The document goes on to outline the main disclosures on remuneration
(both qualitative and quantitative) that banks should include in their
Pillar 3 document.
It states that banks are strongly encouraged not only to disclose the
required information, but to articulate as far as possible how these
factors complement and support their overall risk management framework.
The requested quantitative disclosures (detailed in the document) should
only cover senior management and other material risk takers and be broken
down between these two categories, it concludes. +
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