EBA published the strategy to implement a comprehensive Pillar 3 framework, along with a report that presents results of the assessment of Pillar 3 disclosures of institutions in EU. The report identifies best practices and potential areas for improvement in institutions’ public disclosures, based on a sample of institutions and a subset of standards included in the guidelines. The report also includes a high‐level assessment of the information on sustainability and on environmental, social, and governance (ESG) risks that institutions are already including in their Pillar 3 reports. Overall, progress was observed in the prudential disclosures by institutions; however, some practices may still impair the proper communication of their risk profile in a comparable way, compromising the ultimate objective of market discipline.
As part of the Pillar 3 strategy, EBA expects develop the implementing technical standards on
- Total loss-absorbing capacity (TLAC)/minimum requirement for own funds and eligible liabilities (MREL) disclosures, with a consultation in the fourth quarter of 2019 and the expected application date of June 2021
- Interest rate risk in the banking book (IRRBB) disclosure requirements, with a consultation in the second half of 2021 and the expected application date in June 2021
- Disclosure of global systemically important institutions (G-SIIs) indicators, with a consultation in the first half of 2020 and the expected application date in June 2021
- Disclosures required of investment firms under IFR, with a consultation in the second half of 2020 and expected application date in 2021
- Disclosures of ESG risks, including climate change risks, with a consultation paper in the fourth quarter of 2020 and the expected application date in June 2022
In the assessment report, EBA observes that institutions are on the correct path toward achieving consistency and comparability through the implementation of common disclosure formats, accompanied by qualitative explanations that help communicate meaningful prudential information. However, room for improvement exists as the following findings may hamper the ability of users to access, understand, and compare the information:
- Omissions or incomplete disclosures without any indications or explanations
- Unclear identification and location of Pillar 3 reports that hinders the ability of users to find them
- Lack of consistency in the structure of Pillar 3 reports and of some of the information reported, particularly qualitative information
- Oversimplification of interim reports compared to the end-of-year reports
- Lack of reconciliation of quantitative information across disclosure templates or inconsistent ways to calculate quantitative flows of information
Furthermore, EBA has observed that, although the disclosure of information on ESG risks is still scarce and presented in a dispersed way, institutions recognized in their Pillar 3 reports that integration of sustainability considerations in their strategic agenda plays an increasingly important role in the reputation of a company. Institutions also recognized that issues such as sustainability and digital transformation have started to take on a leading role in the regulatory agenda. The report specifies that, in line with the policy expectations described in EBA action plan on sustainable finance (published in December 2019), EBA expects institutions to:
- Provide a comprehensive and meaningful picture of their risk profile, including ESG and climate change risks, in their Pillar 3 reports
- Elaborate on the potential impact of these risks and how they are integrating them into their risk management framework
- Focus, in the short term, on simple metrics that help to explain how they are embedding these type of risks into their strategy and risk management, such as a green assets ratio, building on existing disclosure standards
In the medium or long term, EBA policy work on implementing the disclosure on ESG risks, as required in the amended Capital Requirements Regulation (CRR2), will contribute to enhanced Pillar 3 disclosures on ESG risks by institutions. This high‐level assessment of information on ESG risks will be a valid input to the EBA policy work on ESG risks disclosures, which will be carried out in 2020 and will follow the mandate included in Article 434a of CRR2. The assessment covers 12 systemically important credit institutions and is based on the end-2018 disclosure reference date, with some extended and partial assessment of the disclosures as of June 2019.
Keywords: Europe, EU, Banking, Pillar 3, Disclosures, Basel III, ESG, CRR2, Sustainable Finance, Climate Change Risk, IRRBB, TLAC, MREL, EBA
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