A New Capital Adequacy Framework: Pillar 3 - Market Discipline

January 2000

Executive summary

This paper provides detailed guidance on what disclosures should be made in order to advance the role of market discipline in promoting bank capital adequacy. It is designed to support and strengthen the third pillar of the consultative paper A New Capital Adequacy Framework issued by the Basel Committee in June 1999.

The issuance of this paper is a component of the Basel Committee's ongoing effort to promote enhanced transparency and effective market discipline worldwide. It is a key part of the Committee's attempt to enhance capital disclosures and seeks to elaborate on disclosures that should be made in order to advance the role of market discipline in promoting bank capital adequacy.

The recommendations in this paper fall into three areas: structure of capital, risk exposures and capital adequacy. The Basel Committee is firmly committed to improving public disclosure and market discipline, and invites comments on this paper on same timeframe as the consultation on A New Capital Adequacy Framework (i.e. by 31 March 2000).

As discussed in the consultative paper A New Capital Adequacy Framework, the focus of the new Framework and, consequently, of the third pillar will be on internationally active banks. However, the Framework's guiding principles, as embodied in the three pillars, are generally suitable for any bank in any jurisdiction, although full account should be taken of individual circumstances.

The Basel Committee recognises that the recommendations contained in this paper may need to be expanded on as debate on the consultative paper A New Capital Adequacy Framework develops and the actual new Framework itself is finalised.