DIS30 - Links between financial statements and regulatory exposures

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This chapter describes requirements for banks to disclose reconciliations between elements of the calculation of regulatory capital to audited financial statements.

Effective as of: 15 Dec 2019 | Last update: 15 Dec 2019

Status: Current (View changes)

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Introduction

30.1

The disclosure requirements set out in this chapter are:

(1)

Table LIA – Explanations of differences between accounting and regulatory exposure amounts

(2)

Template LI1 – Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories

(3)

Template LI2 – Main sources of differences between regulatory exposure amounts and carrying values in financial statements

(4)

Template PV1 – Prudent valuation adjustments (PVAs)

30.2

Table LIA provides qualitative explanations on the differences observed between accounting carrying value (as defined in Template LI1) and amounts considered for regulatory purposes (as defined in Template LI2) under each framework.

30.3

Template LI1 provides information on how the amounts reported in banks’ financial statements correspond to regulatory risk categories. Template LI2 provides information on the main sources of differences (other than due to different scopes of consolidation which are shown in Template LI1) between the financial statements’ carrying value amounts and the exposure amounts used for regulatory purposes.

6 FAQs

FAQ1	In Template LI1, are assets deducted from regulatory capital in accordance with Basel III (eg goodwill and intangible assets) disclosed in column (g)? Elements which are deducted from a bank’s regulatory capital (eg goodwill and intangible assets and deferred tax assets) should be included in column (g), taking into consideration the different thresholds that apply where relevant. Assets should be disclosed for the amount that is actually deducted from capital. Some examples are shown below: - Goodwill and intangible assets: the amount to be disclosed in column (g) is the amount of any goodwill or intangibles,* including any goodwill included in the valuation of significant investments in the capital of banking, financial and insurance entities that are outside the scope of regulatory consolidation. The amount disclosed in the assets rows is net of any associated deferred tax liability which would be extinguished if the intangible assets become impaired or derecognised under the relevant accounting standards. The associated deferred tax liability is also to be disclosed in the liabilities rows of column (g). - Deferred tax assets: for all types of deferred tax assets to be deducted from own funds, the amount to be disclosed in column (g) is net of associated deferred tax liabilities that are eligible for netting. The associated deferred tax liabilities are to be disclosed in the liabilities rows of column (g). For deferred tax assets, for which the deduction is subject to a threshold, the amount disclosed in column (g) in the assets rows is the amount, net of any eligible deferred tax liability, above the threshold. The associated deferred tax liabilities are also to be disclosed in the liabilities rows of column (g). - Defined benefit pension fund assets: the amount disclosed is net of any deferred tax liabilities which would be extinguished if the asset should become impaired or derecognised under the relevant accounting standards. These deferred tax liabilities are also to be disclosed in the liabilities rows of column (g). - Investments in own shares (treasury stock) or own instruments of regulatory capital: when investments in own shares or own instruments of regulatory capital are not already derecognised under the relevant accounting standards, the deducted amount disclosed is net of short positions in the same underlying exposure or in the same underlying index allowed to be netted under the Basel framework. These short positions are also to be disclosed in the liabilities rows of column (g). * Under CAP30.8, subject to supervisory approval, banks that report under local GAAP may use the IFRS definition of intangible assets to determine which assets are classified as intangible and are thus required to be deducted.
FAQ2	In Template LI1, are exposures required to be 1,250% risk-weighted to be disclosed in column (g)? 1,250% risk-weighted exposures should be disclosed in the relevant credit risk or securitisation risk templates.
FAQ3	Template LI1: Considering that the risk weighting framework bears on assets rather than liabilities, should all the liabilities be disclosed in column (g)? Should in any case deferred tax liabilities and defined benefit pension fund liabilities be included in column (g)? The liabilities disclosed in column (g) are all liabilities under the regulatory scope of consolidation, except for the following, which are disclosed in columns (c), (d), (e) and (f) as applicable: liabilities that are included in the determination of the exposure values in the market risk or the counterparty credit risk framework; and liabilities that are eligible under the Basel netting rules.
FAQ4	What is the difference in Template LI2 between the required disclosure in row 2 (Liabilities carrying value amount under regulatory scope of consolidation) and row 6 (Differences due to different netting rules, other than those already included in row 2). Row 2 refers to balance sheet netting, while row 6 refers to incremental netting in application of the Basel rules (when not already covered by balance sheet netting). The netting rules under the Basel framework are different from the rules under the applicable accounting frameworks. The incremental netting in row 6 could represent an additional deduction from the net exposure value before application of the Basel netting rules (when those rules lead to more netting than the balance sheet netting in row 2) or a gross-up of the net exposure value when the off-balance sheet netting operated in row 2 is broader than what the Basel netting rules allow.
FAQ5	How does the disclosure in Template LI2, in particular row 3 (total net amount under regulatory scope of consolidated) relate to accounting equity? The netting between assets and liabilities in Template LI2 does not lead to accounting equity under a regulatory scope of consolidation being disclosed in row 3. Assets and liabilities included in rows 1 and 2 are limited to those assets and liabilities that are taken into consideration in the regulatory framework. Other assets and liabilities not considered in the regulatory framework are to be disclosed in column (g) in Template LI1 and are consequently excluded from rows 1 and 2 of Template LI2.
FAQ6	For Template LI2, how would the entry in row 10 (exposure amounts considered for regulatory purpose) differ from the balance sheet values under a regulatory scope of consolidation? Is it correct that there would be no differences to be explained, given that market risk does not have exposure values and the linkage for the other risk categories does not apply? In general, under a regulatory scope of consolidation, the accounting carrying amount and the regulatory exposure value would vary due to the incidence of off-balance sheet elements, provisions, and different netting and measurement rules. Under market risk, the regulatory exposure value will also differ from the accounting carrying amount. Differences could be due to off-balance sheet items, netting rules and different measurement rules of market risk positions via prudent valuation (as opposed to fair valuation in the applicable accounting framework).

30.4

Template PV1 will provide users with a detailed breakdown of how the aggregate PVAs have been derived. In light of instances where the underlying exposures cannot be easily classified as a banking book or trading book exposure due to the varied implementation of PVAs across jurisdictions, national supervisors are allowed discretion to tailor the format of the template to reflect the implementation of PVAs in their jurisdiction. Where such discretion has been exercised, the allocation methodology should be explained in the narrative commentary to the disclosure requirement.

Table LIA: Explanations of differences between accounting and regulatory exposure amounts

Purpose: Provide qualitative explanations on the differences observed between accounting carrying value (as defined in Template LI1) and amounts considered for regulatory purposes (as defined in Template LI2) under each framework.
Scope of application: The template is mandatory for all banks.
Content: Qualitative information.
Frequency: Annual.
Format: Flexible.
Banks must explain the origins of the differences between accounting amounts, as reported in financial statements amounts and regulatory exposure amounts, as displayed in Templates LI1 and LI2.
(a)	Banks must explain the origins of any significant differences between the amounts in columns (a) and (b) in Template LI1.
(b)	Banks must explain the origins of differences between carrying values and amounts considered for regulatory purposes shown in Template LI2.
(c)	In accordance with the implementation of the guidance on prudent valuation (see CAP50), banks must describe systems and controls to ensure that the valuation estimates are prudent and reliable. Disclosure must include: Valuation methodologies, including an explanation of how far mark-to-market and mark-to-model methodologies are used. Description of the independent price verification process. Procedures for valuation adjustments or reserves (including a description of the process and the methodology for valuing trading positions by type of instrument).
(d)	Banks with insurance subsidiaries must disclose: the national regulatory approach used with respect to insurance entities in determining a bank's reported capital positions (ie deduction of investments in insurance subsidiaries or alternative approaches, as discussed in SCO30.5; and any surplus capital in insurance subsidiaries recognised when calculating the bank's capital adequacy (see SCO30.6.

Template LI1: Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories

Purpose: Columns (a) and (b) enable users to identify the differences between the scope of accounting consolidation and the scope of regulatory consolidation; and columns (c)-(g) break down how the amounts reported in banks' financial statements (rows) correspond to regulatory risk categories.
Scope of application: The template is mandatory for all banks.
Content: Carrying values (corresponding to the values reported in financial statements).
Frequency: Annual.
Format: Flexible (but the rows must align with the presentation of the bank's financial report).
Accompanying narrative: See Table LIA. Banks are expected to provide qualitative explanation on items that are subject to regulatory capital charges in more than one risk category.
	a	b	c	d	e	f	g
	Carrying values as reported in published financial statements	Carrying values under scope of regulatory consolidation	Carrying values of items:
		Carrying values under scope of regulatory consolidation	Subject to credit risk framework	Subject to counterparty credit risk framework	Subject to the securitisation framework	Subject to the market risk framework	Not subject to capital requirements or subject to deduction from capital
Assets
Cash and balances at central banks
Items in the course of collection from other banks
Trading portfolio assets
Financial assets designated at fair value
Derivative financial instruments
Loans and advances to banks
Loans and advances to customers
Reverse repurchase agreements and other similar secured lending
Available for sale financial investments
-.
Total assets
Liabilities
Deposits from banks
Items in the course of collection due to other banks
Customer accounts
Repurchase agreements and other similar secured borrowings
Trading portfolio liabilities
Financial liabilities designated at fair value
Derivative financial instruments
-.
Total liabilities
Instructions Rows The rows must strictly follow the balance sheet presentation used by the bank in its financial reporting. Columns If a bank's scope of accounting consolidation and its scope of regulatory consolidation are exactly the same, columns (a) and (b) should be merged. The breakdown of regulatory categories (c) to (f) corresponds to the breakdown prescribed in the rest of DIS, ie column (c) corresponds to the carrying values of items other than off-balance sheet items reported in DIS40; column (d) corresponds to the carrying values of items other than off-balance sheet items reported in DIS42, column (e) corresponds to carrying values of items in the banking book other than off-balance sheet items reported in DIS43; and column (f) corresponds to the carrying values of items other than off-balance sheet items reported in DIS50. Column (g) includes amounts not subject to capital requirements according to the Basel framework or subject to deductions from regulatory capital. Note: Where a single item attracts capital charges according to more than one risk category framework, it should be reported in all columns that it attracts a capital charge. As a consequence, the sum of amounts in columns (c) to (g) may not equal the amounts in column (b) as some items may be subject to regulatory capital charges in more than one risk category. For example, derivative assets/liabilities held in the regulatory trading book may relate to both column (d) and column (f). In such circumstances, the sum of the values in columns (c)-(g) would not equal to that in column (b). When amounts disclosed in two or more different columns are material and result in a difference between column (b) and the sum of columns (c)-(g), the reasons for this difference should be explained by banks in the accompanying narrative.

Template LI2: Main sources of differences between regulatory exposure amounts and carrying values in financial statements

Purpose: Provide information on the main sources of differences (other than due to different scopes of consolidation which are shown in Template LI1) between the financial statements' carrying value amounts and the exposure amounts used for regulatory purposes.
Scope of application: The template is mandatory for all banks.
Content: Carrying values that correspond to values reported in financial statements but according to the scope of regulatory consolidation (rows 1-3) and amounts considered for regulatory exposure purposes (row 10).
Frequency: Annual.
Format: Flexible. Row headings shown below are provided for illustrative purposes only and should be adapted by the bank to describe the most meaningful drivers for differences between its financial statement carrying values and the amounts considered for regulatory purposes.
Accompanying narrative: See Table LIA.
			a	b	c	d	e
			Total	Items subject to:
			Total	Credit risk framework	Securitisation framework	Counterparty credit risk framework	Market risk framework
1		Asset carrying value amount under scope of regulatory consolidation (as per Template LI1)
2		Liabilities carrying value amount under regulatory scope of consolidation (as per Template LI1)
3		Total net amount under regulatory scope of consolidation (Row 1 - Row 2)
4		Off-balance sheet amounts
5		Differences in valuations
6		Differences due to different netting rules, other than those already included in row 2
7		Differences due to consideration of provisions
8		Differences due to prudential filters
9		⁞
10		Exposure amounts considered for regulatory purposes
	Instructions Amounts in rows 1 and 2, columns (b)-(e) correspond to the amounts in columns (c)-(f) of Template LI1. Row 1 of Template LI2 includes only assets that are risk-weighted under the Basel framework, while row 2 includes liabilities that are considered for the application of the risk weighting requirements, either as short positions, trading or derivative liabilities, or through the application of the netting rules to calculate the net position of assets to be risk-weighted. These liabilities are not included in column (g) in Template LI1. Assets that are risk-weighted under the Basel framework include assets that are not deducted from capital because they are under the applicable thresholds or due to the netting with liabilities. Off-balance sheet amounts include off-balance sheet original exposure in column (a) and the amounts subject to regulatory framework, after application of the credit conversion factors (CCFs) where relevant in columns (b)-(d). Column (a) is not necessarily equal to the sum of columns (b)-(e) due to assets being risk-weighted more than once (see Template LI1). In addition, exposure values used for risk weighting may differ under each risk framework depending on whether standardised approaches or internal models are used in the computation of this exposure value. Therefore, for any type of risk framework, the exposure values under different regulatory approaches can be presented separately in each of the columns if a separate presentation eases the reconciliation of the exposure values for banks. The breakdown of columns in regulatory risk categories (b)-(e) corresponds to the breakdown prescribed in the rest of the document, ie column (b) credit risk corresponds to the exposures reported in DIS40, column (c) corresponds to the exposures reported in DIS43, column (d) corresponds to exposures reported in DIS42, and column (e) corresponds to the exposures reported in DIS50. Differences due to consideration of provisions: The exposure values under row 1 are the carrying amounts and hence net of provisions (ie specific and general provisions, as set out in CAP10.18). Nevertheless, exposures under the foundation internal ratings-based (F-IRB) and advanced internal ratings-based (A-IRB) approaches are risk-weighted gross of provisions. Row 7 therefore is the re-inclusion of general and specific provisions in the carrying amount of exposures in the F-IRB and A-IRB approaches so that the carrying amount of those exposures is reconciled with their regulatory exposure value. Row 7 may also include the elements qualifying as general provisions that may have been deducted from the carrying amount of exposures under the standardised approach and that therefore need to be reintegrated in the regulatory exposure value of those exposures. Any differences between the accounting impairment and the regulatory provisions under the Basel framework that have an impact on the exposure amounts considered for regulatory purposes should also be included in row 7. Exposure amounts considered for regulatory purposes: The expression designates the aggregate amount considered as a starting point of the RWA calculation for each of the risk categories. Under the credit risk framework this should correspond either to the exposure amount applied in the standardised approach for credit risk (see CRE20) or to the exposures at default (EAD) in the IRB approach for credit risk (see CRE32.29); securitisation exposures should be defined as in the securitisation framework (see CRE40.4 and CRE40.5); and counterparty credit exposures are defined as the EAD considered for counterparty credit risk purposes (see CRE51). Linkages across templates Template LI2 is focused on assets in the regulatory scope of consolidation that are subject to the regulatory framework. Therefore, column (g) in Template LI1, which includes the elements of the balance sheet that are not subject to the regulatory framework, is not included in Template LI2. The following linkage holds: column (a) in Template LI2 = column (b) in Template LI1 - column (g) in Template LI1.

Template PV1: Prudent valuation adjustments (PVAs)

Purpose: Provide a breakdown of the constituent elements of a bank's PVAs according to the requirements of CAP50, taking into account the guidance set out in Supervisory guidance for assessing banks' financial instrument fair value practices, April 2009 (in particular Principle 10).

Scope of application: The template is mandatory for all banks which record PVAs.

Content: PVAs for all assets measured at fair value (marked to market or marked to model) and for which PVAs are required. Assets can be non-derivative or derivative instruments.

Frequency: Annual.

Format: Fixed. The row number cannot be altered. Rows which are not applicable to the reporting bank should be filled with "0" and the reason why they are not applicable should be explained in the accompanying narrative. Supervisors have the discretion to tailor the format of the template to reflect the implementation of PVA in their jurisdictions.

Accompanying narrative: Banks are expected to supplement the template with a narrative commentary to explain any significant changes over the reporting period and the key drivers of such changes. In particular, banks are expected to detail "Other adjustments", where significant, and to define them when they are not listed in the Basel framework. Banks are also expected to explain the types of financial instruments for which the highest amounts of PVAs are observed.

Equity

Interest rates

Foreign exchange

Credit

Commodities

Total

Of which: in the trading book

Of which: in the banking book

Closeout uncertainty, of which:

Mid-market value

Closeout cost

Concentration

Early termination

Model risk

Operational risk

Investing and funding costs

Unearned credit spreads

Future administrative costs

Other

Total adjustment

Definitions and instructions

Row

number

Explanation

Closeout cost: PVAs required to take account of the valuation uncertainty to adjust for the fact that the position level valuations calculated do not reflect an exit price for the position or portfolio (for example, where such valuations are calibrated to a mid-market price).

Concentration: PVAs over and above market price and closeout costs that would be required to get to a prudent exit price for positions that are larger than the size of positions for which the valuation has been calculated (ie cases where the aggregate position held by the bank is larger than normal traded volume or larger than the position sizes on which observable quotes or trades that are used to calibrate the price or inputs used by the core valuation model are based).

Early termination: PVAs to take into account the potential losses arising from contractual or non-contractual early terminations of customer trades that are not reflected in the valuation.

Model risk: PVAs to take into account valuation model risk which arises due to: (i) the potential existence of a range of different models or model calibrations which are used by users of Pillar 3 data; (ii) the lack of a firm exit price for the specific product being valued; (iii) the use of an incorrect valuation methodology; (iv) the risk of using unobservable and possibly incorrect calibration parameters; or (v) the fact that market or product factors are not captured by the core valuation model.

Operational risk: PVAs to take into account the potential losses that may be incurred as a result of operational risk related to valuation processes.

Investing and funding costs: PVAs to reflect the valuation uncertainty in the funding costs that other users of Pillar 3 data would factor into the exit price for a position or portfolio. It includes funding valuation adjustments on derivatives exposures.

Unearned credit spreads: PVAs to take account of the valuation uncertainty in the adjustment necessary to include the current value of expected losses due to counterparty default on derivative positions, including the valuation uncertainty on CVA.

Future administrative costs: PVAs to take into account the administrative costs and future hedging costs over the expected life of the exposures for which a direct exit price is not applied for the closeout costs. This valuation adjustment has to include the operational costs arising from hedging, administration and settlement of contracts in the portfolio. The future administrative costs are incurred by the portfolio or position but are not reflected in the core valuation model or the prices used to calibrate inputs to that model.

Other: "Other" PVAs which are required to take into account factors that will influence the exit price but which do not fall in any of the categories listed in CAP50.10. These should be described by banks in the narrative commentary that supports the disclosure.

Linkages across templates

[PV1:12/f] is equal to [CC1:7/a]

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Introduction

Table LIA: Explanations of differences between accounting and regulatory exposure amounts

Template LI1: Differences between accounting and regulatory scopes of consolidation and mapping of financial statement categories with regulatory risk categories

Template LI2: Main sources of differences between regulatory exposure amounts and carrying values in financial statements

Template PV1: Prudent valuation adjustments (PVAs)