Banks Required to Disclose Capital Structure and Risk Management Under Basel II Framework
Introduction
The Mauritian Financial Services Commission has issued a new guideline requiring banks operating in the country to disclose their capital structure and risk management practices under the Basel II framework.
Regulatory Requirements for Maintenance of Capital
The guideline outlines the regulatory requirements for the maintenance of capital and provides a table showing the components of Tier 1 and Tier 2 capital. The significance of any movements in the capital structure is discussed, along with a description of the calculation of Tier 1 and Total capital ratios.
Risk-Weighted Assets
Banks are required to provide details on how risk-weighted assets are determined by applying prescribed risk weights to on- and off-balance sheet assets, according to the credit risk of the counterparty.
Pillar 3 Disclosures
The guideline also provides for Pillar 3 disclosures, which aim to add a risk perspective to disclosure and provide information about banks’ capital structure and solvency. Banks are required to disclose their Tier 1 and Total capital adequacy ratios on a quarterly basis, while smaller banks must do so on a semi-annual basis.
Interaction with Accounting Disclosures
Banks may rely on accounting disclosures or listing requirements to fulfill Pillar 3 expectations, but must provide explanations for any material differences between the two. For non-mandatory disclosures, banks must publish the information on their websites and in annual reports.
Materiality
The guideline emphasizes the importance of materiality in deciding which disclosures are relevant for each bank. Banks should consider whether a user would consider the information material for making economic decisions.
Frequency of Pillar 3 Disclosures
Disclosures under Pillar 3 must be made on a semi-annual basis, with some exceptions. Qualitative disclosures that provide a general summary of banks’ risk management objectives and policies may be published annually, while large internationally active banks and significant banks must disclose their Tier 1 and Total capital adequacy ratios on a quarterly basis.
Proprietary and Confidential Information
Banks are allowed to withhold proprietary and confidential information from disclosure, but must disclose the fact that some information was not disclosed and provide reasons for non-disclosure.
General Disclosure Principles
The guideline requires qualitative and quantitative disclosure requirements in three areas:
- The scope of application of Basel II
- Regulatory capital and capital adequacy
- Risk exposures and assessment