The open data revolution in banking falls short

Lax Pillar 3 rules are leading to inconsistent data being collected

The open data revolution promised a lot. The Basel Committee on Banking Supervision’s Pillar 3 framework put data on the capital, liquidity and leverage of big banks into the public realm, so their risks could be monitored and executives held accountable. Tearing down these information barriers was meant to promote market discipline.  

The periodic data dumps under the Pillar 3 framework are catnip to analysts and regulators. They also provide the raw material for hundreds of Risk Quantum articles. But if the data is flawed, market discipline cannot be enforced. Sadly, much of the information disclosed in Pillar 3 reports is holey, inconsistent and generally of poor quality, according to a recent assessment by the European Banking Authority. 

In some cases, mandatory disclosure templates and tables went partially or entirely unfilled without explanation. Some reports were hidden as appendices in interim reports or buried in obscure corners of firms’ websites. 

Most frustratingly for those using the data for comparative analysis, the structure of Pillar 3s and the labelling of templates and tables were found to be inconsistent among institutions. Interdisclosure-period data changes were also calculated differently across firms, frustrating comparisons over time.

These shortcomings aren’t just fodder for grumpy data wonks, though. Pillar 3 disclosures are crucial for effective investor scrutiny of financial institutions. It’s common on bank earnings calls for analysts to ask about the migration of risk-weighted assets (RWAs), or the reasons why capital levels fluctuated or liquidity buffers dipped. Often, executives can point to their disclosures to furnish answers. That’s what they’re there for.

But banks still keep some data hidden. For example, of the US systemic banks, only JP Morgan, Bank of America and Wells Fargo disclose granular counterparty credit RWA data. Among eurozone systemic lenders, many only provide comprehensive Pillar 3 data as of year-end and June 30, making quarter-on-quarter comparisons tricky. 

One reason for these inconsistencies is that current rules aren’t as strict as they could be. For instance, European banks are only required to produce all disclosures yearly. As a result, interim Pillar 3s are often stripped to the bare essentials, without useful context or clarifying detail. 

But financial markets move fast, and risk profiles can flip in the blink of an eye. The EBA’s efforts to ‘optimise’ Pillar 3 in the wake of the passage of the updated Capital Requirements Regulation could bring European banks’ disclosures into line. The watchdog plans to issue updated rules on institutions’ public disclosures in the second quarter, following a public consultation launched in October last year.

Tougher, less flexible rules may get Pillar 3s into better shape – benefitting banks and stakeholders alike.