Basel’s Forgotten Pillar: The Myth of Market Discipline on the Forefront of Basel III

Abstract

JEL classification: G 21, G24, G28Although Basel II fortified the first two pillars with market transparency enhancing Pillar III disclosures and encouraged the usage of major Credit Rating Agencies (CRAs) such as Moody's, Standard and Poor's, and Fitch as quasi governmental authorities to overcome asymmetric informational problems on risk and capital adequacy fronts of the global financial system, the recent global financial crisis has proven just the opposite. The banks and regulators were not in a position to truly assess the risk and capital adequacy frameworks of the global and domestic financial institutions based on the assessments of the rating agencies. To overcome the problem of informational asymmetry for the market participants, the Basel Committee on Banking Supervision set out new proposals for enhanced Pillar III disclosures in the areas of credit risks and capital reporting standards on the forefront of Basel III that would come into effect on April 1, 2016. This paper is a critical evaluation of the new reporting proposals of BCBS within the critical role of the credit rating agencies.

Pillar 3: Does banking regulation support stakeholders’ interest in banks financial and risk profile?

“…Topics of Pillar 3 and disclosures have also attracted researchers. They have focused mainly on weaknesses of the disclosures (mainly huge costs, ineffective implementation) and less on benefits [ 4 – 6 ]. Research on stakeholders’ interest and comments towards Pillar 3 disclosures is very limited.…”