The Office of the Superintendent of Financial Institutions has issued a notice spelling out what it expects in terms of added disclosure under the Basel II capital adequacy regime.

The third pillar of this framework describes the disclosure requirements for institutions. OSFI says it does not plan to issue additional guidance on the Pillar 3 requirements and will refer mainly to the requirements set out in the new Basel Framework, however it is providing additional clarification on the implementation of these requirements for Canadian institutions.

The new Basel framework requires that most disclosures under Pillar 3 be made on a semiannual basis. However, OSFI believes that the frequency of the quantitative disclosures should align with financial reporting in Canada which is done on a quarterly basis. Qualitative disclosures can be made on an annual basis. OSFI will allow institutions discretion on the location of the Pillar 3 disclosures (e.g., annual report, quarterly report, website, etc.).

The regulator encourages institutions to begin disclosing information under Pillar 3, particularly the quantitative disclosures, in Q1 2008. However, OSFI will allow some flexibility throughout 2008 and require institutions to meet all Pillar 3 disclosure requirements following fiscal year-end 2008.

To ensure compliance with Pillar 3 requirements, OSFI is not proposing to put in place an in-depth compliance review process. OSFI will address non-compliance issues on a case-by-case basis through bilateral discussions with institutions, it says.

OSFI’s current proposal would require all institutions to meet the Pillar 3 disclosure requirements in order to provide investors and depositors with information on the capital position of the institution, it says. “However, we are still considering the treatment of foreign bank subsidiaries where disclosures are made at the parent level,” it notes. “Other jurisdictions may offer some flexibility for foreign bank subsidiaries to reduce the Pillar 3 disclosures on the basis of disclosures made by the parent institution.”

“OSFI is considering allowing some flexibility for foreign bank subsidiaries in Canada. In this regard, OSFI is seeking comment on which elements of Pillar 3 could be eliminated for foreign bank subsidiaries provided that they are disclosed by the parent and how such disclosures provide relevant information about the subsidiary,” it adds.

Comments, particularly on the applicability of the Pillar 3 requirements to foreign bank subsidiaries, are due by July 31.