The Basel Committee on Banking Supervision met in September to discuss recent market trends and disruptions as well as key supervisory initiatives. The Committee noted several spikes in market volatility in July and August related to large, levered positions and the interconnections with non-bank financial intermediaries. The Committee noted the importance of operational resilience and managing third-party risks.

The Committee also finalized the report on lessons learned from the 2023 banking turmoil. As recommended by the G20, the report builds on earlier documentation with a new emphasis on liquidity risk that will be published in the coming months. The Committee also provided an update on its work to support regulatory supervisors including tools that can be used in their day-to-day work. The tools pertain to liquidity risk, the sustainability of business’ models, and effective supervisory judgment.

Finally, the Committee reviewed comments it received on its recent consultation regarding the proposed disclosure framework on climate-related financial risks.

Click here for more information.

The Basel Committee recently approved a disclosure framework for financial institutions' cryptoassets. The disclosure framework has an implementation date of January 1, 2026. This framework creates a standardized set of public tables and templates covering financial institutions’ cryptoasset exposures. The disclosures are intended to enhance information for oversight and provide transparency into the risk level of a financial institution’s cryptoasset exposure. The document, DIS55 Cryptoasset exposures, sets out the final revised standard.

The Basel Committee also approved a set of targeted amendments to the cryptoasset standard. They are intended to promote a consistent understanding of the standards, especially as it relates to stablecoins. The Basel Committee intends to monitor and update the framework as the financial sector's exposure to cryptoassets develops.

While credit union exposure to cryptoassets is currently limited, this is a framework that may impact the sector in the future, as exploration of the possible benefits of cryptoassets grows. Credit unions continue to explore which innovations and review technological and investment possibilities to benefit their members. It is important for credit unions to continue to advocate for a framework that enables them to invest in emerging technology, if appropriate in the future, that does not have prohibitive regulatory barriers. WOCCU along with others requested clearer guidance on several elements including the definition of “materiality.” In response to our comments, the Basel Committee is proposing a revised definition.  

Click here to access the final disclosure framework.

The Basel Committee recently published a consultation on Principles for Sound Management of Third-Party Risk in the banking sector. The proposed principles are open for comment until October 9, 2024. They provide guidance to the financial institutions and supervisors regarding effective third-party risk management to withstand operational disruptions.

This consultation recognizes that continued digitalization of the financial services has led to an increased reliance on third parties for new service offerings. The Basel Committee emphasized that the increased reliance as well as the rising concentration risks requires an updated review of how these third-party risks are managed by financial institutions. There are 12 high-level principles offering guidance. They introduce the idea of third-party life cycle while also emphasizing key concepts such as criticality.

The principles complement and expand on the Financial Stability Board’s 2023 report, Enhancing third-party risk management and oversight. While the principles are primarily directed at large international banks and their supervisors, the Basel Committee specifically noted the benefits these principles offer smaller financial institutions and their supervisory authorities. They establish a common baseline for all supervisors that oversee and evaluate the risk management of third parties.

Notably, the principles follow a technology-neutral approach. The Basel Committee believes this will allow the principles to remain relevant as new technology emerges in the future. The Basel Committee suggests these principles can be applied to third party services involved in a broad array of technology such as artificial intelligence, blockchain technology and machine learning. 

Click here to read the full consultation.

On May 16, 2024 the Basel Committee published a report on the Digitalisation of Finance, outlining the risks and benefits of new technologies and its suppliers for the purposes of banking services, as well as “eight implications for banks and supervisors relating to macro-structural elements, specific digitalisation themes, and capacity building and coordination.” The report expands on the 2018 Sound Practices: implications of fintech developments for banks and bank supervisors. Technologies such as application programming interfaces, artificial intelligence and machine learning, distributed ledger technology and cloud computing, as well as new technologically enabled suppliers (eg big techs, fintechs and third-party service providers) and business models are reviewed within the report. The Committee hopes to address regulatory and supervisory implications such as:

• “monitoring evolving risks and adopting a responsible approach to innovation;
• safeguarding data and implementing robust risk management processes; and
• securing the necessary resources, staff and capabilities to assess and mitigate risks from new technologies and business models.”

More information on the report on the digitalization of finance is available here.

The Basel Committee on Banking Supervision (the Committee) recently met to discuss key items impacting the financial service markets.

The Basel Committee announced it will be revising the Core principles for effective banking supervision (Core Principles). Following comment letters from stakeholders, including the World Council of Credit Unions, the Committee approved the first revisions to the Core Principles since 2012. The final standards will be published following the International Conference of Banking Supervisors at the end of April. The Core Principles are global standards for prudential regulation and supervision. Supervisory authorities across the globe use the Core Principles as a benchmark for evaluating the effectiveness of their regulatory and supervisory frameworks. World Council strongly urged the Basel Committee to include more direct language concerning proportionality and communication with national level supervisory authorities. We also highlighted the disproportionate burden recent regulatory guidance places on credit unions in key areas, such as operational resilience, stress testing, and climate risk management. Click here to read the comment letter submitted by World Council.

During their recent meeting the Committee also discussed developing risks to the global banking system, window-dressing behavior by large banks, and the status of Basel III implementation.

The Committee discussed climate-related financial risks as one of the top ongoing and developing risks for financial institutions. It discussed scenario analysis as a tool for assessing the resilience of financial institutions business models, strategies, and overall risk profile. A discussion paper will be published in the coming months on the use of climate scenario analysis by banks and supervisors. The Committee also discussed sector risks, including segments of commercial real estate facing headwinds and banks’ interconnections with non-bank financial intermediaries.

Finally, the Committee reported on the implementation status of the outstanding Basel III standards, issued in 2017. Implementation is progressing but is uneven between countries. The Committee approved a workplan for the jurisdictional assessments of the implementation of these standards as part of the Committee’s Regulatory Consistency Assessment Programme.  

Click here for more information on the updates provided by the Basel Committee.

In response to the Basel Committee on Banking Supervision's discussion paper regarding digital fraud, World Council submitted a comment letter on behalf of the global credit union movement. The Committee's discussion paper requested comments a description of fraud and the transmission channel's into the banking system. It also requested comments on whether there are additional banking initiatives related to digital fraud that should be pursued by the Committee. 

Among suggestions for a more inclusive description of digital fraud impacting credit unions, World Council urged the Committee to explore the methods and ramifications in which the most vulnerable populations are targeted. Digital fraud is another challenge credit unions face in their mission for financial inclusion. World Council requested the Committee consider additional education initiatives related to fraud activity and resources.

Click here to read the comment letter submitted by World Council.  

World Council has submitted a comment letter on the Basel Committee's public consultation Disclosure of Cryptoasset Exposure. The consultative document proposes a standardized disclosure template that would be required for financial institutions, including credit unions, with cryptoasset exposure beginning in January 2025. The Committee proposed the templates to ensure market discipline and better transparency on risks associated with exposure.  

Similar to other areas of the Basel Framework, World Council requested that proportionality or a more streamlined ability to disclose also be included in the requirements and standard templates. If credit unions decide to explore or take-on cryptoasset exposure in the future it is important that the reporting requirements for community-based financial institutions not be overly burdensome to ensure they are not excluded from new opportunities. 

Click here to read World Council's comment letter.  

The Basel Committee on Banking Supervision issued a public consultation paper on a Pillar 3 disclosure framework for climate-related financial risks.

The Committee is analyzing how a Pillar 3 disclosure framework for climate-related financial risks would further its mandate to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability, and the potential design of such a framework. It is publishing this consultation paper to seek the views of stakeholders on its preliminary proposal for qualitative and quantitative Pillar 3 disclosure requirements that would complement the work of other standard setters, including the International Sustainability Standards Board (ISSB), and provide a common disclosure baseline for internationally active banks.

The Committee goal is to ensure the availability of accurate, consistent and useful climate-related data that can be used to facilitate forward-looking risk assessment by banks is available.  The Committee is taking a flexible approach on the future framework given the evolving nature of this data.  

The Committee is considering which elements would be mandatory and which subject to national discretion. More generally, the Committee notes that the development of a meaningful and robust Pillar 3 framework for climate-related financial risks is likely to be an iterative process.

A copy of the consultation can be viewed here.

In a recent newsletter the Basel Committee provided additional information regarding the status of implementation of the Principles for the effective management and supervision of climate-related financial risks (Principles) and current gaps.

The Committee’s Principles are seeking to improve the banks’ climate-related financial risk management and lower risks to the global banking system.

After reviewing the status of implementation and meeting with supervisors and stakeholders, the Committee identified key areas of focus for the future. Enhancing data availability and quality is a top priority as data limitations were identified as the main impediment for banks and supervisors to implement the Principles. The Committee believes financial institutions will need to invest in better tools and greater automation to capture climate data and minimize operational risks.

Building capabilities and expertise was also identified as a significant challenge and area of focus. The lack of professional experience and human capital continues to challenge the speed of implementation. The Committee is recommending financial institutions continue to build in-house expertise to support integrating and mitigating climate-related risks into their management practices.

Finally, applying climate scenario analysis will be a focus moving forward. Financial institutions reported running a range of different scenarios for different purposes, such as for strategic planning and risk management frameworks. However, the uses and methodologies vary across jurisdictions.

The Committee will continue to monitor implementation progress but it is clear that financial institutions will need to devote further resources to fully implement the Principles.

A few members of the United States Congress are requesting the U.S. Government Accountability Office (GAO) examine the role U.S. federal banking agencies played in the Basel III international capital standards. Financial Services Committee Chairman Patrick McHenry and Monetary Policy Subcommittee Chairman Andy Barr are criticizing the global regulatory capital requirements and related U.S. implementation proposals.

The committee chairmen are questioning the transparency of the Basel Committee on Banking Supervision (BCBS), how the international standards were developed, and the use of those standards in the creation of the U.S. proposed capital rules. Their request for a GAO review comes after the U.S. Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC), jointly proposed new rules which would require significant changes to the US regulatory capital regime for the largest US banks by July 2025.

As national level governments continue to review and implement Basel III standards, World Council in collaboration with its members, continue to encourage proportional and properly tailored standards for credit unions. Click here to read the joint letter from World Council and Credit Union National Association (CUNA) urging proportionality in the U.S. approach to Basel III for credit unions.

The Basel Committee on Banking Supervision met in October to evaluate recent market developments and risks to the global banking system. The Committee also discussed several policy and supervisory initiatives.

The Committee reviewed the outlook for the global banking system given the March 2023 banking turmoil and high interest rate environment. The banking challenges that occurred this Spring were the most significant system-wide stress on the banking industry since the Great Financial Crisis. The Committee reflected on the causes of the banking turmoil and the regulatory and supervisory lessons learned in its October 2023 report. Based on this report, which the Group of Governors and Heads of Supervision recently reaffirmed, the Committee will be pursuing several initiatives. These include:

• Prioritising work to strengthen the supervisory effectiveness and areas that need additional global guidance; and
• Pursuing additional follow-up analytical work to assess whether specific standards of the Basel Framework produced the intended result during the March 2023 banking turmoil (especially related to liquidity and interest rate risk).

In addition to reflecting on this year’s banking challenges and future adjustments, the Committee discussed both climate risks and cryptoasset exposure. The Committee agreed to consult on a Pillar 3 disclosure framework for bank exposures to climate-related financial risks. The Committee will be publishing a consultation paper on this topic by November. The Committee also agreed to consult on disclosure requirements regarding banks’ cryptoasset exposures. These new disclosures would complement the previous standards issued by the Committee in December 2022. The consultation paper on cryptoassets is expected soon.

Finally, members of the Committee also discussed how advances in digitalisation and financial technology are impacting the financial system. Trends discussed included the provision of banking services through non-bank intermediaries (“Banking as a Service”). The Committee expects to publish a report in 2024 on developments in digitalisation of finance and their implications for banks and supervisors.

World Council submitted a comment letter last week on the Basel Committee’s proposed updates to the Core Principles for Effective Banking Supervision (Core Principles). The Core Principles are global standards for prudential regulation and supervision. Supervisory authorities across the globe use the Core Principles as a benchmark for evaluating the effectiveness of their regulatory and supervisory frameworks. This is the first formal update to the Core Principles since 2012.

In the comment letter, World Council strongly urged the Basel Committee to include more direct language concerning proportionality and communication with national level supervisory authorities. We also highlighted the ongoing challenges of accessing quality correspondent banking services and the disproportionate burden recent guidance on operational resilience, climate, digitization and stress testing will have on credit unions.

World Council has long advocated for clearer language regarding proportional implementation of international standards. It is critical that laws and regulations designed to address the largest international banks posing the greatest risks to the financial markets are appropriately tailored for credit unions serving their local community. While the World Council requested several additions and adjustments to the Core Principles, we are pleased that the Basel Committee’s proposed revisions include several updates favorable to credit unions recognizing proportionality.  

A copy of the letter can be viewed here.  

The Group of Central Bank Governors and Heads of Supervision (GHOS), which oversees the Basel Committee on Banking Supervision, met in September to discuss lessons learned from recent banking challenges and review the implementation status of outstanding Basel III standards.

The Spring’s individual bank failures and turmoil resulted in Basel Committee initiatives such as strengthening supervisory effectiveness, pursuing additional analytical work, and assessing the need to explore policy options. GHOS endorsed Basel Committee’s response to the events this Spring.  

The GHOS will be publishing the Basel Committee’s regulatory and supervisory lessons learned from the recent stress in the financial services industry. They include:

• The banks’ risk management practice and governance arrangements are the most important foundation to operational resilience.
• Strong supervision plays a vital role in overseeing the safety and soundness of banks. Effective supervision must act early to identify weaknesses in bank practices.
• The importance of a prudent regulatory framework in safeguarding financial stability.

The GHOS is supporting a series of follow up initiatives. They include strengthening supervisory effectiveness and identifying issues that could merit additional guidance at a global level and follow-up analytical work to determine if components of the Basel Framework are performing as intended.

The GHOS noted that members continue to make progress in implementing the Basel III reforms, which were finalized 2017.  All remaining jurisdictions and standards of Basel III are expected to be implemented by the end of 2025.

Additional information can be found here.

The recent Newsletter issued by the Basel Committee on Banking Supervision highlights the following points:

• Ongoing economic uncertainty continues to pose challenges for banks when assessing the credit quality of borrowers and vulnerable sectors.
• Sound provisioning practices enable banks identify any deterioration in credit risk in a consistent and timely way, thus forming an integral part of credit risk management.
• Supervisors continue to observe a range of practices on internal ratings-based (IRB) models and provisioning across banks and have taken supervisory action, including thematic deep dives, onsite investigations, issuing guidance and bank-specific actions.
• The Committee intends to continue monitoring bank practices in assessing credit risk and setting provisions, as the global economy continues to evolve.

Since the Newsletter on Covid-19 related credit risk issues was published in March 2022, credit risk continues to be a key area of focus for the Committee, amid the ongoing macroeconomic uncertainty and the potential impact on borrowers from rising interest rates, high inflation and market volatility. Failure to identify and measure deterioration in credit risk in a timely and consistent way may lead to higher future bank losses and capital inadequacy that could undermine confidence in the banking sector. Against this backdrop, supervisors remain cautious on banks' practices, given the challenges banks face in capturing any potential deterioration in the credit quality of borrowers and counterparties, considering model and data limitations.

Supervisors consider it crucial that banks adopt a high-quality and robust approach to credit risk modelling that can be applied consistently over time. The Covid-19 pandemic has increased the challenges banks face when assessing the credit quality of borrowers. The Committee has been monitoring and sharing supervisory observations on banks' policies and practices in relation to credit risk modelling, focusing on issues exposed by the Covid-19 pandemic that may remain relevant in the current risk environment. The work highlighted:

• The credit quality assessment of borrowers has become increasingly challenging for banks in the light of the Covid-19 pandemic. A range of practices have been observed in expected credit losses (ECL) provisioning and credit risk internal ratings-based (IRB) models, and there remains scope for further developing robust practices across banks.
• Supervisors continue to observe three main challenges that warrant further monitoring, namely (i) governance controls around model risk management including judgment-based overlay and model performance; (ii) capturing economic uncertainty; and (iii) identifying credit deterioration in vulnerable sectors and borrowers. Together these challenges could affect banks' ability to recognise changes in credit risk in a timely manner.
• Banks continue to apply sizeable judgment-based adjustments to compensate for model and data limitations to reflect credit risk expectations. Due to the scale of government support measures, some of credit risk have become disconnected from the actual risks of the portfolios, which may still materialise in the future.
• The Committee recognises the role played by judgment-based adjustments related to model performance and emphasises that these adjustments should be subject to robust governance and supported by appropriate documentation and methodologies. Banks should monitor and continuously enhance controls around model risk management and development to ensure they remain fit for purpose.
• Banks and supervisors may not have an accurate view of credit risk if model issues are not well understood or adequately compensated for. Supervisors continue to focus on banks' ability to identify model performance issues in a timely manner, and to identify enhancements to ensure a well controlled modelling process. Supervisors also continue to focus on banks' strategic plans to minimise and/or mitigate model risk through better capture of key risk drivers and robust data governance that are relevant to support a sound expected credit loss (ECL) process.
• Undercalibration of probability-of-default (PD) models has been observed by supervisors, and supervisory measures have led to remedial action on the part of banks, including model overlays, risk-weighted assets (RWA) overlays, PD scale-ups and RWA add-ons.
• Recent geopolitical events may have started a new cycle of credit conditions before possible effects of the Covid-19 pandemic have fully fed through. Focus has shifted towards adjustments to capture the impact on borrowers of factors from rising interest rates, high inflation, and market volatility. It may be more challenging to isolate the downturn period that should be used for the ECL process and for IRB models.
• Banks have experienced difficulties in assessing how economic shocks affect different portfolios as the risk environment has evolved rapidly and is very different from that of the recent past, leading to heightened model risk. Supervisors have observed that banks apply a range of different approaches to capture the impact of macroeconomic headwinds on borrowers, particularly when historical data may not reflect the current economic outlook. Supervisors continue to focus on: (i) how banks are using their sensitivity analysis capabilities to understand the impact of using alternative economic assumptions on provision estimates; and (ii) how effective banks' processes are in identifying vulnerable sectors and factoring sectoral risks in to provision estimates.
• The Committee stresses the importance of: (i) sensitivity analysis in assessing credit risk; and (ii) the appropriate use of data collected during the pandemic to understand how the key drivers of credit losses affect different portfolios.
• Supervisors and banks need to be prepared to address the challenges related to ECL provisioning processes and IRB models to ensure banks are able to identify any potential deterioration in the credit quality of borrowers and counterparties.

The Committee intends to continue assessing bank practices in credit risk modelling and will continue to monitor potential risks in the evolving economic environment and financial conditions.

A copy of the Newsletter can be viewed here.

The Basel Committee on Banking Supervision has issued a public consultation on revisions to the Core principles for effective banking supervision ("Core Principles").

The Core Principles are the de facto minimum standards for the sound prudential regulation and supervision of banks and banking systems. They are universally applicable and accommodate a range of banking systems and a broad spectrum of banks. The Core Principles are used by supervisors to assess the effectiveness of their regulatory and supervisory frameworks. They are also used by the International Monetary Fund (IMF) and World Bank as part of the Financial Sector Assessment Program (FSAP) to evaluate the effectiveness of countries' banking supervisory systems and practices.

Originally issued by the Committee in 1997, the Core Principles were last substantively updated in 2012. The Committee commenced a review of the Core Principles in April 2022, with the objective of reflecting supervisory and regulatory developments, structural changes affecting the banking system, and lessons learnt from FSAPs since the last update.

Changes are proposed to both the structure and contents of the Core Principles standard. The proposed amendments have been informed by several thematic topics reflecting regulatory and supervisory developments in: (i) financial risks; (ii) operational resilience; (iii) systemic risk and macroprudential aspects of supervision; (iv) new risks, including climate-related financial risks and the digitalisation of finance; (v) non-bank financial intermediation; and (vi) risk management practices.

The proposals were developed by a Task Force comprised of both Committee and non-Committee member jurisdictions, as well as the IMF and World Bank.

A copy of the consultation can be viewed here.

After negotiations between the Council presidency and the European Parliament, the Basel Committee has reached a provisional agreement on the implementation of Basel III regulatory reforms, specifically involving amendments to the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD). The Basel Committee hopes these reforms will strengthen the resilience of banks operating within the European Union. 

Negotiations also led to additional agreements related to the provisional agreement which include implementation of the “output floor, limiting banks' variability of capital levels computed by using internal models, and the appropriate transitional arrangements to allow sufficient time for market players to adapt.” They also agreed on improvements to credit risk, market risk and operational risk; enhancement to proportionality rules, specifically for small and non-complex financial institutions; a transitional prudential regime for crypt assets; amendments to improve ESG risk management, and harmonization of other frameworks to strengthen bank resiliency.

More information on the provisional agreement reached on Basel III reforms is available here.

On June 6, 2023, the Basel Committee on Banking Supervision followed up on its meeting in Hong Kong in March and met to further discuss recent financial and market developments, global banking system risks, and policy and supervisory developments. Specifically, the Basel Committee assessed current instabilities surrounding the banking system and the need to strengthen supervisory effectiveness. The Committee confirmed that all aspects of Basel II will be implemented “in full and consistently”. They are reviewing its Basel Core Principles (Core principles for effective banking supervision), and will consult on revisions to the principles with stakeholders by publishing a consultation paper next month.

The Basel Committee highlighted the following points regarding current banking turmoil:

• “The first and most important source of financial and operational resilience comes from banks' own risk management practices and governance arrangements.
• It is critical that supervisors have the ability and willingness to act early and effectively to identify and promptly correct weaknesses in bank practices.
• The Basel III reforms that have been implemented to date helped shield the global banking system and real economy from a more severe banking crisis. Members unanimously reaffirmed their expectation of implementing all aspects of the Basel III framework in a full and consistent manner, and as soon as possible, in order to further enhance the resilience of the global banking system.”

The Committee also discussed prudential treatment of banks’ cryptoassets exposure and potential revisions to existing standard, and climate-related financial risks as it relates to its development of a Pillar 3 framework addressing requirements for disclosure of a bank’s exposure to these risks. The framework will work in tandem with the other authorities such as the ISSB and the Committee will publish a consultation paper by the end of the year. Further, the Basel Committee “reviewed and approved the assessment reports on the United States' implementation of the Net Stable Funding Ratio and large exposures framework” under its Regulatory Consistency Assessment Programme.

More information on the Basel Committee’s June 6^th meeting can be found here.

In March of this year 2023, the Basel Committee on Banking Supervision met in Hong Kong and virtually to discuss current market developments, risks and vulnerabilities to the global banking system, and policy and supervisory initiatives including review of its Core Principles for Effective Banking Supervision. Recent market developments have highlighted the need for “resilient global banking system underpinned by effective bank governance and risk management practices, robust regulatory standards, and strong supervision supported by proactive cross-border cooperation.” According to the Basel Committee, current risks include inflation, lower growth and geopolitical tensions; and in response the Committee plans to implement the Basel III framework “in a full and consistent manner”.

The Committee also examined the Pillar 3 disclosure framework for climate-related financial risks and how it will coincide with the International Sustainability Standards Board’s (ISSB) disclosure initiatives. The Committee further reviewed progress to its Core principles for effective banking supervision ("Basel Core Principles"), and approved a workplan related to its global bank prudential standard for cryptoassets and work programme, to mitigate risks to the global banking system.

 More information on the Basel's Committee's meetings to discuss market developments and risks is available here. 

The Financial Stability Issued and Executive Summary of Proportionality in Banking Supervision to summarize various proportionality approaches to implementing the Basel III Framework.  Notable in the summary is the reiteration of the principles of proportionality built into the Basel III Framework and most recently elaborated on the Basel Committee on Banking Supervision’s High-level Considerations on Proportionality.

Notably the summary indicates that proportionality provides supervisory authorities with options for adopting simpler standardized approaches and that in some jurisdictions, even the simpler approaches might require further adaptation. 

The summary notes that the Basel Framework is the full set of standards for the oversight of internationally active banks (IABs) in member jurisdictions of the Basel Committee on Banking Supervision (BCBS). This framework includes the Core Principles for Effective Banking Supervision (BCPs) and regulatory (Pillar 1), supervisory (Pillar 2) and disclosure (Pillar 3) standards. Although the BCPs are universally applicable, the remaining elements of the Basel Framework (the three pillars) are the standard for IABs. To accommodate the diversity of banks and banking systems, the BCPs embed the concept of proportionality. Proportionality allows assessments of compliance with the BCPs that are commensurate with the risk profile and systemic importance of a broad spectrum of banks.

This summary makes it clear that national-level regulators have the appropriate tools to tailor regulations more appropriate for smaller, less-complex community based cooperatives such as credit unions.

A copy of the Executive Summary can be viewed here.

The Basel Committee on Banking Supervision met in Hong Kong to take stock of recent developments and risks in the global banking system along with discussing a range of policy initiatives.

In particular the Committee noted that the risks of high inflation, lower growth and geopolitical tensions are posing risk management challenges to banks. Years of unprecedentedly low interest rates underpinned the build-up of leverage across household and corporate sectors. As most central banks raise interest rates to combat inflation, borrowers are now facing sharply rising debt service burdens. A broad-based repricing in asset markets could also expose banks to additional risks.

The Basel Committee directed banks and supervisors to be vigilant to the evolving outlook to ensure that the global banking system is resilient. In addition, the Committee agreed to take stock of the regulatory and supervisory implications stemming from recent events, with a view to learn lessons.

On other related topics the Basel Committee discussed the following policy initiatives:

1. Climate-related financial risks

The Committee discussed its work related to the development of a Pillar 3 disclosure framework for climate-related financial risks. The purpose of the framework is to provide additional bank disclosures about the prudential risks. This framework would complement, and be interoperable with, parallel disclosure initiatives under way by the International Sustainability Standards Board and other authorities. The Committee will issue a consultation paper on the proposed

2. Cryptoassets

Following the publication of a prudential treatment for banks' exposures to cryptoassets last year, the Committee approved a workplan to continue to assess and mitigate risks from cryptoassets to the global banking system. This includes a set of targeted reviews of the prudential treatment, including with regard to the treatment of permissionless blockchains and the eligibility criteria for "Group 1" stablecoins. The Committee will also continue to monitor banks' cryptoasset activities and exposures, including their role as potential issuers of stablecoins and tokenised deposits, custodians of cryptoassets and interconnections with other nodes of the cryptoasset ecosystem.

3. Implementation of Basel III reforms

The Committee members unanimously reaffirmed their expectation of implementing all aspects of the Basel III framework in a full and consistent manner, and as soon as possible, in order to further enhance the resilience of the global banking system and provide a regulatory level playing field for internationally active banks.

 A copy of the press release can be viewed here.

The Basel Committee on Banking Supervision issued its Evaluation of the impact and efficacy of the Basel III reforms noting that the more sophisticated and multi-dimensional framework introduced through Basel III to address a variety of risks to enhance bank resilience came at the cost of greater regulatory complexity.  With respect to this complexity, the report notes a position that has been consistently argued by the World Council that “complex rules applied to simple banking activities may limit competition, giving advantages to larger and more complex banks, potentially providing incentives for banks to become even more complex and aggravating the [too big to fail] problem.”

World Council on numerous occasions to the Basel Committee stated that compliance with overly complex regulations disproportionately affect credit unions as compared to larger more complex financial institutions.  Their findings note that there are several drawbacks to a complex regulatory framework including challenges to capital planning and could lead to spurious risk assessments and a misallocation of capital.

These findings should now be of use to national level-regulators when implementing the Basel III framework who should take a proportional approach to regulations for credit unions, consistent with the proportionality built into the Basel III framework and consistent with other guidance issued by the Basel Committee.

Additionally, the report provides a holistic evaluation of the impact and efficacy of the implemented Basel III reforms assessing whether the implemented reforms have met their intended objectives, in particular of increasing bank resilience and reducing systemic risk. It also examines some potential unintended effects, notably on banks' lending and capital costs.  This report specifically provides evidence on the following:

• the impact of the capital and liquidity reforms on bank resilience and systemic risk;
• potential side effects on banks' lending and capital costs; and
• interactions among elements of the reforms and the regulatory complexity within the Basel Framework.

 A copy of the report can be viewed here.

The Basel Committee finalized its prudential standard on Cryptoasset Exposures which has been endorsed by the Committee’s oversight body, the Group of Governors and Heads of Supervision. The document sets out the final standard which the Committee has agreed to implement by 1 January 2025. The text will be incorporated into the consolidated Basel Framework shortly. After final incorporation, the standard will need to be adopted by national-level regulators before being applied to financial institutions. 

The Basel Committee stated that “[t]he standard will provide a robust and prudent global regulatory framework for internationally active banks' exposures to cryptoassets that promotes responsible innovation while preserving financial stability.”

The standard requires financial institutions to classify cryptoassets on an ongoing basis into two groups:

1. Cryptoassets that meet a full set of classification conditions covering tokenized traditional assets and cryptoassets and includes an effective stabilization mechanism;
2. Unbacked cryptoassets and cryptoassets that fail to meet any of the classification conditions and pose additional and higher risk compated with group one, accompanied by a complicated capital treatment.

A copy of the finalized standard can be viewed here.

The Basel Committee on Banking Supervision approved its 2023-2024 Work Programme outlining its strategic priorities for its policy, supervision and implementation activities.  The Committee will focus on the following key themes:

• Emerging risks and horizon scanning
• Digitalisation of finance
• Climate-related financial risks
• Monitoring and review of existing standards and guidance
• Implementation and evaluation

On digitalization the Committee will focus on the emergence of new entrants/suppliers in the banking system, the use of artificial intelligence and machine learning, big data and governance arrangements. The Committee will also conduct a deep dive analysis on the supervisory implications of Banking as a Service. Further, the Committee will continue to assess bank-related developments in cryptoasset markets, including the role of banks as stablecoin issuers, custodians of cryptoassets and broader potential channels of interconnections with the cryptoasset ecosystem as well as blockchain technology.

On sustainable finance, the Committee will continue to pursue a holistic approach to address climate-related financial risks to the global banking system. This will include work across all three pillars of regulation, supervision and disclosure. This includes considering whether additional regulatory measures are needed to address climate-related risks.

A copy of the work programme can be viewed here.

On November 8, 2022, the European Council reached a decision on its general approach to Basel III regulatory reforms, namely proposals on amendments to the capital requirements directive (CRD) and the capital requirements regulation (CRR). The Council hopes that by implementing these reforms, it will “boost the resilience of banks operating in the Union and strengthen their supervision and risk management”.

The “output floor” which uses internal models to calculate minimum capital requirements, will apply to both individual and group banking levels, however, member states will have discretion, within its own country, to apply the output floor at the highest level of consolidation. In addition to enhanced technical improvements to credit and market risk and several other improvements, the Council’s position on the implementation of Basel III reforms will enhance proportionality rules for small banks, specifically for disclosure requirements as they pertain to small and non-complex financial institutions. The European Commission previously presented its proposal on the review of the CRD and CRR regulations on October 27, 2021-- next steps include negotiations with the European Parliament to finalize a version of the texts and finalizing the implementation of Basel III international agreements into EU law.

More information on the European Council’s position on the proposals amending the CRD and CRR , is available here.

On July 14-15, 2022, the Basel Committee held a meeting to discuss several issues including, but not limited to: necessary measures to address climate-related financial risks, risks and vulnerabilities within the global banking system, additional empirical analyses on buffer usability and cyclicality in the Basel framework (the Committee plans to publish an evaluation report), and the approved results of the annual assessment exercise for globally systemically important banks (G-SIBs). The global banking system is currently enduring inflation and other growth inhibiting factors, and the Committee met to discuss its effects. The Committee believes that banks have been resilient due the success of its Basel II reforms and emplore banks and supervisors to "remain vigilant". Moreover, as a follow up to its interim evaluation report in 2021, on early lessons from the Covid-19 pandemic, the Committee plans to release a second report before the G20 Leaders' Summit, taking place in November of this year. In addition to this report, the Committee approved the results of its annual assessment exercise for G-SIBs, which will be submitted to the Financial Stability Board before it publishes a list of G-SIBs for 2022. Most notably, the Committee discussed the assessment and development of “a suite of potential measures – spanning disclosure, supervisory and/or regulatory measures – to address climate-related financial risks to the global banking system.”

More information on the Basel Committee’s July 14-15 meeting is available here.