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.

The Basel Committee on Banking Supervision (Committee) issued a newsletter discussing its internal discussions regarding artificial intelligence and machine learning.  The newsletter made the following observations:

• Banks are increasingly exploring opportunities for using artificial intelligence (AI), including machine learning (ML). 
• Banks' use of AI/ML presents significant opportunities but can also heighten certain risks and challenges. 
• The Committee intends to continue exploring banks' use of AI/ML, especially in the areas of explainability, governance, and resilience and financial stability.

The paper notes that banks are increasingly exploring opportunities for using AI/ML. AI/ML technology is expected to increase banks' operational efficiency and also facilitate improvements in risk management. While significant opportunities are emerging from the increasing use of AI/ML in many areas of banking, there are also risks and challenges associated with these techniques.

It notes that given the challenges associated with AI/ML, both supervisors and banks are assessing existing risk management and governance practices to determine whether roles and responsibilities for identifying and managing risks remain sufficient. As with other complex operations and technologies, it is important that banks have appropriately skilled staff, which can include model developers, model validators, model users and independent auditors. 

The Committee is working to develop further insights on this topic with a focus on the following areas:  

• First, the extent and degree to which the outcomes of models can be understood and explained.
• Second, AI/ML model governance structures, including responsibilities and accountability for AI/ML-driven decisions.
• Third, the potential implications of broader usage of AI/ML models for the resilience of individual banks and more broadly, for financial stability. 

A copy of the newsletter can be viewed here.

The Basel Committee on Banking Supervision published its Principles for the Effective Management and Supervision of Climate-related Financial Risks. The document forms part of the Committee's holistic approach to addressing climate-related financial risks to the global banking system and seeks to improve banks' risk management and supervisors' practices in this area.

The document outlines numerous principles for addressing climate-related risks that will form the bases of requirements from national level regulators when addressing climate-related risks for financial institutions and credit unions.   The principles outline numerous elements that should be included in national-level rulebooks as follows:

• internal control framework;
• capital and liquidity adequacy requirements;
• a risk management process;
• management monitoring and reporting requirements;
• comprehensive management of credit risk requirements;
• comprehensive management of market, liquidity, operational and other risks, and
• scenario analyses.

WOCCU commented on this document during the consultation process noting that the principles may result in a significant increase in regulatory burden for smaller, community based deposit taking institutions such as credit unions.  The principle of proportionality is key to allowing credit unions to address climate-related risks, but in a manner appropriate for their size and complexity.

The committee included its strong support of the principle of proportionality by including the following language as follows:

• The principles seek to accommodate a diverse range of banking systems and are intended to be applied on a proportionate basis depending on the size, complexity and risk profile of the bank or banking sector for which the authority is responsible.
• Supervisors should set expectations in a manner proportionate to the nature, scale and complexity of relevant banks’ activities.
• Where appropriate, supervisors should determine that banks have in place a scenario analysis programme that is proportionate to their size, business model and complexity, in order to assess the resilience of their business models and strategies to a range of plausible climate-related outcomes
• Banks should manage climate-related financial risks in a manner that is proportionate to the nature, scale and complexity of their activities and the overall level of risk that each bank is willing to accept.

This strong embrace of proportionality should provide clear direction to credit union supervisors and regulators to engage in the important and necessary process of tailoring these principles for credit unions in manner that does not impose an unreasonable regulatory burden on credit unions while allowing the regulated entity to address climate-related risks.

A copy of the principles can be viewed here.

On May 27, 2022, the Basel Committee met to contend with matters related to climate related financial risks, cryptoassets, G-SIB assessment methodology, and risks and vulnerabilities in the global banking system. Notably, the Committee finalized principles for the effective management and supervision of climate-related financial risks. They finalized a principles-based approach to improve risk management and supervisory practices devised to mitigate risks associated with climate-related financial risks; and these principles were drafted to include proportional application based on a “diverse range of banking systems”.

The Committee further issued a consultation on “the prudential treatment of banks’ cryptoasset exposures” as a follow-up to its consultation released in 2021 on the ‘Prudential treatment of cryptoasset exposures’. The recently released consultation aims to aid in the continued development of a “global minimum prudential framework” to address risks related to cryptoassets. The Basel Committee also reviewed European Banking Union methodologies on cross-border exposures, as well as risk and vulnerabilities to the global banking system in light of the Ukraine conflict.

More information on the Basel Committee’s May 27^th meeting is available here.

The Basel Committee on Banking and Supervision released a newsletter underscoring internal discussions and outreach sessions took place to improve third- and fourth-party risk management and concentration risk to support day-to-day activities for banks and supervisors. The newsletter further highlighted concerns regarding operational risks that have emerged during the pandemic related to third-party provided technology-based services. Last month the Basel Committee, in response to some of these issues, released Principles for Operational Resilience (POR) and revised its Principles for the Sound Management of Operational Risk (PSMOR). During the Committee’s outreach sessions with private sector participants and supervisors, it was noted that:

• “Primary gaps relating to firms' third-party risk management include a lack of clarity regarding respective bank and service provider responsibilities, insufficient monitoring of critical fourth parties, inadequate challenge or oversight from second lines of defence, and a lack of developed and tested business continuity plans.
• Banks and supervisors are concerned that a lack of complete supply chain transparency may increase operational risk. Risk-management efforts are focused on immediate suppliers, though key risks stemming from outsourcing arrangements may be driven by suppliers further down the supply chain.
• While several banks maintain formal exit strategies with respect to critical suppliers, they often lack sufficient detail and testing, and identifying the appropriate stage to execute a strategy can be unclear.
• There are a range of tools for managing operational disruptions, such as the substitutability of a third-party service provider and contracting for enhanced resilience options or service levels offered by service providers. Exit strategies designed to guide transitions that occur over longer time periods may not be as useful as other tools for curing operational disruptions.”

The full newsletter is available here.

On March 2, 2022, the Basel Committee on Banking Supervision issued a newsletter on COVID-19 related credit risk issues they believe will be helpful to support the day-to-day activities of banks and supervisors. The newsletter addresses: the Committee’s intention to continue to assess credit risk and asset quality by maintaining their monitoring of bank practices, in addition to administering necessary provisions; observations from supervisors regarding policies and practices across banks' credit risk governance and credit risk models; and challenges to assessing the creditworthiness of borrowers due to the COVID-19 pandemic.

The Committee highlighted that the key applicable elements of risk include, risks related to supervisory concerns that residual support measures may mask creditworthiness and therefore borrowers’ “future debt servicing capacity"; supervisory fears over whether bank provisions are capturing risk; uncertainty that supervisors feel around the adequacy of governance or boards to assess unlikeliness to pay (UTP), in addition to “incorporating public support measures in data reporting”; and supervisory observations that banks are applying “sizeable judgment-based adjustments to their internal ratings-based (IRB) approach and provisioning models, reflecting the pandemic environment,” as well as their belief that bank controls and governance that support model adjustments need improvement.

The Committee will continue to focus on the following credit risk topics in 2022:

• “particular asset classes (eg residential real estate, commercial real estate and leveraged lending) that may be generating supervisory concerns in specific regions;
• indicators and triggers for UTP assessments, particularly for loans subject to moratoriums;
• controls and governance around credit risk models and model adjustments in the pandemic environment; and
• the use and incorporation of data over the COVID-19 period, particularly whether and how it should inform future credit model development, testing and validation.”

More information on the Basel Committee’s newsletter is available here.

The World Council of Credit Unions urged the Basel Committee on Banking Supervision to include proportionality in its Principles for the Effective Management and Supervision of Climate Related Financial Risks.    The comments came as a response to the Basel Committee’s request for comments on its efforts to address the physical and transition risks that could affect the safety and soundness of individual financial institutions as a result of climate-related financial risks.  The Basel Committee is looking to strengthen the regulation, supervision, and practices of financial institutions worldwide.

WOCCU urged the Basel Committee to provide clear guidance for prudential supervisors that a proportional and risk-based approach is necessary not only to prevent overburdensome regulation on smaller financial institutions, but to advance the Commission’s objective to bolster financial inclusion.

The principles seek to impose numerous requirements for credit unions in addressing climate-related risks including and internal control framework, capital and liquidity adequacy requirements, a risk management process, management monitoring and reporting requirements, comprehensive management of credit risk requirements, comprehensive management of market, liquidity, operational and other risks, and scenario analyses.

While WOCCU supports addressing climate-related risks, these requirements need to be in proportion to the size, risk and complexity of the institution.

A copy of the letter can be viewed here.

On February 9, 2022, the Basel Committee’s oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), met to not only reappoint Pablo Hernández de Cos as Chair for a second term, but to reaffirm its “commitment to implementing all aspects of the Basel III framework”. The GHOS reviewed progress of the Basel III implementation process and pushed for implementation in “a full, timely and consistent manner to provide a regulatory level playing field for internationally active banks”; which was followed by full agreement from all members. Under the purview of the Regulatory Consistency Assessment Programme, the GHOS further obligated the Basel Committee to continue to monitor implementation of the framework. The GHOS is currently looking to fill its Chair vacancy as their previous Chairman, François Villeroy de Galhau, stepped down to accept his appointment as Chair of the Board of Directors of the Bank for International Settlements.

More information regarding current GHOS endeavors is available here.  

 

World Council congratulates Neil Esho on his newly appointed position and the Basel Committee on Banking Supervision. The Basel Committee announced that their former Deputy Secretary General, has been appointed to Secretary General. Esho’s three-year term will begin next month in February 2022. World Council has previously met with Esho, then Deputy Secretary General, in March 2019 to support proportionality and discuss the effect of overburdensome regulations on credit unions. World Council followed the meeting with a letter urging Esho and the Basel Committee to “issue additional guidance on proportionality in regulation in the form of a set of high-level principles or weighing-factors on when less complex regulatory approaches can be warranted, such as:

• Whether the institution has cross-border operations;
• The complexity of the institution’s assets and liabilities; 
• The asset-size of the institution;
• The extent of the institution’s leverage;
• The institution’s interconnectedness with the financial system;
• The degree to which the institution reports to multiple prudential supervisors;
• The extent and nature of the institution’s off-balance-sheet exposures; and
• The mix of business activities of the institution, such as whether it engages in community banking, commercial banking and/or investment banking.”

More information on Neil Esho’s appointment is available here.

Yesterday the International Financial Reporting Standards (IFRS) Foundation announced that it is establishing the International Sustainability Standards Board (ISSB). The purpose of the ISSB is “to develop global standards to improve the consistency, comparability and reliability of sustainability reporting.” The Basel Committee on Banking Supervision (Basel Committee) declared its endorsement for the ISSB; stated support for “the development of a consistent approach across sectors and minimising regulatory fragmentation”; and promised to “work on the Pillar 3 framework to promote a common disclosure baseline for climate-related financial risks across internationally active banks”.

The Basel Committee believes the ISSB’s mission coincides with its Pillar 3 goals related to climate-related financial risks and plans to analyze Pillar 3 to bolster these risks for a common disclosure baseline traversing all internationally active banks. In coordination with the IFRS Foundation, the Basel Committee intends on advance their analogous objectives by working with other international forums such as the Financial Stability Board (FSB) and the Network for Greening the Financial System (NGFS), “to ensure the prerequisites for a high-quality and globally consistent disclosure framework for climate-related financial risks are in place”.

More information on the Basel Committee’s collaboration with the ISSB can be found here.

In separate releases today the Basel Committee on Banking Supervision called for the following:

• Increased efforts to improve resilience to cyber threats
• Called for the development of a common set of global sustainability standards as they related to climate-related financial risks; and
• Discussed the impact of digitalization of finance on the banking system.

To that end, the Basel Committee today published a newsletter calling on banks to improve their resilience to cyber threats noting the widespread adoption of measures to strengthen banks cyber security.

The Committee also noted efforts on climate-related financial risks resulting from the publication of a series of analytical reports on climate-related financial risks in April, it is assessing the extent to which the current Basel framework adequately mitigates such risks.  It is expected that a set of related supervisory practices will be published for consultation later this year and may include additional disclosure, supervisory and/or regulatory measures.

Finally, the Committee is looking at the impact of the ongoing digitalization and disintermediation of finance on the banking system, with an initial focus on retail banks.   It is continuing to assess the supervisory challenges and risks in the competitive landscape for the provision of retail banking, including non-bank financial and technological institutions.

A copy of the press release can be viewed here.

"I don't see Basel III as a burden - I see a compelling case to get it done" said Carolyn Rogers, Secretary General of the Basel Committee on Banking Supervision in the ECB Supervision Newsletter.  This quote came as a part of her comments responding to the question of whether the implementation of Basel III reforms in the aftermath of the pandemic was creating an extra burden on banks (and financial institutions). 

Rogers noted that a healthy, well-capitalised banking system can support an economy, even under severe stress. This is in contrast to what was learned during the great financial crisis, which was that weak banks not only create a financial crisis but they can also amplify the effects of that crisis on the real economy. 

WOCCU's concern with the statement, however, continues to be the indifference by the Basel Committee to smaller, less complex, community based financial institutions such as credit unions where clearly the Basel III reforms have increased complexity, regulatory burden, and in some instances the ability to serve rural or underserved markets.  

A complete copy of the interview can be viewed here.

The World Council of Credit Unions called for flexibility from the Basel Committee on Banking Supervision as the Committt considers the withdrawal of relief measures adopted during the COVID-19 pandemic. “It is important to allow national level regulators a great amount of flexibility to adjust to local conditions and economies when removing COVID-19 relief measures for credit unions.  Otherwise unnecessary shocks to their balance sheets could hinder their ability to serve communities trying to recover from the pandemic,” said WOCCU Sr. VP of Advocacy and General Counsel, Andrew Price.

In particular WOCCU urged the following actions by the Basel Committee that will benefit credit unions and set the framework for a measured and orderly withdrawal of relief measures:

1. Provide clear direction to national-level supervisors that a measured and orderly withdrawal is appropriate, without establishing any firm timelines or deadlines.
2. Allow national-level supervisors with ample discretion to adjust the withdrawal of relief based on local conditions and localized circumstances.
3. Provide direction to national-level supervisors urging patience and leniency erring on the side of leaving a relief measure in place versus the risk of harm that may result from an early withdrawal of a relief measure.
4. Allow supervisors to work with financial institutions on reasonable capital restoration plans that are appropriate for each institution while holding them harmless from any regulatory violation so long as the plan is being executed in good faith and absent any safety and soundness concern.

Additionally, World Council, in conjunction with FEDEAC, has issued “Financial Strategy to Mitigate the Impact of the COVID-19 Crisis COVID-19 Global Response Committee Technical Paper”[1]; which provides additional insight into the specific areas of concern for credit unions during the COVID-19 recovery period. This is a beneficial tool that credit unions utilize that is comprised of recommendations for strategic methods to manage the impact of the social and economic crisis generated by the COVID-19 pandemic

A full copy of World Council's letter can be viewed here.

 

[1] See, https://www.woccu.org/newsroom/covid19_resources?post_id=2156#2156.

 

On July 30, 2021, the Basel Committee on Banking Supervision and the World Bank published a global survey of 90 authorities including bank supervisors and regulators entitled, Proportionality in bank regulation and supervision - a joint global survey. Although the Basel Committee acknowledges that proportionality encourages many benefits such as banking stability, reduction of compliance costs and regulatory burden, and utilization of “scarce supervisory resources”,  the Committee recognizes challenges related to the approach and implementation of proportionality such as “how to define the tiering criteria, how to maintain a level playing field and how to avoid opportunities for regulatory arbitrage” and “how to ensure financial positions are still comparable across banks and how to achieve net reduction in compliance costs and stress on supervisory resources and constraints.”

The Basel Committee touts that proportionality is ingrained in their work, specifically in the Committee’s Core Principles for Effective Banking Supervision (BCPs). World Council fully supports the Basel Committee and World Bank’s commitment to improving proportionality approaches, however, the related concerns and concepts within proportionality should apply widely to all relevant financial institutions such as credit unions and not just to banks. “We applaud the Basel Committee’s focus on understanding proportionality. However, we note the absence of responses that indicate a connection between proportionality and financial inclusion and providing access to responsible financial products. This should also be a significant driver for implementing proportionality by all supervisory authorities beyond the focus on supervisory resources”, says World Council Sr. Vice President of Advocacy, Andrew Price. 

“The key takeaways from the analysis of survey responses are:

• Proportionate implementation is practised widely, across geographic regions and income groups. The use of proportionality is growing, as judged by respondents reporting future plans for proportionality. This is a work-in-progress but is also challenging for several jurisdictions.
• Importantly, proportionality is acknowledged by respondents as promoting banking stability, reducing unnecessary regulatory burden and compliance costs, and making effective use of scarce supervisory resources. Consistent with this, a significant proportion of respondents (67%) are planning to implement or revise their proportionate approaches. Respondents have also expressed a clear preference for implementing a limited set of Committee standards.
• However, challenges remain for jurisdictions that have adopted or are considering adopting proportionality. These challenges are during the design of proportionate approach (eg how to define the tiering criteria, how to maintain a level playing field and how to avoid opportunities for regulatory arbitrage) and after proportionality is implemented (eg how to ensure financial positions are still comparable across banks and how to achieve net reduction in compliance costs and stress on supervisory resources and constraints).
• Implementation is motivated by factors other than risk profile or systemic relevance in some cases. For example, full or conservative set are implemented by jurisdictions seeking to obtain or retain correspondent banking relationships, meet the expectation of host jurisdiction supervisors or of rating agencies, regional pressure and peer pressure.”

More information on the survey can be found here.