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Basel Discusses AI and Machine Learning

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.

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Basel

WOCCU Advocated Proportionality Included in Climate-Related Financial Risks Standard

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.

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Basel

Basel Committee Finalizes Principles for Climate-Related Financial Risks

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 27th meeting is available here.

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Basel

Basel Committee Releases Newsletter on Third- and Fourth-Party Risk Management and Concentration Risk

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.

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Basel

Basel Committee Releases Newsletter on COVID-19 Related Credit Risk Issues

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.

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Bank of International Settlements, Basel

WOCCU Urges Proportionality in Climate Principles

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.

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Basel

The Basel Committee’s Oversight Body Renews its Commitment to Basel III Implementation

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.  

 

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Bank of International Settlements, Basel

WOCCU Congratulates Neil Esho On Secretary General Appointment to the Basel Committee

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.

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Basel

IFRS Establishes International Sustainability Standards Board with Basel Committee’s Support

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.

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Basel, IFRS

Basel Committee Focused on Cyber Resilience, Climate and Digitalisation

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.

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Basel

Basel III Not Viewed as a "Burden" by Basel Committee

"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.



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Basel

World Council Calls for Pandexit Flexibility from Basel Committee

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.

 

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Basel

Basel Committee and World Bank Publish Survey on Proportionality

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.

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Basel

Basel Releases Report on Impact of Basel Reforms in Light of Pandemic

On July 7, 2021, the Basel Committee on Banking Supervision released its interim report,  Early lessons from the Covid-19 pandemic on the Basel reforms, as part of “the Committee's broader work programme to evaluate its post-global financial crisis reforms”.  The report supports the argument that regulatory reforms in response to the financial crisis have “absorbed the shock” brought about by the COVID-19 pandemic. The report essentially touts the success of the Basel III reforms maintaining that without them and other support measures by public authorities, the banking system would have suffered from greater stress.

  • “New report gives a preliminary assessment of the impact of implemented Basel reforms during the pandemic as part of a broader evaluation of their effectiveness.
  • Higher quality capital and liquidity levels required by the reforms helped banks absorb the significant impact of Covid-19 shock.
  • The banking system would have faced greater stress during this period had the reforms not been adopted and implemented.”

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

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Basel

Basel Committee Meets to Discuss Covid-19 Impact on Banks

On June 4, 2021, the Basel Committee on Banking Supervision met to cover the following issues related to the effect of Covid-19 on the current banking system:

  • Discussion on “Covid-19 risks to banking system, reviews provisioning practices and stresses importance of using capital and liquidity buffers.
  • Review of interim report evaluating impact of Basel framework during Covid-19.”
  • Agreement “to hold public consultation on prudential treatment of cryptoasset exposures.”

While the world is beginning to re-open, the Committee cautioned that banks and supervisors should still remain watchful for Covid-19 risks and vulnerabilities by using, among other things, “Basel III capital and liquidity buffers to absorb shocks and maintain lending to creditworthy households and businesses”, and strengthening operational resilience. The committee also evaluated post-crisis reforms by reviewing an interim report, which gave a preliminary assessment of the impact that Basel III standards had during the pandemic. Cryptoassets market developments were also covered during the meeting, as well as “next steps in developing its prudential treatment for banks' cryptoasset exposures.”

More information on the June 4th Basel Committee meeting is available here.

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Basel

Financial Stability Institute Issues Paper on Supervising Cryptoassets

The Financial Stability Institute issued its insights on supervising cryptoassets for anti-money laundering.  The paper noted that although certain cryptoassets have the potential to make payments and transfers more efficient, some of their features may heighten money laundering/terrorist financing (ML/TF) risks. In particular, the speed of transactions, global reach, potential for anonymous activity and the potential for transactions to take place without financial intermediaries make cryptoassets vulnerable to misuse. In fact, the scale of illicit use of cryptoassets is already significant, highlighting the importance of AML/CFT regulation and supervision, as well as law enforcement, in this area.

The paper discusses emerging regulatory approaches and supervisory practices and identifies policy priorities to address common challenges faced by regulatory authorities.  It also notes the efforts of hte Financial Action Task Force in this area to prevent the misuse of cryptoassts for ML/TF.

A copy of the paper can be viewed here.

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Basel

Basel Committee 2021-22 Work Programme and Strategic Priorities Released

On April 16, 2021, the Basel Committee on Bank Supervision published it’s 2021-22 work programme outlining the Committee’s strategic priorities and “reflects the outcome of a recent strategic review by the Committee to ensure that it continues to effectively promote global financial stability and strengthen the regulation, supervision and risk management practices of banks worldwide.” The key themes of the work programme cover Covid-19 resilience and recovery; horizon scanning, analysis of structural trends and mitigation of risks; and strengthening supervisory coordination and practices. The Committee’s oversight body, Group of Governors and Heads of Supervision (GHOS), will be focusing on these themes in the following ways:

  • Covid-19 resilience and recovery: Ongoing monitoring and assessment of risks and vulnerabilities to the global banking system; and additional policy and/or supervisory measures to mitigate these risks where relevant.
  • Horizon scanning and mitigation of medium-term risks and trends: Identifying, assessing and mitigating medium-term risks and structural trends to the banking system, including efforts towards the digitalisation of finance, climate-related financial risks, and the impact on banks' business models resulting from a "low-for-long" interest rate environment.
  • Strengthening supervisory coordination and practices: Pursue “initiatives aimed at strengthening supervisory coordination and practices, with a focus on the role of artificial intelligence / machine learning in banking and supervision, data and technology governance by banks, operational resilience, and the role of proportionality in bank regulation and supervision.”

More information on the Basel Committee’s 2021-22 work programme can be viewed here.

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Basel

Basel Committee Releases Two Reports on Climate-Related Financial Risks

On April 14, 2021, the Basel Committee on Banking Supervision published two reports on climate-related financial risks entitled,  Climate-related risk drivers and their transmission channels and Climate-related financial risks – measurement methodologies. According to the Bank for International Settlements’ press release:

  • The two reports discuss transmission channels of climate-related risks to the banking system, and the measurement methodologies of climate-related financial risks.
  • Climate risk drivers can be captured in traditional financial risk categories, but additional progress is needed to better estimate these risks.
  • The reports provide a conceptual foundation for the Basel Committee's next phase of work to identify potential gaps in the Basel Framework and consider measures to address them.

The report on Climate-related risk drivers and their transmission channels, discusses how climate-related risks come to fruition and how they affect banks and the banking system as a whole, while the report on Climate-related financial risks – measurement methodologies, covers “conceptual issues” surrounding climate-related financial risk measurements, as well as related bank and supervisory practices. There is still a way to go to identify and improve on risk mitigation and the Basel Committee is currently working on how to incorporate climate-related financial risk into their Basel Framework. “While a range of methodologies is currently in use or being developed, challenges remain in the estimation process, including data gaps and uncertainty associated with the long-term nature and unpredictability of climate change.” 

More information on the Basel Committee’s climate-related financial risk reports can be viewed here.

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Basel

Basel Oversight Group Discuss Global initiatives on Non-Bank Financial Intermediation

On March 31, 2021, the Basel Committee on Banking Supervision’s oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), met to endorse the Basel Committee’s 2021-22 work programme and strategic priorities. The work programme “places high priority on the implementation and evaluation of previously agreed reforms, on assessing emerging risks and vulnerabilities, and increasing supervisory cooperation.” Part of that endorsement included and discussion surrounding global initiatives for non-bank financial intermediation (NBFI).

Regulators are taking notice that NBFI has a substantial impact on the market: banks and non-banks (such as like insurance companies, pension funds, investment funds, etc) are “interconnected through multiple channels”, and non-banks take up nearly half of the “global financial system”. Following the Financial Stability Board’s lead on tackling NBFI initiatives, the GHOS suggest taking a “holistic approach” when addressing areas needed to improve NBFI resilience.

More information on the GHOS meeting can be viewed here.

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Basel

World Council Advocated Proportionality Included in Basel Operational Resilience Guidance

The Basel Committee on Banking Supervision issued two guidance documents concerning Operational Resilience including the Principles of Operational Resilience and  Revisions to the Principles for the Sound Management of Operational Risk.  Both documents take a principled approach which allows for a risk-based and proportional application to any requirements implemented. 

Specifically, the Principles of Operational Resilience state “By building upon existing guidance and current practices, the Committee is issuing a principles-based approach to operational resilience that will help to ensure proportional implementation across banks of various size, complexity and geographical location.”

Further, the Principles for Sound Management of Operational Risk states “Thus, the review of the Principles is also the opportunity to stress that this model should be adequately and proportionally used by financial institutions to manage every kind of operational risk subcategory, including ICT risk” (emphasis added).

World Council advocated for the inclusion of this emphasis on proportionality in its comment letters to the Basel Committee filed during their consultation period (here and here).  WOCCU applauds the Basel Committee on this principles based and proportional approach which will help increase credit unions’ capacity to withstand disruptions due to severe events, but in a manner commensurate with their size, risk, and complexity.

A copy of the Principles of Operational Resilience can be viewed here; and the Principles for Sound Management of Operational Risk can be viewed here.

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Basel

Basel Provides WOCCU Advocated Relief for Non-Performing Loans

The Basel Committee on Banking Supervision amended its capital requirements for non-performing loan securtisations throuh a WOCCU advocated technical amendment Capital treatment of securitisations of non-performing loans. The rule closes a gap in the Basel framework by setting out prudent and risk sensitive capital requirements for non-performing loan securitisations.

The final rule permits banks to apply the external ratings-based approach to non-performing loans securitisation exposures, without the 100% risk weight floor. In addition, the rule refines the definition of discount incurred by the originating bank that factors in the capital requirements.

WOCCU commented on this proposal in June advocating for relief in connection with the securitisations of non-performing loans.  The rule should make it easier and cheaper for banks and credit unions to securtise non-performing loans which will be important as institutional stress increases as a result of COVID-19. 

A copy of the amendment can be viewed here.

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Basel

WOCCU Urges Proportionality in Basel Operational Resilience Principles

In two separate comment letters WOCCU urged proportionality and consideration of regulatory restraints for credit unions when implementing requirements for operational resilience and the management of operational risk. 

The two related consultations are being proposed by the Basel Committee on Banking Supervision in their  Consultative Document:  Principles for Operational Resilience and Consultative Document:  Revisions to the Principles for the Sound Management of Operational Risk.

In the letter, WOCCU noted that national-level prudential regulators are hesitant to fully proportionally tailor requirements for smaller, community-based financial institutions such as credit unions and therefore requested further emphasis on requiring consideration of proportional implementation of the standard.  WOCCU supports many of the principles surrounding operational resilience and the management of operational risk, but believes it should be done in a manner appropriate for credit unions.

A copy of the letters can be viewed here and here

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Basel

Basel Updates Workplan to Include COVID-19 Analysis

The Basel Committee on Banking Supervision (Committee) approved an updated workplan to evaluate its post crisis reforms to include lessons learned from the COVID-19 pandemic.  The Committee is currently consulting on a set of principles to enhance banks' operational resilience.

The Committee noted that the financial sector is on a more stable footing, thanks in part to the Basel III post-crisis reforms.  The reforms helped to make banks' capital and liquidity resources are greater than during the Great Financial Crisis of 2007-09, thus making them more resilient.

As part of this evaluation the Committee noted that it incorporate lessons learned from the Covid-19 crisis. The Committee will conduct a range of empirical analyses to evaluate:

  • the extent to which its post-crisis reforms have achieved their objectives;
  • the interactions among the Basel III reforms and other post-crisis reforms; and
  • whether there are gaps in the regulatory framework or significant unintended effects.
A copy of the press release can be viewed here.
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Basel

WOCCU Urges Further Relief from Basel on NPL Securitisations

WOCCU supported the Basel Committee on Banking Supervisions Technical Amendment: Capital Treatment of Securitsations of Non-Performing Loans (NPL), but urged it to go further and consider the amendments made in the European Union by the European Banking Authority in its opinion on the Capital Requirements Regulation (CRR) and the European Securitisation Regulation (ESR). Removing impediments to securitisations of NPLs should result in the freeing up regulatory capital reserves, which in turn will increase liquidity in the market. This will be important as the number of NPLs is likely to increase as the effects of the COVID-19 pandemic continue. WOCCU urged Basel to consider those items adopted in the EU on NPLs.

A copy of the comment letter can be found here.

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Basel

Basel Committee Consults on Operational Resilience

The Basel Committee on Banking Supervision (Basel Committee) issued a consultative document seeking input on its principles-based approach to improving operational resilience. The principles aim to strengthen the ability of financial institutions to withstand operational risk-related events which could cause significant operational failures or wide-scale disruptions in financial markets, such as pandemics, cyber incidents, technology failures or natural disasters.

While the principles-based approach endeavors to allow a proportional approach, WOCCU will encourage the Basel Committee to make sure this principle is clearly stated in the document together with clear direction to national-level prudential regulators to implement proportionality. 

A copy of the consultation can be viewed here

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Basel