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.