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    BIS Publications Discuss Credit Losses and Window Dressing at Banks

    August 18, 2021

    BIS published a working paper that examines whether banks are window dressing their balance sheets to avoid tougher regulation and a bulletin that discusses the forecast for corporate credit losses resulting from pandemic. The bulletin notes that credit risk forecasts should provide information both about losses in a baseline scenario (expected losses) and about the potential for extreme outcomes (unexpected losses). The results presented in the bulletin indicate that, while necessary and effective in containing losses so far, the policy response to the crisis has generated considerable uncertainty, with a wide range of possible loss rate paths up to 2024. To the extent that future losses fall outside government guarantees, the high unexpected loss forecasts indicate that the adequate amount of capital for exposures to U.S. corporate loans could be substantial.

    The working paper on window dressing by banks explores whether banks are adjusting their balance sheets to avoid tougher regulation, by studying the assessment of global systemically important banks (G-SIBs). The paper examines the evolution of the G-SIB "score" around supervisory reporting dates for a large sample of banks in the European Union. The score is the regulatory measure that determines banks' G-SIB status and the attendant capital requirements. It predominantly relies on a snapshot of banks' balance sheets at year-end. The paper shows how banks in the European Union compress their G-SIB score at year-end and highlights that these adjustments distort the supervisory assessment of the systemic importance of banks. While a variety of factors may be driving banks' window dressing, the paper shows that the tightness of capital requirements plays an important role and sheds light on how the G-SIB rules interact with other regulatory requirements, such as national capital surcharges. The findings argue in favor of moving away from using point-in-time data in regulatory requirements and making greater use of averages. The findings also highlight the importance of supervisory judgment in the assessment of G-SIBs. This could help address window dressing by banks and mitigate any associated adverse impact on financial markets.

     

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    Keywords: International, Banking, Credit Risk, Loan Moratorium, Public Guarantee Schemes, COVID-19, Debt Servicing Ratio, Basel, G-SIBs, Regulatory Capital, G-SIB Assessment, Window Dressing, BIS

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