BIS Publications Discuss Credit Losses and Window Dressing at Banks
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.
Related Links
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
Featured Experts

María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer

Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.

Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
BCL Updates Documentation for AnaCredit Reporting in April 2022Related Articles
EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models
The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.
EP Reaches Agreement on Corporate Sustainability Reporting Directive
The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).
PRA Consults on Model Risk Management Principles for Banks
The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.
EC Regulation Amends Standards for Calculating Credit Risk Adjustments
The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.
BIS Hub Updates Work Program for 2022, Announces New Projects
The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.
EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance
The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.
US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule
Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)
EIOPA Consults on Review of Securitization Framework in Solvency II
The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.
UK Authorities Issue Regulatory and Reporting Updates for Banks
The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.
BCBS Issues Climate Risk Principles while HKMA Expresses Its Support
The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.