Featured Product

    FSI Examines Application of Proportionality in Supervisory Approaches

    July 05, 2019

    The Financial Stability Institute (FSI) of BIS published a paper that surveys 16 jurisdictions on their Pillar 2 implementation approaches, including the application of proportionality. The focus of the paper is on whether, and how, the supervisory authorities apply proportionality in tailoring risk management expectations and supervisory practices according to the size, complexity, and risk profile of regulated entities. The analysis reveals that, while all surveyed jurisdictions have a process that incorporates the key elements of Pillar 2, their implementation approaches vary. Differences include variations in the methods used to determine Pillar 2 capital add-ons and what these add-ons are intended to cover.

    The paper specifies that diverging Pillar 2 approaches can also be attributed to the role of supervisory judgment in applying proportionality and in assessing an institution's risk profile. The study finds that some authorities provide explicit guidance to support the judgments of supervisors, while others allow greater discretion to supervisory teams to fulfill their Pillar 2 responsibilities. This paper reveals that, while all surveyed jurisdictions have a process that incorporates the four principles of Pillar 2, their application varies. For example, some jurisdictions require all banks to submit a self-assessment of their own risk profile and internal capital adequacy assessments, while other jurisdictions impose such requirements on only a subset of banks. In addition, there is limited consensus on what Pillar 2 capital add-ons, if imposed, should cover, including how these capital add-ons interact with the new Basel III buffer requirements. The process used to determine Pillar 2 capital add-ons, if warranted, also differs.

    Another insight is that authorities apply proportionality in supervision through one (or a combination) of two methods. The proportionality approaches used in supervision involve trade-offs. The principles-based proportionality methods allow supervisory teams flexibility in tailoring supervisory assessments to institution-specific circumstances. The guided discretion approaches eliminate some of the judgment required from supervisory teams by hard-wiring certain proportionality elements into applicable guidance. Almost all jurisdictions apply proportionality when adopting rules for internal capital adequacy assessment process (ICAAP), stress testing, and recovery plans. Nearly all tailor rules and supervisory expectations according to size, risk and complexity. In addition, some countries exempt smaller and less complex banks from applicable requirements, especially from developing recovery plans.

    The paper concludes that supervisors may benefit if Pillar 2 implementation becomes the central area of focus, following the finalization of Basel III. With the post-crisis regulatory reforms now complete, there is value for the supervisory community to pay even more attention to Pillar 2. The expansion of Pillar 1 requirements under Basel III, including new global liquidity rules and the introduction of various capital buffers, has expanded the supervisory review process and its interactions with Pillar 1. In addition, new sources of risk such as cyber and climate-related risk, together with a greater focus on a firm’s conduct and culture, pose fresh challenges for banks and supervisors. In this context, continued collaboration between jurisdictions, through the ongoing exchange of experience on the various methods used to implement Pillar 2, can facilitate a robust implementation of the post-crisis reforms while taking into account the evolution of bank risk management and supervisory practices.

     

    Related Links

    Keywords: International, Banking, Proportionality, Basel III, Pillar 2, Supervisory Approach, FSI, BIS

    Featured Experts
    Related Articles
    News

    PRA to Elaborate on Approach to Transposition of CRD5 by Mid-December

    PRA published a statement that explains when to expect further information on the PRA approach to transposing the Capital Requirements Directive (CRD5), including its approach to revisions to the definition of capital for Pillar 2A.

    November 30, 2020 WebPage Regulatory News
    News

    SRB Sets Out Work Program for 2021-2023

    SRB published the work program for 2021-2023, setting out a roadmap to further operationalize the Single Resolution Fund and to achieve robust resolvability of banks under its remit over the next three years.

    November 30, 2020 WebPage Regulatory News
    News

    EIOPA Consults on KPIs on Sustainability for Non-Financial Reporting

    EIOPA is consulting on the relevant ratios to be mandatorily disclosed by insurers and reinsurers falling within the scope of the Non-Financial Reporting Directive as well as on the methodologies to build these ratios.

    November 30, 2020 WebPage Regulatory News
    News

    US Agencies Issue Statement on LIBOR Transition

    US Agencies (FDIC, FED, and OCC) issued a joint statement encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021, to facilitate an orderly LIBOR transition.

    November 30, 2020 WebPage Regulatory News
    News

    GHOS Endorses Coordinated Approach to Mitigate COVID Risks for Banks

    The Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS, endorsed a coordinated approach to mitigate COVID-19 risks to the global banking system.

    November 30, 2020 WebPage Regulatory News
    News

    HM Treasury Extends Consultation Dates for FRF and Solvency II Reviews

    HM Treasury extended the consultation period on Phase II of the Future Regulatory Framework (FRF) Review, from January 19, 2021 to February 19, 2021.

    November 30, 2020 WebPage Regulatory News
    News

    ECB Publishes Guide on Management of Climate and Environmental Risks

    ECB finalized guidance on the way it expects banks to prudently manage and transparently disclose climate and other environmental risks under the current prudential rules.

    November 27, 2020 WebPage Regulatory News
    News

    BCBS Amends Capital Treatment of Non-Performing Loan Securitizations

    BCBS published a technical amendment to the capital treatment of securitizations of non-performing loans by banks.

    November 26, 2020 WebPage Regulatory News
    News

    PRA Policy on Stressed VaR and RNIV Calculations Under Market Risk

    PRA published the policy statement PS23/20 on the calculation of stressed value at risk (sVAR) and risks not in value at risk (RNIV) under the market risk framework.

    November 26, 2020 WebPage Regulatory News
    News

    BoE to Move Statistical Data Collection to BEEDs Portal

    BoE announced that the Data and Statistics Division is planning to move collection of statistical data to the BoE Electronic Data Submission (BEEDS) portal.

    November 25, 2020 WebPage Regulatory News
    RESULTS 1 - 10 OF 6179