The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks. HKMA issued a circular in support of these principles, also indicating that it will assess the need for aligning the existing supervisory framework with these principles. HKMA further advised all authorized institutions to take into account the guidance in the Principles when strengthening their management of climate-related financial risks and implementing the HKMA Supervisory Policy Manual module GS-1 on climate risk management.
The principles-based approach builds on the review of the current Basel framework—particularly the Basel core principles for effective banking supervision (BCPs) and the supervisory review process (SRP)—and draws from existing supervisory initiatives undertaken by individual prudential authorities and other international bodies. The document includes 18 high-level principles: principles 1 to 12 provide banks with guidance on effective management of climate-related financial risks, while principles 13 to 18 provide guidance to prudential supervisors. BCBS expects these principles to be implemented as soon as possible and will monitor progress across member jurisdictions to promote a common understanding of supervisory expectations and support the development and harmonization of strong practices across jurisdictions. These 18 principles cover areas related to corporate governance, internal controls, risk assessment, management, and reporting, providing the following key guidance to banks:
- Consider climate-related financial risks that could materialize over various time horizons and incorporate these risks into their overall business strategies and risk management frameworks
- Clearly assign climate-related responsibilities to members and/or committees and exercise effective oversight of climate-related financial risks
- Adopt appropriate policies, procedures, and controls that are implemented across the entire organization to ensure effective management of climate-related financial risks
- Incorporate climate risks into their internal control frameworks across the three lines of defense to ensure sound, comprehensive and effective identification, measurement and mitigation of material climate-related financial risks
- Identify and quantify climate-related financial risks and incorporate those assessed as material over relevant time horizons into their internal capital and liquidity adequacy assessment processes, including their stress testing programs
- Identify, monitor, and manage all climate-related financial risks that could materially impair their financial condition, including their capital resources and liquidity positions
- Ensure that the internal reporting systems are capable of monitoring material climate-related financial risks and producing timely information to ensure effective board and senior management decision-making
- Understand the impact of climate-related risk drivers on their credit risk, market risk, liquidity risk and operational risk profiles and ensure that the risk management systems and processes consider material climate-related financial risks
- Use scenario analysis to assess the resilience of their business models and strategies to a range of plausible climate-related pathways and determine the impact of climate-related risk drivers on their overall risk profile
Keywords: International, Banking, ESG, Climate Change Risk, Basel, Supervisory Review Process, Reporting, Disclosures, Credit Risk, Market Risk, Liquidity Risk, Operational Risk, Scenario Analysis, Stress Testing, Climate Risk Principles, BCBS
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The Financial Stability Institute (FSI) of the Bank for International Settlements recently published a paper proposing a framework for classifying financial stability regulation as either entity-based or activity-based.
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A Consultative Group on Risk Management (CGRM) at the Bank for International Settlements (BIS) published a report that examines incorporation of climate risks into the international reserve management framework.
The European Banking Authority (EBA) published the final guidelines on liquidity requirements exemption for investment firms, updated version of its 5.2 filing rules document for supervisory reporting, and Single Rulebook Question and Answer (Q&A) updates in July 2022.
The European Insurance and Occupational Pensions Authority (EIOPA) published Version 2.8.0 of the Solvency II data point model (DPM) and XBRL taxonomy.
The European Union published, in the Official Journal of the European Union, an opinion from the European Economic and Social Committee (EESC); the opinion is on the proposal for a regulation to amend the Capital Requirements Regulation (CRR).
HM Treasury published a draft statutory instrument titled “The Financial Services (Miscellaneous Amendments) (EU Exit) Regulations 2022,” along with the related explanatory memorandum and impact assessment.