While speaking at the 13th ASBA-BCBS-FSI High-Level Meeting on Global and Regional Supervisory Priorities in Bahamas, Sabine Lautenschläger of ECB took stock of risks, rules, and supervision ten years after the global financial crisis. She examined importance of the effective global implementation of Basel III reforms, outlined the new approach for banking supervision, and discussed the risks looming in the horizon.
She examined the importance of the global implementation of Basel III reforms and highlighted the need to watch out for regulatory arbitrage by banks. With respect to a better approach to banking supervision, she mentioned that supervisors must be adaptive and must take a risk-based and forward-looking approach. They need not rely on what the banks tell them, but can form their own opinion and challenge the views of banks. For example, ECB benchmarks banks that pursue the same line of business. Supervising the 118 largest banking groups from across the euro area means that ECB can benefit from a deep quantitative and qualitative analysis. This allows ECB to challenge banks in a more credible manner. Next, she discussed the importance and need for international cooperation, adding that the Financial Stability Institute plays an important role in bringing together supervisors at all levels from around the world.
She mentioned various risks facing the banking sector, including geopolitical uncertainties related to trade tensions and Brexit, legacy assets such as non-performing loans, cyber risk and other risks associated with digitalization, shadow banking risks, and climate change risks. In terms of climate change, she sees three challenges for banks. First, there are physical risks. More frequent and more severe storms, floods, droughts, heatwaves, and rising sea levels have already caused losses for businesses. When these risks were uninsured, they had very direct effects on banks’ credit risk, for example, through damaged collateral. Second, “green finance” is a growing area of business. As all supervisors know well, financial innovation can bring a lot of good—but it can also spin out of control. So, green finance must be monitored, just as any other type of financial innovation is monitored.
The third challenge is related the transition to a low-carbon economy. Policies to encourage a more sustainable way of doing business will have far-reaching consequences. For one, they could impact the banks’ customers. Think of car manufacturers or energy suppliers. They could affect commodity and energy prices. This in turn could change market risks for banks. The policies required to shift to a more sustainable economy could upset financial stability. However, this should not scare us into inaction. This is because the true risk is that banks do not adjust or adjust in the wrong way. She added that supervisors should keep expanding their horizons. In practice, this could mean encouraging banks to recognize the potential impact of climate risk on their exposures.
Related Link: Speech
Keywords: Europe, EU, Banking, Banking Supervision, Basel III, Climate Change Risks, ECB
Previous ArticleRandal Quarles of FED Speaks on Impact of LCR on FED Balance Sheet
BCBS published a technical amendment to the capital treatment of securitizations of non-performing loans by banks.
BoE announced that the Data and Statistics Division is planning to move collection of statistical data to the BoE Electronic Data Submission (BEEDS) portal.
APRA published the updated reporting standards and guidance for the collection of Economic and Financial Statistics (EFS), following a consultation process. Also published was a response letter to the feedback received on the proposal for amending the EFS reporting standards and guidance.
EC is consulting on a draft delegated regulation to supplement the Taxonomy Regulation (2020/852) by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as environmentally sustainable.
The IFRS Foundation published material highlighting the ways in which existing requirements in IFRS standards require companies to consider climate-related matters when their effect is material to the financial statements.
EBA published a report analyzing the impact of the unwind mechanism of the liquidity coverage ratio (LCR) for a sample of European banks over a three-year period, from the end of 2016 to the first quarter of 2020.
In response to questions from a member of the European Parliament, the ECB President Christine Lagarde issued a letter clarifying the possibility of amending the AnaCredit Regulation and making targeted longer-term refinancing operations (TLTROs) dependent on the climate-related impact of bank loans.
IASB started the post-implementation review of the classification and measurement requirements in IFRS 9 on financial instruments and added the review as a project to its work plan.
FSB published a report that examines progress in implementing policy measures to enhance the resolvability of systemically important financial institutions.
EBA published a report on the benchmarking of national loan enforcement frameworks across 27 EU member states, in response to the call for advice from EC.