The Basel Committee on Banking Supervision (BCBS) launched a consultation on revisions to the core principles for effective banking supervision, with the comment period ending on October 06, 2023. The proposal retains the 29 principles from the earlier 2012 version of core principles, with certain changes being introduced to the text and substance of the earlier version. The revisions to the principles address themes such as financial risks, operational resilience, systemic risk and macro-prudential supervision, emerging risks related to the climate change and the digitalization of finance, non-bank financial intermediation, and risk management practices.
The BCBS core principles represent a set of global minimum standards for the prudential regulation and supervision of banks and banking systems worldwide. The International Monetary Fund (IMF) and the World Bank use these principles to assess the effectiveness of banking supervisory systems and practices of countries, in the context of the Financial Sector Assessment Program (FSAP). A few key proposed revisions are outlined below:
- Financial risks. With respect to financial risks, the proposed adjustments include targeted changes to strengthen credit risk management practices; adjustments to reflect the introduction of expected credit loss (ECL) provisioning; targeted adjustments to better reflect the potential impact of customer behaviors on interest rate risk assumptions; and amendments to align the definition of connected counterparties and large exposure limits with the Committee’s large exposure framework and to clarify the scope of concentration risk.
- Operational resilience. The Committee considers that substantive changes are warranted to reflect developments in operational resilience as per the revised principle CP25 Operational risk and operational resilience. This revised principle retains the key requirements for operational risk, while enhancing the focus on governance, operational risk management, business continuity planning and testing, mapping of interconnections and interdependencies, third-party dependency management, incident management, and resilient cybersecurity and information and communication technology (ICT). The revised CP25 highlights the importance of operational resilience, given that banks are increasingly relying on third parties for the provision of technology services, which creates additional points of cyber risk as well as potential systemwide concentrations.
- Climate risks. Targeted changes have been introduced to explicitly reference climate-related financial risks and to promote a principles-based approach to improving supervisory practices and risk management of banks. Amendments to the principles CP8 Supervisory approach and CP10 Supervisory reporting would require supervisors to consider climate risks in their supervisory methodologies and processes and to have the power to require banks to submit information that allows for the assessment of the materiality of climate risks. Furthermore, adjustments to the principle CP15 Risk management process would require banks to have comprehensive risk management policies and processes for all material risks, including climate-related financial risks while adjustments to the principle CP26 Internal control and audit would require banks to consider such climate risks as part of their internal control framework.
- Other notable revisions. The Committee is proposing to reflect the shift in minimum supervisory expectations since the last review of core principles by upgrading several existing additional criteria (ACs) to essential criteria (ECs). For example, for the principle CP23 Interest rate risk in the banking book, AC1 requires banks to provide supervisors with the results of their internal interest rate risk measurement systems using standardized shocks. Additionally, AC2 requires the supervisor to assess whether internal capital measurement systems adequately capture interest rate risk in the banking book. With respect to the CP24 Liquidity risk, AC1 requires the supervisor to form a view of banks’ levels of encumbered assets and it requires banks to disclose this information and set appropriate limits to mitigate this risk.
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Keywords: International, Operational Resilience, Credit Risk, Third-Party Risk, Interest Rate Risk, Climate Change Risk, Liquidity Risk, Core Principles, BCP, BCBS
Dr. Denton provides industry leadership in the quantification of sustainability issues, climate risk, trade credit and emerging lending risks. His deep foundations in market and credit risk provide critical perspectives on how climate/sustainability risks can be measured, communicated and used to drive commercial opportunities, policy, strategy, and compliance. He supports corporate clients and financial institutions in leveraging Moody’s tools and capabilities to improve decision-making and compliance capabilities, with particular focus on the energy, agriculture and physical commodities industries.
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