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
HKMA Issues Update on Benchmark Transition for BanksRelated Articles
ECB Finds Banks Unprepared for Pillar 3 Climate Risk Disclosures
The European Central Bank (ECB) published results of the 2022 supervisory assessment of climate-related and environmental risk disclosures among significant institutions (103) and a selected number of less significant institutions (28).
NCUA Assesses Credit Union Exposure to Climate-Related Physical Risks
The National Credit Union Administration (NCUA) released a Research Note that examines the exposure of credit unions to climate-related physical risks. In a related development
EBA Issues Multiple Regulatory and Reporting Updates for Banks
The European Banking Authority (EBA) is seeking comments, until July 31, 2023, on the draft Guidelines on the proposed common approach to the resubmission of historical data under the EBA reporting framework.
EC Adopts Regulation on Own Funds, Issues Other Updates
The European Commission adopted Delegated Regulations on own funds and eligible liabilities, on requirements for the internal methodology under the internal default risk model
CDP Platform to Report Plastic-Related Impact, Issues Other Updates
The Carbon Disclosure Project (CDP) announced that its global environmental disclosure platform has enabled reporting on plastic-related impact for nearly 7,000 companies worldwide
IASB to Enhance Reporting of Climate Risks, Proposes IFRS 9 Amendments
The International Accounting Standards Board (IASB) updated its work plan to enhance the reporting of climate-related risks in the financial statements,
BIS Addresses Data Gaps and Macro-Prudential Policy for Climate Risks
The Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) published a brief paper that examines challenges associated with the use of macro-prudential policies to address climate-related financial risks.
FCA Sets Out Business Plan, Launches TechSprint on Greenwashing
The Financial Conduct Authority (FCA) published its business plan for 2023-24. The plan sets out details of the work planned for the next 12 months to achieve better outcomes for consumers and markets
UK Committee Sets Out Recommendations for Next Phase of Open Banking
The Joint Regulatory Oversight Committee (JROC), comprising the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR) as co-chairs and the HM Treasury and the Competition and Markets Authority (CMA) as members
ECB Publishes Multiple Regulatory Updates for Banking Institutions
The European Central Bank (ECB) published the results of the 2022 climate risk stress test of the Eurosystem balance sheet,
