June 21, 2019

BCBS published a report that examines the Pillar 2 supervisory review practices and approaches in Basel member jurisdictions. The report concludes that there is a rich range of practices among BCBS member jurisdictions in how they implement Pillar 2 of the Basel Framework. In key areas—such as risk management—all supervisors assess and evaluate banks’ risk frameworks, thresholds, and triggers.

The report covers key areas of the Pillar 2 supervisory review process, including the risk assessment process, risk appetites, board and senior management roles, and supervisory practices adopted to enhance transparency and bank disclosure practices. The report further describes a number of selected Pillar 2 risks, including business risk and interest rate risk in the banking book (IRRBB). Finally, the report presents a range of actions that are taken under Pillar 2. Case studies are included throughout the report to illustrate supervisory practices. Content from the report should be helpful to BCBS members and non-members alike as well as to the industry at large. 

The report shows that most supervisors rely on banks' internal capital adequacy assessment process (ICAAP) and other risk reporting. In areas of emerging risks, each supervisor is pursuing the areas that appear to pose the greatest risk to the banks it supervises and to its banking system. Supervisors also tailor and apply rules of proportionality, as they supervise banks with different risk profiles and in different economic and financial environments. As intended under Pillar 2 of the Basel Framework, jurisdictional approaches to developing, implementing, and executing a supervisory review regime are aligned with local needs and expectations. This approach both complements and supports the other two pillars of the Basel Framework. Notwithstanding some differences in supervisory approaches adopted by BCBS members, the Pillar 2 outcomes across these jurisdictions take similar direction. Furthermore, BCBS jurisdictions try to minimize any potential effect on banks from jurisdictional differences through cooperation in supervisory colleges and other forms of collaboration and coordination. The supervisors are expected to continue to develop Pillar 2 practices over time and adjust to new risks and methodologies. 

 

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Keywords: International, Banking, Pillar 2, Basel III, IRRBB, Risk Management, ICAAP Proportionality, Credit Risk, Supervisory Review, Reporting, BCBS

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