The Basel Committee on Banking Supervision (BCBS) issued consultation on principles for the effective management and supervision of climate-related financial risks, following the publication of a series of analytical reports this year. Through this consultation, BCBS seeks to promote a principles-based approach to improve banks' risk management practices and supervisory practices related to climate-related financial risks. The Committee intends to monitor implementation across member jurisdictions to promote a common understanding of expectations, support the development of harmonized practices, and facilitate implementation of the principles as soon as possible. The commend period on the consultation closes on February 16, 2022.
BCBS is taking a holistic approach to addressing climate-related financial risks to the global banking system and this includes the assessment and consideration of disclosure, supervisory, and regulatory measures. The 18 principles presented in the consultation seek to achieve a balance in providing a common baseline for internationally active banks and supervisors, while retaining sufficient flexibility given the evolving practices in this area. These principles span the following areas:
- Corporate governance
- Internal control framework
- Capital and liquidity adequacy
- Risk management process
- Management monitoring and reporting
- Comprehensive management of credit risk
- Comprehensive management of market, liquidity, operational, and other risks
- Scenario analysis
- Prudential regulatory and supervisory requirements for banks
- Responsibilities, powers, and functions of supervisors
The principles take into account the concept of proportionality. Specifically, with regard to scenario analysis, including stress testing, the principles are formulated with a view toward application to large, internationally active banks and to supervisory and other relevant financial authorities in Basel Committee member jurisdictions. However, smaller banks and authorities in all jurisdictions can benefit from a structured consideration of the potential impact of climate-related financial risks. BCBS welcomes feedback from all stakeholders, specifically on whether the principles appropriately capture the necessary requirements for the effective management of climate risks and the related supervision and if there are any aspects that the Committee could consider further or that would benefit from additional guidance. The Committee also seeks views on how the transmission of environmental risks to risk profiles of banks should be taken into account when considering the potential application of these principles to broader environmental risks in the future and what key aspects should be considered for this. Any comments on the individual principles and supporting commentary are also welcomed.
Comment Due Date: February 16, 2022
Keywords: International, Banking, Climate Change Risk, ESG, Basel Framework, Credit Risk, Liquidity Risk, Reporting, Stress Testing, Scenario Analysis, Regulatory Capital, Operational Risk, Market Risk, BCBS
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