Revision of the BIS’ Core Principles for Effective Banking Supervision
Enhancing Global Financial Safety
Supervisors from around the globe have come together to revise the Core Principles for Effective Banking Supervision. Frank Elderson, Vice-Chair of the Supervisory Board, elucidates how these revisions aim to fortify the global banking system, ensuring that supervision remains adaptive amidst our swiftly evolving world.
Catching up – and looking ahead
The Basel Committee on Banking Supervision (BCBS) recently unveiled an updated version of its Core Principles for Effective Banking Supervision, initially introduced in 1997 and last amended in 2012.
These principles, commonly referred to as the Core Principles, serve as pivotal global supervisory standards, delineating comprehensive requirements for both supervisors and banks. They encompass a broad array of supervisory powers, responsibilities, and functions, along with a diverse spectrum of prudential requirements and risks.
Acting as a playbook for governments, regulators, and supervisors worldwide, the Core Principles guide the adoption and evaluation of supervisory regulations and practices. Notably, they underpin various regulatory frameworks, such as the single European rulebook, and serve as benchmarks for assessments conducted by international bodies like the International Monetary Fund (IMF) and the World Bank.
The forthcoming Financial Sector Assessment Programme (FSAP) of the euro area, scheduled for 2024-25 FSAP of the euro area, will be based on the revised Core Principles, acknowledging the existence of supranational supervisory frameworks like the “Single Supervisory Mechanism”.
In essence, the Core Principles form the cornerstone of effective global banking supervision, especially vital in light of the banking tumult of March 2023.
Revisions Reflecting Realities
The revisions to the Core Principles stem from extensive deliberations among BCBS members and supervisors worldwide, bolstered by inputs garnered from a widespread public consultation.
These revisions embody lessons gleaned over the past decade and account for structural shifts reshaping the banking landscape. Notably, three new topics have been explicitly incorporated: operational resilience, business model sustainability, and climate-related financial risks, underscoring a global consensus on their relevance and the imperative for action.
Bolstering Operational Resilience
In response to evolving challenges, supervisors have heightened their focus on operational resilience, recognizing banks' imperative to withstand pandemics, cyber incidents, and natural disasters. Accordingly, the principle on operational risk has been fortified to explicitly encompass operational resilience, with enhanced requirements spanning governance, business continuity planning, and third-party dependency management. These revisions align closely with the ECB's supervisory initiatives, fortifying banks globally against operational threats.
Future-proofing Bank Business Models
Given the contemporary macroeconomic milieu, ensuring the robustness of bank business models is paramount. The revised Core Principles underscore the assessment of business model sustainability as integral to effective supervision. Banks are urged to adopt sound and forward-looking strategies to ensure sustainable returns amidst challenges like low profitability and digital transition.
Addressing Climate-related Financial Risks
Recognizing the escalating threats posed by climate change, the revisions explicitly incorporate climate-related financial risks. Climate risks are acknowledged as material risks necessitating identification, measurement, evaluation, and mitigation by banks, with supervisors mandated to factor these risks into their assessments. These revisions mirror the ECB's existing supervisory expectations and underscore the global imperative of addressing climate-related financial risks.
A Comprehensive Update
While these three areas represent significant revisions, the updated Core Principles encompass a multitude of other enhancements, including measures to constrain leverage buildup, strengthen capital requirements, and address risks from non-bank financial intermediaries.
Wrap-up
In conclusion, the revised Core Principles mark a pivotal stride towards fortifying the safety and soundness of banks worldwide. They equip the global banking system to confront contemporary challenges and ensure supervisory practices remain agile amid evolving landscapes. Moreover, they epitomize global supervisory cooperation and trust, attesting to the BCBS's commitment to adapt standards amidst dynamic global risk environments. In an era of uncertainty, the revised Core Principles offer assurance that banks are resilient, sustainable, and attuned to emerging risks.