Basel announced revised core principles for effective banking supervision, endorsed at Basel's 50th anniversary, 23rd International Conference of Banking Supervisors.
Also follows Basel Feb. 2024 issue outcome of the meeting on policies, see #203060.
Overview
The Core Principles are de facto minimum standards for sound prudential regulation and supervision of banks and banking systems, and are universally applicable.
They are used by bank supervisors to assess the effectiveness of their regulatory and supervisory frameworks, as well as by IMF and World Bank in their assessments.
Specifically, Principles are used as part of Financial Sector Assessment Program (FSAP) to evaluate effectiveness of countries' banking supervisory systems and practices.
Approach to Core Principles and Risk Assessments
At a minimum, Basel expects members to fully implement the Basel Framework for their internationally active banks, and the Core Principles are also a Basel standard.
However, they are applicable to all banks in all jurisdictions, and each Core Principle applies to the supervision of all banks and banking groups.
The intensity of supervision will need to be commensurate with the risk profile and systemic importance of banks, and also set out in supervision of an individual bank.
Includes individual banks which are part of a corporate group, and it is essential that supervisors consider the bank and its risk profile from a number of perspectives.
Considerations include those on a solo basis, but with both a micro and macro focus.
Also, on consolidated basis, supervising the bank with other entities in banking group.
Group-wide focus takes into account potential risks to the bank posed by other group entities outside of the banking group, which is also key to assessing risk profiles.
Group entities, inside or outside the banking group, may be a source of strength, but may be a source of weakness capable of adversely affecting banks' financial condition.
This also includes reputation and overall safety and soundness of the bank.
Supervisors should carefully consider risks posed to a bank in a group or financial conglomerate with a mix of regulated and unregulated entities across different sectors.
In the discharge of their functions, supervisors must look at a broad canvas of risk.
This could arise from an individual bank, from its associated entities, regulated or not.
Risks could also arise from the prevailing macro-financial environment.
Climate Change and evolving technological innovation also informed revised Principles.
Resolution and Crisis Management
Banks will periodically run into difficulties, so effective crisis preparation and management and orderly resolution frameworks and measures are required.
This to minimise the adverse impact on the broader banking and financial sectors.
These include measures to be adopted by banks, such as recovery plans, and those to be adopted by supervisory, resolution and other authorities to coordinate accordingly.
Such authorities will coordinate for orderly restructuring or resolution of troubled bank.
Basel advises that compliance with the Core Principles document does not require the supervisory authority to also be the resolution authority, in the event of a crisis.
Changes From Consultation Version
Based on feedback received, amended certain requirements relative to the proposals.
Minor adjustments to clarify scope of supervisory access and review requirements (CP1), to clarify application of macroprudential aspects of supervision (CP8 and CP9) and to better recognise supervisory discretion (CP11).
Amendments to the definition of business model sustainability to clarify relationship to business model analysis (BCP10.1) and emphasise ultimate responsibility for designing and implementing sustainable business strategies lies with bank’s board (CP8).
Adjustments to better align CP14 corporate governance and CP28 disclosure and transparency with the Committee’s Corporate governance principles (2015).
CP15 Risk management process amended to upgrade additional criteria to essential.
CP20 Transactions with related parties has been revised to provide supervisory discretion to exempt certain intra (banking) group transactions and to reinstate the reference to aggregate related party exposure limits in line with large exposure limits.
Introduction of a definition of climate-related financial risks (BCP10.1) and adjustments to the requirements for scenario analysis and stress testing to facilitate a more flexible and proportionate application (CP15 Risk management process).
Financial risks: minor refinements to improve consistency of drafting across various principles, better align requirements with Basel Framework (CP16 Capital adequacy).
To clarify the scope of concentration risks (CP19 Concentration risk and large exposure limits), to clarify optional elements (CP23 Interest rate risk in the banking book) and banks’ assessment of their capacity to monetise assets (CP24 Liquidity risk).
Amendments to the definition of service providers to clarify the meaning of intragroup entities (BCP10.1), to clarify types of scenarios to be assessed in the context of banks’ exit strategies, and to better align requirements with the Committee’s guidelines on Outsourcing in financial services (2005) (CP25 operational risk, operational resilience).
Effectiveness
Basel's Core Principles are effective immediately as of Apr. 25, 2024.
