The 2024 updates to the Basel Core Principles

[Music] [Music] hello I'm Ryan zamil senior adviser at the financial stability Institute of the bank for international settlements welcome to this policy brief on the 2024 revisions to the core principles for Effective banking supervision this video will provide you with a comprehensive overview of the latest developments in banking supervision but before we get into the details let's take a broader look at what the core principles are how they're used how it is evolved over time and who they apply to the core principle set the minimum standard for banking Supervision in all jurisdictions and provide the foundation for the regulation supervision governance and risk management of the banking sector think of the core principles as a heartbeat of the vast Bank supervisory ecosystem with the main arteries being the enabling legal Regulatory and supervisory Frameworks needed to support a safe and sound banking system the core principles are used by authorities as a benchmark to assess the effectiveness of their Regulatory and supervisory Frameworks and by the IMF and World Bank as part of their external assessments of Bank supervisory systems in the context of the financial sector Assessment program the core principles were initially published in 1997 and have been updated three times each update builds upon earlier versions to reflect Regulatory and supervisory developments structural changes Banking and Lessons Learned From prior assessments by the IMF and World Bank the main objective has always been to strike the right balance between raising supervisory standards while retaining the core principles as a flexible universally applicable standard now it's really important to emphasize that the core principles apply to all banks in all jurisdictions and to ensure their Universal applicability the core principles embed the concept of proportionality proportionality allows supervisors to better match the level of regulatory requirements and the intensity of supervision to different banks and banking systems the goal of proportionality is not to lower the bar but to reflect different country's circumstances and supervisor capacity in short the core principles allow for different approaches to credential supervision as long as the overriding goals are achieved there are 29 core principles in total principles 1 to 13 focus on the powers responsibilities and functions of Supervisors while principles 14 to 29 focus on credential regulation and requirements for banks now each core principle contains both essential and additional criteria essential criteria are Baseline requirements that are applicable to all countries while the additional criteria are recommended best practices that countries with more complex Banks should aim for IMF and World Bank cor principal assessments are based on compliance with the essential criteria although a country can also choose to be assessed and graded against the essential and additional criteria so with this brief overview let me now hand over to Monica who can talk you through the major updates made to the core principles thanks rayan hello I'm Monica spich member of the Secretariat of the Basel committee for banking supervision I've been supporting the work on the committee's latest revisions to the core principles and I'd like to spend a few minutes going over some of the key changes including the broader implications for banking supervisors let's get started we've divided our update into five key areas strengthening the effectiveness of supervision including the importance of macro predial supervision dealing with new and emerging risks reinforcing corporate governance and risk management practices embedding learnings for mitigating Financial risks and promoting operational resilience all of these changes are underpinned by the concept of proportionality which we've sought to give greater emphasis to throughout the current update strengthening the effectiveness of supervision was one of our primary goals when updating the core principles as we wanted to ensure that all supervisors have the necessary powers and resources to meet their primary objective which is to promote the safety and sadness of Banks and the banking system while the existing standard already provided a good Baseline we've made incremental changes to various principles that deal with the powers and responsibilities of Supervisors to be effective super supervisors must be able to supervise the whole banking group and need access to all relevant information we're ensuring that supervisors have full access to bank records including those that are held by service providers parent companies and Affiliates and can request a broad range of information from other entities within the wider group we're also ensuring that supervisors can continue to review all activities within a banking group including those performed by service providers as well as major Acquisitions or Investments by other entities within the group to assess whether they present risks to the bank supervisory transparency supports the industry in meeting credential standards so we're encouraging supervisors to publicly communicate the supervisory priorities and enforcement actions where appropriate we have also strengthened expectations for decision-making and accountability as well as legal protections for supervisors to ensure their independence we've strengthened supervisory discretion to take enforcement action and to require that appropriate safeguards are in place to prevent Del dels we're confident that these measures will help strengthen the effectiveness of supervision and enhance the transparency accountability and risk management capabilities for supervisors leading to a more stable and sound banking system over the last decade we've also seen how important it is to apply a systemwide macro perspective to the supervision of banks to identify and analyze systemic risks and take preemptive action to address them in light of this we're emphasizing the importance of closer cooperation both domestically and internationally between authorities who are responsible for banking supervision macro predial policy and financial stability we're also clarifying the role of Supervisors in assessing and taking action to mitigate risks to Banks and the banking system with supervisors now being required to assess and identify systemically important banks in a domestic context supervisors are also being asked to Monitor and assess common behaviors by Banks interlinkages and interconnect connections that could adversely affect banking or financial system stability these updates will contribute to systemwide resilience and ensure that supervisors have appropriate tools to identify and Tackle systemic risks the world has changed a lot since the last version of the core principles was published in 2012 since then we've seen the emergence of new risks that we need to address especially those linked to climate related Financial risks and the digitalization of Finance climate related Financial risks could affect the safety and soundness of individual Banks and have broader implications for banking systems and financial stability in light of this supervisors will now be required to consider climate related Financial risks in their risk assessment of Banks and banks will be required to report information that allows supervisors to assess the materiality of climate related Financial risks bank's risk management policies will also need to be adequate to assess risks that could materialize over longer time Horizons and they will need to consider climate related Financial risks as part of their internal control Frameworks to address the risks arising from the digitalization of Finance we're emphasizing the importance of operational resilience as Banks increase their Reliance on third parties for technology services and of supervisory access and review of these service providers bank's risk management policies also need to be sufficiently comprehensive to identify evaluate and control or mitigate material risks related to digitalization we're also ensuring that Banks Implement sustainable business models considering the impacts of new and emerging risks and that supervisors assess these strategies as part of their business model analysis of banks these updates aim to enhance both supervisory approaches and Bank risk management practices in the face of new and evolving risks while the business of banking is inherently risky it's important that Banks Implement a strong risk culture and effective risk management practices to achieve these goals we're giving greater emphasis to corporate culture and values ensuring that boards have appropriate skills diversity and experience and promoting board Independence and renewal we're also placing a greater emphasis on banks to foster a strong risk culture to implement risk appetite Frameworks and to improve their risk data aggregation capabilities when it comes to transactions with related parties we're ensuring the definition is sufficiently Broad to capture all parties that can present potential conflicts of interest and are strengthening the limits and processes for approving managing and Reporting these transactions we're also ensuring that banks have group-wide programs in place to prevent money laundering proliferation and terrorist financing these updates are designed to fortify Banks against risks and build resilience integrity and transparency within the banking sector recent events such as the covid-19 pandemic the Russia Ukraine war and turmoil in the global banking system highlight the importance of banking system resilience to a range of different shocks we're strengthening the core principles to reflect key aspects of the post great financial crisis reforms to ensure that banking systems remain strong through periods of stress we're implementing measures aimed at ensuring that Banks continue to manage Financial risks to do this we've introduced a Leverage ratio as a back stop to compl risk-based approaches in constraining leverage in Banks and the banking system we're also ensuring that supervisors have the power to require Banks to maintain additional capital in the form of a buffer that can be released in the event of systemwide shocks we've also strengthened expectations for banks credit risk management practices including risks related to securitization transactions and counterparty credit risk we're also making adjustments to requirements for managing problem exposures and Provisions to reflect the introduction of expected credit loss approaches to provisioning we have also enhanced the requirements for managing concentration risk and large exposures by strengthening the definition of connected counterparties and the application of large exposure limits finally we've made targeted adjustments to better reflect the influence of customer behaviors on interest rate risk assumptions and have also strengthen the minimum requirements for internal interest rate risk measurement systems these measures will help ensure that all banks in all jurisdictions can better navigate the evolving economic landscape and mitigate Financial risks to ensure that banks are better prepared to withstand adapt to and recover from severe operational risk related events such as cyber attacks technology failures and natural disasters we're taking action to strengthen their operational resilience we're emphasizing the need for banks to identify their critical operations and to map the relevant interconnections and interdependencies that are necessary to deliver critical operations through disruption banks will also be required to implement policies and processes to manage the risks associated with service providers including monitoring Financial conditions maintaining effective control environments developing exit strategies and the right to inspect books and Records these updates aim to strengthen bank's ability to identify assess and mitigate operational risks effectively while also being able to continue to deliver critical operations through disruption thanks for watching this policy brief on our 2024 updates to the core principles for Effective banking supervision we hope this video has provided you with insights into the evolving banking supervision landscape and the critical role that the core principles play in strengthening the quality of supervision and in building a more resilient banking sector [Music]

Channel: Bank for International Settlements

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Length: 13min 11sec (791 seconds)

Published: Thu Jun 20 2024