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IN BRIEF
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The Basel Committee on Banking Supervision has recently reiterated its commitment to the complete and consistent implementation of the Basel III framework. During its recent meeting, the committee finalized crucial guidelines aimed at strengthening counterparty credit risk management, addressing vulnerabilities that emerged in the financial system. Furthermore, the committee is actively progressing initiatives designed to enhance supervisory effectiveness, reflecting lessons learned from past banking disturbances and promoting a more resilient global banking landscape.
Basel Committee Reinforces Implementation of Basel III
The Basel Committee on Banking Supervision convened on November 19-20, 2024, to address recent market developments and assess potential risks in the global banking system. In this meeting, committee members collectively emphasized their commitment to fully implement all elements of the Basel III framework without delay. This commitment aligns with the recent reiteration by G20 Finance Ministers and Central Bank Governors, which further underpins the necessity for robust banking regulations.
As part of the Regulatory Consistency Assessment Programme, the committee analyzed and approved the assessment reports concerning the implementation of the Net Stable Funding Ratio and large exposures framework in Korea. These reports are slated for publication next month, showcasing the diligent oversight by the committee in enhancing regulatory consistency across jurisdictions.
Finalizes Guidelines for Enhanced Counterparty Credit Risk Management
During the meeting, the committee reviewed and finalized new guidelines aimed at strengthening banks’ counterparty credit risk management. The finalized guidelines address the shortcomings that came to light during recent episodes of distress among non-bank financial intermediaries (NBFIs). These guidelines introduce improved practices for due diligence, risk mitigation, governance, and supervisory oversight to bolster resilience in the banking sector.
In light of evolving risks the banking sector faces from interconnections with NBFIs, the committee has committed to remain vigilant. Data gaps continue to obstruct effective measurements and management of risks associated with these interconnections. The finalized guidelines are expected to be published next month, serving as a crucial resource for banks navigating the complexities of counterparty risks.
Advances Initiatives to Fortify Supervisory Effectiveness
The committee also deliberated on strategies to enhance the effectiveness of supervisory measures. This initiative is particularly relevant following the challenges faced in the banking sector during the 2023 turmoil. The committee aims to provide supervisors with practical tools designed to support their daily activities, resulting in improved oversight capabilities.
This ongoing initiative encompasses the supervision of liquidity risk, the evaluation of banks’ business models’ sustainability, and the significant role of effective supervisory judgment. An update regarding the advancements in this area is anticipated for early 2025, reflecting the committee’s commitment to strengthening the supervisory framework in response to past lessons learned.
Additionally, the committee is examining current practices related to macroprudential policy, specifically the Basel III countercyclical capital buffer. A forthcoming report will be published to assist jurisdictions interested in implementing a positive cycle-neutral rate, which is essential for maintaining financial stability in fluctuating economic conditions.
Continued Focus on Climate-related Financial Risks
As part of its commitment to ensuring the robustness of the banking sector, the committee is also reviewing its proposed disclosure framework concerning climate-related financial risks. This framework aims to provide clarity on how financial institutions are addressing climate risks within their risk management strategies. The completion of this work is expected in the first half of 2025.
For more information on this significant meeting and the decisions taken, the committee’s releases and insights can be accessed through various financial regulatory channels, including the Basel Committee website and other related sources.
Key Initiatives of the Basel Committee
| Initiative | Description |
| Implementation of Basel III | Commitment to fully implement all aspects of the Basel III framework as soon as possible. |
| Guidelines for Counterparty Credit Risk | Finalized new guidelines aimed at improving banks’ management of counterparty credit risk. |
| Supervisory Effectiveness | Development of tools to enhance supervisory practices following lessons from banking disruptions. |
| Non-bank Financial Intermediation | Addressing risks posed by interconnections between banks and non-bank financial entities. |
| Macroprudential Policy | Assessment of practices related to countercyclical capital buffers to stabilize financial systems. |
| Climate-related Financial Risks | Review of Pillar 3 disclosure framework to improve transparency on climate-related risks. |
Basel Committee Reinforces Implementation of Basel III
The Basel Committee on Banking Supervision has taken a significant step by reaffirming its commitment to the full and consistent implementation of the Basel III framework. The recent meeting held in Basel on November 19-20, 2024, highlighted recent market developments and risks threatening the global banking system, instilling confidence in regulatory compliance and operational resilience across financial institutions.
Finalizes Guidelines for Enhanced Counterparty Credit Risk Management
In response to the challenges and vulnerabilities exposed during recent financial distress incidents, the Committee has finalized new guidelines aimed at strengthening counterparty credit risk management practices within banks. These guidelines provide enhanced protocols for due diligence, risk mitigation, governance, and supervisory oversight, ensuring that institutions are better prepared to handle potential liabilities stemming from non-bank financial intermediation (NBFI) connections. The finalized guidelines are expected to be published next month, marking an important milestone in regulatory reforms.
Advances Initiatives to Fortify Supervisory Effectiveness
The Committee has also made strides in fortifying supervisory effectiveness by developing practical tools that will aid supervisors in their daily operations. Following the banking turmoil of 2023, there is a focused effort to enhance supervision across liquidity and interest rate risks, assess the sustainability of banking business models, and advocate for effective supervisory judgment. An update regarding these ongoing initiatives is anticipated in early 2025, promising further advancement in governance and risk management standards within the banking sector.
For more insights into the Basel III implementation and its implications for financial stability, additional resources can be found through the following links: Finextra, IMF, BIS, Corporate Finance Institute, and IMF eLibrary.
- Focus on Implementation: Reaffirmed commitment to implement all aspects of Basel III fully and swiftly.
- Counterparty Credit Risk Management: Finalized new guidelines to enhance management standards in banks.
- Regulatory Consistency Assessment: Reviewed and approved assessments on Net Stable Funding Ratio.
- Non-Bank Financial Intermediation: Analyzed risks and vulnerabilities linked to growing NBFI connections.
- Practical Tools for Supervisors: Developed tools to bolster supervisory effectiveness post-2023 banking turmoil.
- Macroprudential Policies: Evaluated practices for a positive Basel III countercyclical capital buffer.
- Climate-Related Financial Risks: Continued review of a disclosure framework addressing climate-related risks.
Overview
The Basel Committee on Banking Supervision has recently reinforced its commitment to implementing the Basel III framework, finalized guidelines aimed at enhancing counterparty credit risk management, and initiated efforts to strengthen supervisory effectiveness in the banking sector. These actions represent crucial steps towards achieving greater financial stability and resilience in the global banking system.
Commitment to Basel III Implementation
The committee has unanimously reaffirmed its expectation to fully implement all aspects of the Basel III framework as soon as possible. This framework aims to enhance the regulation, supervision, and practices of banks globally, thereby improving financial stability. Members of the committee, along with G20 Finance Ministers and Central Bank Governors, recognize the importance of maintaining regulatory consistency and adapting to recent market developments.
It is essential that member countries prioritize this implementation, focusing on the aspects of the Net Stable Funding Ratio and large exposures framework. Adopting these measures will be vital in enhancing the banking sector’s resilience against future financial shocks.
Enhancing Counterparty Credit Risk Management
The finalized guidelines addressing counterparty credit risk management will introduce more robust practices for due diligence, risk mitigation, governance, and supervisory oversight. These guidelines were developed following an in-depth review of the challenges faced by banks during recent episodes of distress in non-bank financial intermediation (NBFI).
Financial institutions must now prioritize these guidelines to mitigate potential risks and enhance their overall credit risk management frameworks. By focusing on these improved standards, banks can better prepare themselves to handle uncertainties and vulnerabilities that may arise in the financial landscape.
Strengthening Supervisory Effectiveness
In light of the lessons learned from the banking turmoil of 2023, the Basel Committee has moved to fortify supervisory effectiveness through the development of practical tools for supervisors. This initiative will focus on the supervision of liquidity risk and interest rate risk, assessment of banks’ business models, and the significance of proactive supervisory judgment.
To ensure these tools address supervisor needs effectively, collaboration among regulatory authorities will be paramount. Implementing such tools will aid supervisors in executing their responsibilities more efficiently and in a timely manner, ultimately leading to a more stable banking environment.
Addressing Non-Bank Financial Intermediation Risks
The committee has highlighted the growing interconnections between banks and non-bank financial intermediation (NBFI) as an area of concern. The evolution of NBFI poses risks that can potentially affect the stability of the global banking system. It is critical for banks and regulatory bodies to remain vigilant in monitoring these interconnections and understand their implications on overall risk profiles.
Data gaps currently limit the effectiveness of risk measurement and management regarding NBFI. Banks should invest in improving information-sharing and risk assessment practices to better gauge the materiality of their connections to NBFI.
The Role of Macroprudential Policy
The committee’s ongoing assessments of macroprudential policies, including the Basel III countercyclical capital buffer, underscore the importance of maintaining a cycle-neutral rate when risks are neither subdued nor elevated. Establishing such a framework will enable authorities to navigate economic fluctuations effectively while fortifying the resilience of the banking sector.
By implementing concrete measures based on best practices observed worldwide, jurisdictions can create a more robust system that enhances financial stability and reduces vulnerability to systemic risks.
Frequently Asked Questions
What is the Basel Committee’s recent commitment regarding Basel III? The Basel Committee has unanimously reaffirmed its expectation to implement all aspects of the Basel III framework fully, consistently, and as soon as possible.
What guidelines have been finalized by the Basel Committee? The Committee has finalized guidelines aimed at strengthening banks’ counterparty credit risk management, addressing the weaknesses identified in recent episodes of distress in non-bank financial intermediation.
How does the Committee plan to strengthen supervisory effectiveness? The Committee is advancing its work to develop practical tools that will support supervisors in their daily activities, especially in light of the lessons learned from the 2023 banking turmoil.
What issues were discussed regarding non-bank financial intermediation (NBFI)? The Committee examined the growing interconnections between banks and NBFI, noting that these developments could pose risks and vulnerabilities to the banking system.
When will the finalized guidelines for counterparty credit risk management be published? The finalized guidelines will be published next month.
What are the Committee’s expectations about the sustainability of banks’ business models? The Committee has emphasized the importance of assessing the sustainability of banks’ business models as part of their strengthened supervisory effectiveness initiatives.
What will happen to the proposed Pillar 3 disclosure framework for climate-related financial risks? The Committee is reviewing this framework and expects to finalize its work in the first half of 2025.
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