On July 6, 2023, the Basel Committee on Banking Supervision
(“Basel Committee”) released proposed revisions to its
core principles for effective banking supervision (the
“Revised Principles”).1 The Revised Principles
are substantially similar to the current version, which was adopted
in 2012. However, they contain many revisions to reflect
intervening standard setting by the Basel Committee as well as
other developments.
Comments on the Revised Principles are due by October 6, 2023.
The Revised Principles, if adopted by the Basel Committee, will not
have the force of law on their own. However, the International
Monetary Fund and World Bank assess the degree to which their
member jurisdictions have implemented the Basel Committee’s
core principles, and, therefore, we expect many jurisdictions will
incrementally adapt supervisory practices from the Revised
Principles.
Background
The Basel Committee is a group of several dozen central banks
and bank supervisors that sets standards for the prudential
regulation of banks and provides a forum for regular cooperation on
banking supervisory matters. The Basel Committee standards do not
have the force of law but, rather, must be adopted or transposed by
its members (i.e., national regulators) into legal requirements
that apply within a specific jurisdiction.
Since 1997, the Basel Committee has maintained the core
principles as minimum standards for the sound prudential regulation
and supervision of banks and banking systems. The core principles
are a series of statements that describe sound supervisory
practices for banking regulators. Each statement is supplemented
with “essential criteria,” which are the minimum baseline
requirements for a sound supervisory practice, and “additional
criteria,” which are suggested best practices that should be
considered by jurisdictions with more complex banks. Over time, the
Basel Committee generally expects that additional criteria will
become essential criteria to reflect changes in baseline
expectations.
Revised Principles
The Revised Principles would retain the 29 principles from the
2012 version, with few changes to the substance of the
principles.
Cross-referencing
Each statement of principle would be cross-referenced to other
Basel Committee standards and supervisory publications.
Changes to Particular Principles
Further:
- Principle 14, discussing corporate governance, would be
expanded to require banks to have robust policies and procedures
that address corporate culture and values and suitability
assessments - Principle 15, discussing the risk management process, would
explicitly require banks to consider climate-related financial
risks, emerging risks, and sustainability risks as part of their
risk management practices - Principle 17, addressing credit risk, would require banks to
explicitly consider forward-looking information when developing and
executing the credit risk management process - Principle 25, originally addressing only operational risk,
would be expanded to require banks to implement measures to
maintain operational resilience during disruptive events
Changes to Criteria
Criteria for the principles would be modestly revised to address
six key topics:
(i) Financial risks
(ii) Operational resilience
(iii) Systemic risk and macroprudential aspects of
supervision
(iv) New risks, including climate-related financial risks and the
digitalization of finance
(v) Non-bank financial intermediation
(vi) Risk management practices
For example, the criteria for Principles 8, 10, 15, and 26 would
be revised to impose specific obligations on banking regulators and
banks with respect to climate-related financial risks. Similarly,
the criteria for Principle 16 would be expanded to explicitly
recognize and mitigate financial risk through a supplementary
leverage ratio requirement.
Most Notable Changes: Risk Management Criteria
Most notable appear to be the revisions to the criteria for risk
management practices. The criteria in the Revised Principles would
give greater emphasis to:
(i) Establishing corporate culture
and values (including aligning with compensation systems)
(ii) Ensuring that bank boards have appropriate skills, diversity
and experience
(iii) Promoting board independence and renewal
The criteria also would focus on the attributes of a bank’s
risk culture and risk appetite frameworks and risk data aggregation
and require banks to understand the sustainability of their
business model. Banks would be required to have whistleblower
policies and report to their regulators on material information
that may negatively affect the fitness and proprietary of their
board members or senior managers.2
Conclusion
What’s Next
As with other BCBS pronouncements, the Revised Principles will
not have the force of law in the United States. Rather, the US
banking regulators would need to determine whether and how to apply
the Revised Principles to the supervision of US banking
organizations. This could be done through the supervisory guidance
process or the notice-and-comment process and may result in a US
approach to supervising banks that differs from the Basel
Committee’s approach. Further, several changes in the Revised
Principles would adopt concepts that already are being used in the
United States, implying that the United States may be a leader in
certain areas of banking supervision.
Concerns
Still, larger US banking organizations may consider engaging
with the Basel Committee to ensure that the Revised Principles
strike the right balance between essential and additional criteria.
As the Revised Principles note, non-bank financial intermediation
continues to increase, and imposing overly burdensome criteria on
banks will do nothing to reduce that risk to the financial system.
Further, as we have seen in the United States over the last several
months, regional and community banks continue to face the problem
of being “too small to succeed” due in part to regulatory
burdens. Therefore, the Basel Committee should consider whether now
is the right time to “upgrade” certain additional
criteria to essential criteria if the result will be an even
greater burden on the middle market.
Footnotes
1 Press Release, Basel Committee consults on
revisions to the Core principles for effective banking
supervision (July 6, 2023), https://www.bis.org/press/p230706.htm.
2 See our recent Legal Update on a similar proposal in
New York: https://www.mayerbrown.com/en/perspectives-events/publications/2023/05/know-your-ceo-new-york-proposes-character-and-fitness-requirements.
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