Core principles for effective banking supervision - Consultation

The Core Principles are the de facto minimum standards for the sound prudential regulation and supervision of banks and banking systems. They are universally applicable and accommodate a range of banking systems and a broad spectrum of banks. The Core Principles are used by supervisors to assess the effectiveness of their regulatory and supervisory frameworks. They are also used by the International Monetary Fund (IMF) and World Bank as part of the Financial Sector Assessment Program (FSAP) to evaluate the effectiveness of countries' banking supervisory systems and practices.

Originally issued by the Committee in 1997, the Core Principles were last substantively updated in 2012. The Committee commenced a review of the Core Principles in April 2022, with the objective of reflecting supervisory and regulatory developments, structural changes affecting the banking system, and lessons learnt from FSAPs since the last update.

The Basel Committee on Banking Supervision has issued a public consultation on revisions to the Core principles for effective banking supervision ("Core Principles").

Changes are proposed to both the structure and contents of the Core Principles standard. The proposed amendments have been informed by several thematic topics reflecting regulatory and supervisory developments in: (i) financial risks; (ii) operational resilience; (iii) systemic risk and macroprudential aspects of supervision; (iv) new risks, including climate-related financial risks and the digitalisation of finance; (v) non-bank financial intermediation; and (vi) risk management practices.

The proposals were developed by a Task Force comprised of both Committee and non-Committee member jurisdictions, as well as the IMF and World Bank.

Check HERE for a comparison between the 2012 and 2023 versions of the Core principles for effective banking supervision

Comments on the revised Core Principles, can be submitted here up to 6 October 2023.

Basel Commission’s proposed changes to its Core Principles

The Basel Committee on Banking Supervision (BCBS) issued a public consultation on revisions to the Core principles for effective banking supervision ("Core Principles") on 6 July 2023

This reflects supervisory developments and structural changes affecting the banking system since the previous update in 2012.

It covers six areas: 

- financial risks
- operational resilience
- systemic risk and macroprudential aspects of supervision
- new risks, including climate-related financial risks and the digitalisation of finance
- non-bank financial intermediation

- risk management practices.

Check out the practical insights from the Basel Commission to the proposed changes to its Core Principles HERE.

Blueprint for the future monetary system: improving the old, enabling the new

A special chapter of the BIS’ Annual Economic Report 2023 lays out a blueprint for the future monetary system underpinned by central bank digital currency, thus opening up a new era in the joint development of the monetary system and the economy. Read more at https://www.bis.org/publ/arpdf/ar2023e3.htm

Project Rosalind: building API prototypes for retail CBDC ecosystem innovation

The BIS Project Rosalind develops a prototype application programming interface layer for retail CBDC systems and explores ecosystem innovation.

Project Polaris: Offline payments with CBDC

As part of Project Polaris, the BIS Innovation Hub Nordic Centre has published a comprehensive handbook exploring key aspects of how central bank digital currencies (CBDCs) could work for offline payments. 

Read the report at https://www.bis.org/publ/othp64.htm

The future monetary system - BIS Media Briefing

A burst of creative innovation is under way in money and payments, opening up vistas of a future digital monetary system that adapts continuously to serve the public interest.

Structural flaws make the crypto universe unsuitable as the basis for a monetary system: it lacks a stable nominal anchor, while limits to its scalability result in fragmentation. Contrary to the decentralisation narrative, crypto often relies on unregulated intermediaries that pose financial risks.

A system grounded in central bank money offers a sounder basis for innovation, ensuring that services are stable and interoperable, domestically and across borders. Such a system can sustain a virtuous circle of trust and adaptability through network effects.

New capabilities such as programability, composability and tokenisation are not the preserve of crypto, but can instead be built on top of central bank digital currencies (CBDCs), fast payment systems and associated data architectures.

Does safe DeFi require CBDCs?

A BIS conference, streamed live on 4 April 2022, aimed at establishing a common understanding on how DeFi-based markets might evolve from their current state, what role central banks might have, and the potential interaction with Central Bank Digital Currencies.

How to Regulate Big Tech? Ideas from the BIS

The U.S. House Judiciary subcommittee, in a 449-page report last October characterized Amazon, Apple, Facebook and Google as “gatekeepers” with “significant and durable market power.” The antitrust panel acknowledged open competition’s economic benefits and opportunities but compared the Big Techs to “the kinds of monopolies we last saw in the era of oil barons and railroad tycoons.”

“Big Techs have done something quite remarkable,” Agustín Carstens, general manager of the Bank for International Settlements (BIS), said in a January talk, Public Policy for Big Techs in Finance. “Within less than two decades, they have gone from being startups to dominating a range of markets. This is unprecedented,” Carstens said, noting that financial services accounted for “only 11%” of Big Tech revenues “so far.” 

In Fintech Regulation: How to Achieve a Level Playing Field, a paper published in early February, Fernando Restoy, chairman of the BIS Financial Stability Institute (FSI), examines the straightforward “same activity, same regulation” principle alongside so-called entity-based regulation. 

The full article here; How to Regulate Big Tech? The BIS Has Some Ideas

 

International banking supervisory community meets virtually - Focus on the future of banking supervision in a changing world

The 21st International Conference of Banking Supervisors (ICBS), hosted virtually by the Office of the Superintendent of Financial Institutions (OSFI) and the Bank of Canada, was held on 19-22 October 2020. Approximately 450 senior banking supervisors and central bankers representing close to 100 countries took part.

Delegates discussed a wide range of issues related to the future of banking supervision in a changing world. The discussions covered the digitization of finance and the evolution of banking models, operational resilience, climate-related financial risks and remote working arrangements. Participants also exchanged views on the challenges for central banks and bank supervisors in advanced and emerging market economies during the Covid-19 pandemic, as well as adapting to the changing operating environment for central banks and supervisors.

The event included several panel discussions and keynote speeches by Pablo Hernández de Cos, Chair of the Basel Committee on Banking Supervision and Governor of the Bank of Spain, and Prithwiraj Choudhury, Associate Professor at Harvard Business School.

This successful event marks the first time that the Basel Committee has worked with a host country to offer a completely virtual conference.

The ICBS, which has been held every two years since 1979, brings together bank supervisors and central bankers from around the world as well as representatives of international financial institutions. The conference promotes the discussion of key supervisory issues and fosters the continuing cooperation in the oversight of international banking. With its wide membership of senior supervisors and policymakers, the ICBS presents a unique opportunity for a broad-based discussion on issues that are timely and relevant to supervisors in both advanced and emerging market economies.

Central banks and BIS have published their first central bank digital currency (CBDC) report laying out key requirements

Seven central banks and the BIS have release a report assessing the feasibility of publicly available central bank digital currency (CBDC). The aim is to help central banks deliver their public policy objectives.

The report outlines base principles and core features of a CBDC, but does not give an opinion on whether to issue digital currencies. Central banks will continue investigating CBDC feasibility without committing to issuance.

The report, Central bank digital currencies: foundational principles and core features, was compiled by the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, Sveriges Riksbank, the Swiss National Bank and the BIS, and highlights three key principles for a CBDC:

• Coexistence with cash and other types of money in a flexible and innovative payment system.
• Any introduction should support wider policy objectives and do no harm to monetary and financial stability.
• Features should promote innovation and efficiency.
  

The group of central banks will continue to work together on CBDCs, without prejudging any decision on whether or not to introduce CBDCs in their jurisdictions.

Based on these principles, the group has identified the core features of any future CBDC system, which must be:

• Resilient and secure to maintain operational integrity.
• Convenient and available at very low or no cost to end users.
• Underpinned by appropriate standards and a clear legal framework.
• Have an appropriate role for the private sector, as well as promoting competition and innovation.
  

Further development of CBDCs requires a commitment to practical policy analysis and applied technical experimentation. While this has already started, the speed of innovation in payments and money-related technologies requires the prioritisation of collaborative experimentation.

Future activities will include exploring other open questions around CBDCs and the challenges of cross-border payments, as well as continuing outreach domestically and with other central banks to foster informed dialogue on key issues. Work by the BIS Innovation Hub, which serves the broader central banking community, will contribute to this objective.

Correspondent Banking - What might replace a clunky system in a world where payments are becoming ever more global?

The Bank for International Settlements (BIS) said in a recent report that the number of correspondent banks — where banks and financial institutions (and domestic payment systems) are linked together — slipped 3% in 2019 vs. 2018 and declined a significant 22% from 2011 to 2019.

Even though more money is crossing borders digitally, there are fewer correspondent banks to move that money. And the hallmark of that money movement — a lack of transparency and speed. What might replace a clunky system in a world where payments are becoming ever more global?

Read the Payments.com article HERE.

Operational Risk and Operational Resilience - BIS releases consultative document

The Basel Committee of the BIS released a new consultative document on the principles for operational risk and operational resilience on 6 August 2020.

The consultative document has a three-part focus;

• It proposes operational resilience principles that are aimed at increasing the capacity of banks to withstand disruptions due to potentially severe events.

• Proposes updated principles on operational risk focus on change management and information and communication technologies (ICT).

• Acknowledges that Covid-19 has raised the importance of operational resilience and of mitigating operational risk.

In recent years, the growth of technology-related threats has increased the importance of banks' operational resilience. The Covid-19 pandemic has made the need to address these threats even more pressing. Given the critical role played by banks in the global financial system, increasing banks' resilience to absorb shocks from operational risks, such as those arising from pandemics, cyber incidents, technology failures or natural disasters, will provide additional safeguards to the financial system as a whole.

Recognizing that a concerted operational resilience effort may not prevent a significant shock resulting from a specific hazard, the Committee is looking for comment on proposed Principles for operational resilience that aim to mitigate the impact of potentially severe adverse events by enhancing banks' ability to withstand, adapt to and recover from them.

The Committee is of the view that operational resilience is also an outcome of effective operational risk management. Activities such as risk identification and assessment, risk mitigation (including the implementation of controls), and ongoing monitoring work together to minimize operational disruptions and their effects when they materialize. Given this natural relationship between operational resilience and operational risk, the Committee is proposing updates to its Principles for the sound management of operational risk (PSMOR).


Specifically, the Committee is proposing a limited number of updates to:

1. align the PSMOR with the recently finalised Basel III operational risk framework; 
2. update the guidance where needed in the areas of change management and ICT, and 
3. enhance the overall clarity of the principles document.

The proposed principles for operational resilience set forth in this consultative document not only build upon the proposed updates to the PSMOR, they are largely derived and adapted from existing guidance on outsourcing, business continuity, and risk management-related guidance issued by the Committee or national supervisors over a number of years.

By building upon existing guidance and current practices, the Committee is seeking to develop a coherent framework and avoid duplication. The proposed operational resilience principles focus on governance; operational risk management; business continuity planning and testing; mapping interconnections and interdependencies; third-party dependency management; incident management; and resilient cybersecurity and ICT.

Comments to the CDs should be submitted to the BIS (for link Click here ) by Friday 6 November 2020. All comments may be published on the BIS website unless a respondent specifically requests confidential treatment.

The Basel Committee is the primary global standard setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. Its mandate is to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability. The Committee reports to the Group of Central Bank Governors and Heads of Supervision and seeks its endorsement for major decisions. The Committee does not possess any formal supranational authority, and its decisions do not have legal force. Rather, the Committee relies on its members' commitments to achieve its mandate. The Basel Committee is chaired by Pablo Hernández de Cos, Governor of the Bank of Spain. More information about the Basel Committee is available here.

You just missed a great Webinar on the “Principles for the Management of Operational Risk”

Even though you lost out on the live webinar you can still view this webinar on-line or purchase the CD.

This webinar highlights the evolution of operational risk management. The principles outlined in the Bank for International Settlements (BIS) report are based on best industry practice, supervisory experience and cover three overarching themes: governance, risk management and disclosure. We will look at the practicality of these principles and the implementation factors with each of them.

DETAILS HERE>>

Webinar - Principles for the Management of Operational Risk

Join Citadel Advantage’s STANLEY EPSTEIN on Thursday July 28, 10:00 AM PDT / 1:00 PM EDT.

This webinar highlights the evolution of operational risk management. The principles outlined in the Bank for International Settlements (BIS) report are based on best industry practice, supervisory experience and cover three overarching themes: governance, risk management and disclosure. We will look at the practicality of these principles and the implementation factors with each of them.

Although financial institutions have been managing risk exposures for years operational risk management as a discipline is relatively new. The change in focus to operational risk management has been driven by a number of factors, led in the first instance by the compliance requirements of bank regulators. Regulators look to the Bank for International Settlements (BIS) to formulate position and regulatory consensus in the world.

DETAILS HERE>>

Corporate Governance in the Banking Industry

By Stanley Epstein 

Broadly speaking corporate governance can be best described as a system of rules, practices and processes by which a business enterprise is directed and controlled. In essence corporate governance involves balancing the interests of the many stakeholders in a firm. These stakeholders include its shareholders, management, customers, suppliers, financiers, government and the larger community.

Corporate governance has become firmly entrenched on the world business scene over the past three decades. Today it is a key component in the operation of all manner of firms around the globe. Even more important is the need for corporate governance to be effective, not only for business firms but for the economy as a whole.

Banking is an important component of the economy, be it national or global. Banks play a very important financial intermediation role in this space. Clearly any difficulties arising from corporate governance shortcomings at banks will also result in a very high degree of nervousness in both the public and the market.

Some very fundamental deficiencies in bank corporate governance became very apparent during the 2008 financial crisis adding to the general distress that the crisis itself generated.

So in 2010 the Basel Committee on Banking Supervision published a set of principles for enhancing sound corporate governance practices at banking organizations. These principles set out best practices in corporate governance for banks.

The Basel Committee has since revised its original set of principles. This revision was published in July 2015, after consultation with the international banking community.

The revised guidance stresses the vital importance of effective corporate governance and promotes the importance of risk governance as part of a bank's overall corporate governance structure.

There are in all thirteen principles, which range from the bank board’s responsibilities, composition, structure; senior management, governance, risk management, compliance, audit compensation, disclosure right through to the role of bank supervisors.

So what major changes have taken place over the past five years?

The following five broad themes are evident in the revision.

1. The guidance has been expanded as regards the role of the board in overseeing the implementation of effective risk management systems.
2. Additional stress is placed on the need for the board to be competent as a group and for individual board members to devote enough time to their role on the board and to keep up-to-date of current banking developments.
3. Reinforces the guidance on risk governance. This also covers the risk management roles played by bank business units, risk management teams and internal audit. The importance of a sound risk “culture” is also addressed.
4. Bank supervisors are provided with guidance on how to evaluate the processes that banks use to select not only their board members but their senior management as well.
5. The guidance also recognizes that compensation schemes are a key part of the governance and incentive structure by which the bank board and its senior management transmit acceptable risk-taking behavior and strengthen the bank's operating and risk culture.

The Basel Committee stresses that these principles are relevant irrespective of whether or not a jurisdiction chooses to adopt the Committee’s regulatory framework. The board and senior management at each bank still have an obligation to pursue good governance.

As regards Systematically Important Financial Institutions (SIFIs), these organizations are expected to have the corporate governance structure and practices appropriate with their role in and potential impact on national and global financial stability.

The full document covering the revised principles can be downloaded directly from the BIS at http://www.bis.org/bcbs/publ/d328.pdf