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.
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.
The Revised Principles would retain the 29 principles from the 2012 version, with few changes to the substance of the principles.
Each statement of principle would be cross-referenced to other Basel Committee standards and supervisory publications.
Changes to Particular Principles
- 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
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.
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.
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.