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“Suite of practical tools” will draw on lessons learned from 2023’s Banking turmoil.
The Basel Committee on Banking Supervision is building a “suite of practical tools” to supervise Liquidity and interest rate Risks as well as the sustainability of Banks’ business models. At its meeting on November 19–20, the Basel Committee agreed to build these tools to “strengthen supervisory effectiveness in light of the lessons learned from last year’s Banking turmoil”. It said it would publish an update on the project in “early 2025”.
Alex Knight, Head of Europe, the Middle East and Africa at Baton Systems, which offers tools to monitor intraday Liquidity Risk, says the Committee’s announcement “underscores that this Risk is not just a side issue, but the foundation of financial stability and investor confidence”.
Knight adds that Banks must “urgently transition from outdated legacy systems” to modern and robust ones.
The Committee “unanimously reaffirmed” that it expects Basel III to be implemented in “full, consistently and as soon as possible”. It said it had also reviewed and approved South Korean authorities’ reports on the “Net stable funding ratio and large exposures framework” and would publish them next month.
The Basel Committee said it had discussed Banks’ entanglement with Non-Bank Financial Intermediaries (NBFIs). As the latter sector continued to grow and evolve, so did the Risks and vulnerabilities to the global banking system, the committee noted. Banks and their supervisors “must continue to be vigilant” to these Risks and gauge the “Range and materiality” of these entanglements.
“Data gaps hinder the effective measurement and management of Risks to Banks from their NBFI interconnections,” the Committee warned.
Cédric Cajet, Product Director at Asset Management software firm, NeoXam, says: “When it comes to Liquidity Risk, NBFIs have never been held to the same standards as the Banks, despite their increasingly integral role in the effective functioning of global markets.”
The Basel Committee said that after receiving comments on its draft guidelines on counterparty Risk Management, it had approved a “Final set of guidelines” to address Banks’ weak points in managing these Risks. The Committee said that this too would be published next month.
The Committee also reiterated its support for the positive “Cycle-neutral” Counter-Cyclical Capital Buffer Rate (CCyB). This sets a positive CCyB when “Risks are judged to be neither subdued nor elevated”. The Committee said it would publish another report next month addressing those jurisdictions that wished to apply such a rate, and the practices they should employ.
The Committee added that it would continue working to address the “Window-dressing” by some global systematically important Banks. It has previously defined such activity as “The temporary reduction in market activity and balance sheet items by Banks in anticipation of period-end Reporting dates to appear safer or less systemically important than they may actually be”.
