Strong improvement in capital reserves and liquidity risk profiles key to banking resilience, says BCBS
23 March 2023 Switzerland
Image: AdobeStock/bakhtiarzein
The Basel Committee on Banking Supervision (BCBS) has highlighted major improvements in bank liquidity risk profiles and capital reserves since the 2008 financial crisis as a key step to reinforcing the resilience of the global banking system.
Since 2011, banks’ leverage ratio has improved from 3.5 to 6.5 per cent and their risk-based common equity tier 1 ratio (CET1) has risen from 7 to 13 per cent, according to BCBS.
Additionally, banks have strengthened their liquidity risk profiles, with their average global Liquidity Coverage Ratio currently standing at 140 per cent and their Net Stable Funding Ratio (NSFR) at 125 per cent.
At a meeting held virtually on 13 March and an in-person meeting in Hong Kong on 22 and 23 March, the BCBS outlined the steps that it is taking to protect the resilience of the global banking system, reinforced by robust regulatory standards and effective bank governance and risk management practices.
Reflecting on recent banking instabilities in Switzerland with the Credit Suisse takeover and in the US and UK with the collapse of Silicon Valley Bank, BCBS reminded stakeholders that risks of high inflation, lower growth and geopolitical tensions are presenting significant risk management challenges to banks.
It notes that years of low interest rates allowed debt to build across household and corporate sectors and, with central bank rate hikes, borrowers are facing significant increases in their debt service obligations. It notes that a broad-based repricing of asset markets could present additional risks to the banking sector.
Given these risks, the Basel Committee reaffirmed its commitment to implementing all elements of the Basel III framework as quickly as possible. As part of its core work programme, the Committee is conducting a review of its Core Principles for Effective Banking Supervision, integrating structural changes and supervisory experience that it has acquired since the last update in 2012.
It is also evaluating South Africa’s experience in implementing the Net Stable Funding Ratio and large exposures framework, with a report to follow in April.
Alongside this, the Committee has confirmed a workplan to evaluate and mitigate risks from cryptoassets to the global banking system, including risks associated with permissionless blockchain and eligibility criteria for Group 1 stablecoin. This will also include monitoring banks’ exposures to cryptoassets, including their activities as issuers of stablecoins and tokenised deposits, and their role as cryptoasset custodians.
In the area of climate risk, the BCBS is developing a Pillar 3 disclosure framework to require additional disclosures from banks relating to their prudential risks. This will be interoperable with, and will complement, disclosure initiatives being developed by the International Sustainability Standards Board and other global authorities. BCBS aims to publish a consultation paper on its progress in this area by the end of 2023.
Since 2011, banks’ leverage ratio has improved from 3.5 to 6.5 per cent and their risk-based common equity tier 1 ratio (CET1) has risen from 7 to 13 per cent, according to BCBS.
Additionally, banks have strengthened their liquidity risk profiles, with their average global Liquidity Coverage Ratio currently standing at 140 per cent and their Net Stable Funding Ratio (NSFR) at 125 per cent.
At a meeting held virtually on 13 March and an in-person meeting in Hong Kong on 22 and 23 March, the BCBS outlined the steps that it is taking to protect the resilience of the global banking system, reinforced by robust regulatory standards and effective bank governance and risk management practices.
Reflecting on recent banking instabilities in Switzerland with the Credit Suisse takeover and in the US and UK with the collapse of Silicon Valley Bank, BCBS reminded stakeholders that risks of high inflation, lower growth and geopolitical tensions are presenting significant risk management challenges to banks.
It notes that years of low interest rates allowed debt to build across household and corporate sectors and, with central bank rate hikes, borrowers are facing significant increases in their debt service obligations. It notes that a broad-based repricing of asset markets could present additional risks to the banking sector.
Given these risks, the Basel Committee reaffirmed its commitment to implementing all elements of the Basel III framework as quickly as possible. As part of its core work programme, the Committee is conducting a review of its Core Principles for Effective Banking Supervision, integrating structural changes and supervisory experience that it has acquired since the last update in 2012.
It is also evaluating South Africa’s experience in implementing the Net Stable Funding Ratio and large exposures framework, with a report to follow in April.
Alongside this, the Committee has confirmed a workplan to evaluate and mitigate risks from cryptoassets to the global banking system, including risks associated with permissionless blockchain and eligibility criteria for Group 1 stablecoin. This will also include monitoring banks’ exposures to cryptoassets, including their activities as issuers of stablecoins and tokenised deposits, and their role as cryptoasset custodians.
In the area of climate risk, the BCBS is developing a Pillar 3 disclosure framework to require additional disclosures from banks relating to their prudential risks. This will be interoperable with, and will complement, disclosure initiatives being developed by the International Sustainability Standards Board and other global authorities. BCBS aims to publish a consultation paper on its progress in this area by the end of 2023.
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