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RISK IN CONTEXT

BCBS Proposals Present New Operational Risk Challenges for Financial Institutions

Posted by Shirley Beglinger 14 December 2016

The Basel Committee on Banking Supervision (BCBS) met recently in Santiago, Chile, to continue discussions surrounding the re-introduction of a standardised approach for credit risk and the introduction of a standardised measurement approach for operational risk.

European banks in particular have been vociferous in their disapproval of the proposals so far.

On operational risk, the proposed Standardised Measurement Approach would impose a capital charge calculated as a function of the size of each bank’s profit and loss (P&L) and balance sheet. A multiplication factor would be created by tracking each bank’s operational risk losses over the previous 10 years. The capital charge calculated would therefore give no consideration to risk management lessons learned or to other mitigating steps taken by a bank post-loss.

On credit risk, the BCBS proposes to withdraw the Internal Ratings Based Approach and replace it with a standardised approach. Banks argue that such a standardised approach would have little regard for the credit quality of individual loans, and no regard for national differences in how impaired loans are recognised and dealt with.

Taken together, the proposed changes could substantially increase the amount of capital banks would need to hold against their lending books and their operational risk. Many bankers, insurers, brokers, and associations have voiced their concerns with regard to the BCBS consultations.

In the absence of a hearing by the BCBS, many banks have placed their hopes in Brussels. The European Parliament, in turn, has indicated that these latest proposals are unlikely to be incorporated into Capital Requirements Directive 5 (CRD 5). CRD 5 is the soon-to-be issued rule governing the capital requirement for banks operating from the European Union (EU). Should the BCBS guidance fail to become part of CRD 5, it seems reasonable to anticipate that it will have to wait for CRD 6, which will likely be issued for consultation sometime around 2020. Given the comparatively slow progress of legislation in Europe, such a delay would mean that new BCBS capital rules would probably not come into force until 2023.

If the EU does not implement the proposed rules promptly, other large jurisdictions might similarly drag their heels.

Small wonder then that the BCBS press release papered over the lack of consensus at the Chile meeting with a rather arid statement that: “Participants also exchanged views on implementation challenges of the post-crisis framework in advanced and emerging market economies.”

Related to:  Financial Institutions

Shirley Beglinger