The Basel Committee on Banking Supervision (“BCBS”) has not been laying idle at the beach this summer. It has issued three papers of some consequence: (i) loss absorbency, (ii) remuneration, and (iii) bilateral counterparty credit risk, and none of it is a light “beach read.” Let’s dig in.
BCBS recently published a paper that sets out proposals for an assessment methodology for determining whether a banking institution should be regarded as a globally systemically important bank (“G-SIB”) and the additional capital requirements that G-SIBs should be subject to. In a related paper, the Financial Stability Board (“FSB”) sets out proposals for a framework for the resolution of failing institutions.
In its supplemental Pillar 2 (supervisory review process), the BCBS offered guidance addressing perceived weaknesses that were revealed in some banks’ risk management processes during the recent financial turmoil. The guidance included a set of “Principles for Sound Compensation Practices,” which had been published in April 2009 by the FSB. One of these principles was that “[f]irms must disclose clear, comprehensive and timely information about their compensation practices.” The FSB, however, has noted that there are significant variances in compensation-related disclosure across different jurisdictions. This prompted the FSB to recommend that detailed disclosure requirements be incorporated into Pillar 3 (of Basel II) in order to be more prescriptive and engender greater uniformity across the different jurisdictions.
As a result, the BCBS recently published its proposed Pillar 3 disclosure requirements for remuneration. BCBS believes the proposed requirements will “allow market participants to assess the quality of the compensation practices and the quality of support for a firm’s strategy and risk posture.”
Bilateral Counterparty Credit Risk
Earlier this summer, the BCBS finished its review of the Basel III capital treatment for counterparty credit risk in bilateral trades. Following the review, it has made a minor change to the credit valuation adjustment, which is the measure of the risk of loss caused by changes in the credit spread of a counterparty due to changes in its credit quality. The existing Basel II regime addressed counterparty default and credit migration risk, but not the risk of mark-tomarket losses caused by credit valuation adjustments.