BASEL COMMITTEE GUIDANCE FOR WEAK BANKS

In March 2002, the Basel Committee on Banking Supervision (“BCBS”) released international supervisory guidance for dealing with weak banks, based on the experiences and circumstances of various countries. Intended as a toolkit for supervisors, the March 2002 guidance examined a wide variety of bank problems and their background and causes, and assessed the pros and cons of the methods used to address them. The methods included preventive measures, early identification, corrective actions, resolution issues and exit strategies.

On 18 June 2014, the BCBS published a consultative document on supervisory guidelines for identifying and dealing with weak banks (“Draft Guidelines”). The aim of the Draft Guidelines is to provide practical guidance to bank supervisors on how to identify and deal with a weak bank. The Draft Guidelines take into account the occurrences, and consequences, of the financial crisis.

The Draft Guidelines, which are intended for banking supervisors, are split into two parts:

  • part I – identifying weak banks – considers the underlying supervisory pre-conditions for dealing with weak banks and techniques that should allow supervisors to identify problems in banks. It also considers preparatory work on recovery and resolution planning; and
  • part II – dealing with weak banks – considers the corrective measures available to turn around a weak bank and resolution and exit strategies for failing or failed banks.

Key changes include:

  • emphasising the need for early intervention and the use of recovery and resolution tools, and updating supervisory communication policies for distressed banks;
  • providing further guidance for improving supervisory processes, such as incorporating macro-prudential assessments, stress testing and business model analysis, and reinforcing the importance of sound corporate governance at banks;
  • highlighting the issues of liquidity shortfalls, excessive concentrations, misaligned compensation and inadequate risk management; and
  • expanding guidelines for information-sharing and cooperation among relevant authorities.

The consultation closes to responses on 19 September 2014. All comments may be published on the Bank for International Settlements website unless a respondent marks their comment as confidential. Once the Draft Guidelines are finalised they will replace the 2002 guidance.

FSB THEMATIC PEER REVIEW REPORT ON REDUCING RELIANCE ON CREDIT RATING AGENCY RATINGS

On 12 May 2014, the Financial Stability Board (“FSB”) published a thematic peer review report on reducing reliance on credit rating agency (“CRA”) ratings.

At the St Petersburg G20 Summit in September 2013 and subsequent meetings, the G20 called on national authorities to accelerate progress in implementing the FSB Principles in accordance with the FSB roadmap agreed in October 2012. The report focuses on action plans developed by national authorities to implement the FSB’s roadmap for reducing reliance on CRA ratings published in November 2012. The FSB has published a webpage setting out the action plans developed by national authorities to implement the roadmap. These include action plans produced by the UK, the EU, and the United States.

The FSB found that progress towards removing references to CRAs ratings has been uneven across jurisdictions and the financial sectors. It considers that a key challenge for national authorities is to develop alternative standards creditworthiness.

The report recommends that national authorities should:

  • Consider refining their action plans as lessons of experience are gained, although they should not delay in beginning to implement their existing action plans in line with the timelines set out in the FSB roadmap.
  • Engage in dialogue with market participants on strengthening internal credit assessment processes and developing alternative measures of creditworthiness.
  • Resist the temptation to adopt a small number of alternative measures of assessing creditworthiness in place of CRA ratings, which can result in substituted pro- cyclicality and herd behaviour.
  • Encourage market participants to review provisions within their private contracts, such as ratings triggers, which represent mechanistic reliance on CRA ratings.

The report suggests that the FSB should provide clearer guidance for smaller financial entities, in particular pension funds, on how to more effectively implement its principles to address the issue of proportionality for smaller entities. It recommends that international standard-setting bodies should provide guidance to members on steps to further discourage reliance on CRA ratings as set out in the roadmap.

The report represents the second and final stage of the FSB’s thematic peer review. In August 2013, the FSB published an interim report setting out the results of the first stage, which set out a stock-taking of references to CRA ratings in national laws and regulations.