The Basel Committee on Banking Supervision today published the final Guidelines for identifying and dealing with weak banks.
Weak banks are a worldwide phenomenon. They pose a continuing challenge for bank supervisors and resolution authorities in all countries, regardless of the political structure, financial system and level of economic and technical development. All bank supervisors should be prepared to mitigate the incidence of weak banks and deal with them when they occur.
A weak bank can be defined in various ways. In this report, it is “one whose liquidity or solvency is impaired or will soon be impaired unless there is a major improvement in its financial resources, risk profile, business model, risk management systems and controls, and/or quality of governance and management in a timely manner”. In cases where a bank is no longer viable, or likely to be no longer viable, and has no reasonable prospect of becoming viable once again, the authorities should resolve the institution without severe systemic disruption and without exposing taxpayers to loss, while protecting its critical functions. It may well be that the bank as a legal entity ceases to exist, but it should do so in a way that seeks to ensure continuity of access to the critical functions necessary to maintain financial stability and confidence in the financial system.
In the light of the significant post-crisis developments in financial markets and the regulatory landscape, the Committee has updated its 2002 Supervisory guidance on dealing with weak 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 macroprudential assessments, stress testing and business model analysis, and reinforcing the importance of sound corporate governance at banks;
- highlighting the issues of liquidity shortfalls, excessive risk concentrations, misaligned compensation and inadequate risk management; and
- expanding guidelines for information-sharing and cooperation among relevant authorities.
Part I of the report discusses the underlying supervisory preconditions for dealing with weak banks and techniques that will allow the supervisor to identify problems. These phases include preparatory work on recovery and resolution issues. Part II concerns the corrective measures available to turn around a weak bank and, for resolution authorities, tools for dealing with failing or failed banks.
A consultative version of this paper was published for comment in June 2014.
