Basel Committee Debuts Credit Risk Guidelines for Banks

A global banking watchdog introduced new guidelines covering counterparty credit risk (CCR) management.

The regulations issued by the Basel Committee on Banking Supervision replace the committee’s existing regulations from 1999, according to a Wednesday (Dec. 11) press release.

“The guidelines provide a supervisory response to the significant shortcomings that have been identified in banks’ management of CCR, including the lessons learned from recent episodes of nonbank financial intermediary distress,” the release said.

The report said the committee’s 1999 rules were written in response to the collapse of the Long-Term Capital Management hedge fund and its associated risk management failures. Since then, several other issues have come to light underlining the need for new rules, including the failure of Archegos Capital Management in 2021.

“These incidents have made it clear that certain fundamental CCR practices remain inadequate relative to supervisory expectations,” the report said. “Weaknesses pertain to due diligence, both at initial onboarding and on an ongoing basis; credit risk mitigation practices such as margining; risk measurement practices related to potential future exposure and stress testing; and the governance and senior management oversight of CCR.”

The report came two days after an official from the Bank of England warned that nonbank financial institutions (NBFIs) such as pension funds, insurers, hedge funds and money market funds could threaten financial stability as their role in the financial system increases.

Dave Ramsden, deputy governor of markets and banking for the British central bank, said in a speech that these institutions make up roughly half of the total assets in the financial systems of the United Kingdom and the world amid an ongoing shift in consumer and business savings and borrowing habits.

The Bank of England said last month that it plans to develop the ability to lend to NBFIs to deal with potential liquidity challenges in core financial markets that could threaten the financial stability of the U.K.

The Basel Committee and the Bank of England are among those warning about possible NBFI dangers. In July, Financial Stability Board (FSB) Chair Klaas Knot said “incidents of market stress and liquidity strains” demonstrated that NBFIs can cause or worsen systemic risks to the financial system at large.