Basel Committee advances work on climate risk and regulation of crypto assets

The Basel Committee met on May 27 and approved a finalized set of principles for effective management and monitoring of climate-related financial risks.

It also advanced its work on specifying a prudential treatment of crypto-assets and publishing a second consultation paper, and agreed on a way forward to reflect developments within the Banking Union. European Union (EBU) on the methodology for assessing global systemically important banks (G-SIB). . In addition, the Committee continues to assess risks and vulnerabilities in the global banking system, including those resulting from the conflict in Ukraine.
Climate-related financial risks

The Committee agreed on a finalized set of principles for effective management and monitoring of climate-related financial risks. This follows the Committee’s consultation on these principles last year. The principles, which will be released in the coming weeks, aim to promote a principle-based approach to improving risk management and oversight practices to mitigate climate-related financial risks. They are designed in such a way that they can be adapted to a wide range of banking systems proportionally.

The publication of these principles is part of the Committee’s broader assessment of potential measures – covering disclosure, supervisory and regulatory measures – to address climate-related financial risks to the global banking system. The Committee will provide an update on its work in these dimensions in due course. It will continue to collaborate with other global forums on climate-related financial risk initiatives.

The Committee made progress in its work to publish a second consultation paper on the prudential treatment of banks’ exposures to crypto-assets, following its initial consultation last year. Recent developments have further highlighted the importance of having a global minimum prudential framework in place to mitigate the risks associated with crypto-assets. Based on feedback received from external stakeholders, the Committee expects to publish another consultation paper in the coming month, with a view to finalizing the prudential treatment towards the end of this year.
G-SIB Assessment Methodology

The Committee completed its targeted review of the treatment of cross-border exposures within the EBU on the methodology applicable to G-SIBs. The Committee recognizes the progress made in the development of the EBU. It agreed to recognize this progress within the G-SIB through the existing methodology, which allows adjustments to be made based on the judgment of supervisors.

As part of the agreement, a parallel set of G-SIB scores will be calculated for EBU-headquartered G-SIBs and used to adjust their allocations. The parallel scores recognize 66% of the score reduction that would result from treating intra-EBU exposures as domestic exposures under the G-SIB scoring methodology. The committee’s agreement will not affect the classification of banks as G-SIBs or the scores or tranche allocations of banks outside the EBU.

In due course, EU authorities will publish a more detailed description of the methodology and requirements for EBU-headquartered banks to publish the cross-jurisdictional indicators needed to calculate the parallel set of scores.
Global Banking System Risks and Vulnerabilities

Following the outbreak of conflict in Ukraine, the Committee held a series of meetings to discuss risks and vulnerabilities in the global banking system. Banks’ direct financial exposures to Russia, Ukraine and Belarus are relatively limited and manageable. Additionally, banks are focusing on their operational resilience while dealing with sanctions and dealing with an increase in cyber threats. However, there are in principle several potential channels through which the banking system could be affected by the ongoing conflict. These include indirect, second- and third-round effects arising from the conflict, such as developments in commodity markets and exposures to financial and non-financial institutions that are affected by the conflict. Risks stemming from a deterioration in the macroeconomic outlook, rising inflation and interest rates in a number of markets and widespread asset valuations also warrant close monitoring. In this context, the Committee noted the importance for banks and supervisors to continue to closely monitor, assess and mitigate these risks and vulnerabilities.

Maria D. Ervin