Banking regulators should be prepared to intervene early to deal with the challenge of weak banks, according to new guidelines published Thursday by the Basel Committee on Banking Supervision.
Banking supervisors everywhere should be prepared to contend with the threat posed by banks that find themselves on shaky financial footing, the Basel Committee says in a statement.
“Weak banks are a worldwide phenomenon,” it says. “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.”
As a result, the committee stresses that all bank regulators should be prepared to mitigate the risk of banks falling into this position, and to deal with them when it does happen. To that end, the guidelines published today incorporate lessons learned during the financial crisis when numerous banks failed.
The new guidelines stress the need for early intervention, the use of recovery and resolution tools, and updating regulators’ communication policies for distressed banks, among other things.
The guidelines also provides 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. And, they highlight areas of potential weakness at banks, such as liquidity shortfalls, excessive risk concentrations, misaligned compensation and inadequate risk management.
In addition, the new guidelines expand the Basel Committee’s guidelines for information sharing and co-operation among regulators and other authorities.