Basel Committee Research Articles

News Sentiment and Liquidity Risk Forecasting: Insights from Iranian Banks

This study addresses the critical challenge of predicting liquidity risk in the banking sector, as emphasized by the Basel Committee on Banking Supervision. Liquidity risk serves as a key metric for evaluating a bank’s short-term resilience to liquidity shocks. Despite limited prior research, particularly in anticipating upcoming positions of bank liquidity risk, especially in Iranian banks with high liquidity risk, this study aimed to develop an AI-based model to predict the liquidity coverage ratio (LCR) under Basel III reforms, focusing on its direction (up, down, stable) rather than on exact values, thus distinguishing itself from previous studies. The research objectively explores the influence of external signals, particularly news sentiment, on liquidity prediction, through novel data augmentation, supported by empirical research, as qualitative factors to build a model predicting LCR positions using AI techniques such as deep and convolutional neural networks. Focused on a semi-private Islamic bank in Iran incorporating 4,288,829 Persian economic news articles from 2004 to 2020, this study compared various AI algorithms. It revealed that real-time news content offers valuable insights into impending changes in LCR, particularly in Islamic banks with elevated liquidity risks, achieving a predictive accuracy of 88.6%. This discovery underscores the importance of complementing traditional qualitative metrics with contemporary news sentiments as a signal, particularly when traditional measures require time-consuming data preparation, offering a promising avenue for risk managers seeking more robust liquidity risk forecasts.

Risk-based regulation and supervision of second-tier banks: experience of EU countries

The aim of the study was to determine the impact of increased capital adequacy standards of second-tier banks on their performance. The study is based on second-tier banks of EU member states, as these countries are the first to implement the Basel Committee recommendations, so their experience should be studied and taken into account when building risk-based regulation of second-tier banks of Ukraine and Kazakhstan. The study covers the period of 2009–2022, as the Basel III regulations were adopted after 2008, and they began to operate for the second-tier banks of EU member states in 2013. The study was conducted using econometric modelling with an analysis of the dependence of banking indicators on the capital structure established by Basel III. Functional interrelationships of the dependence of Net Interest Income, Profit, Return on Assets, Return on Equity, Risk Costs to Operating Income were tested. The impact of capital adequacy requirements on the performance of second-tier banks was determined: capital adequacy requirements have a positive impact on net interest income and profit of second-tier banks. The obtained results can be used to substantiate increasing capital adequacy requirements to increase the reliability of the banking system as an element in the system of factors of economic growth of the national economy.

Basel Implementation in Banking in Indonesia

This study’s goal is to determine the application of Basel in banking in Indonesia. Bank Indonesia in issuing banking regulations refers to the Bank for International Settlement (BIS) policies related to liquidity, especially as a reference to protect Indonesian banks from crises caused by insufficient liquidity needs in the Bank. policies from the BIS will be accommodated first by the Islamic Financial Service Board (IFSB). IFSB is used as a reference for regulators to make banking policies. One of the IFSB committees, namely the Basel committee in the field of banking supervision, has issued provisions that are a reference for international banking, namely Basel 1, Basel II and Basel III. This study collects data using a descriptive qualitative methodology and secondary data obtained from literature studies. The results of the research show that banks in Indonesia have implemented regulations according to the Basel III international standard OJK has adopted Basel recommendations and has implemented Basel 1, 2 and 3 although there are some shortcomings but the application of risk management is more effective and efficient. The application of the continuation of Basel III is adjusted to the conditions of national banking proportionally.

CBDCs, regulated stablecoins and tokenized traditional assets under the Basel Committee rules on cryptoassets

Purpose This paper examines the impact of Central Bank Digital Currencies (CBDCs), regulated stablecoins and tokenized traditional assets on the cryptocurrency market, following the guidelines set by the Basel Committee. This study aims to analyze the implications for secure storage, cross-border transfers and necessary investments. Design/methodology/approach The paper uses a policy analysis approach to assess the potential effects of the Basel Committee’s regulations on CBDCs, regulated stablecoins and tokenized traditional assets. It explores their impact on the cryptoasset market, strategies of central and commercial banks, payment systems and risk management. Findings The adoption of CBDCs, regulated stablecoins and tokenized traditional assets is expected to grow rapidly in the coming years. It raises concerns about secure storage, cross-border transfers and required investments. Central banks are likely to introduce CBDCs and authorize stablecoin issuance, aiming for efficient monetary policies and risk management. Basel III regulations may lead to asset tokenization by banks, reducing asset size and increasing fee-based income. Originality/value This paper provides insights into the potential impact of the Basel Committee's regulations on CBDCs, regulated stablecoins and tokenized traditional assets. It contributes to the understanding of the evolving cryptoasset market and the strategies of central and commercial banks in adopting these technologies. The findings offer valuable information for policymakers, regulators and market participants in navigating the changing landscape of digital assets.

CORPORATE GOVERNANCE REFORMS IN THE BANKING SECTOR: ENHANCING STABILITY AND PROTECTING DEPOSITORS& INTERESTS

The global financial crisis of 2008 exposed significant weaknesses in the corporate governance practices of banks, leading to excessive risk-taking, lack of oversight, and eventual failures. In response, corporate governance reforms have been implemented in the banking sector to enhance stability, restore public confidence, and protect the interests of depositors. Effective corporate governance ensures that banks are managed responsibly, aligning the interests of various stakeholders. Key areas of focus for these reforms include board composition and effectiveness, risk governance and management, remuneration policies, internal controls and auditing, transparency and disclosure, and stakeholder engagement. Reforms emphasize the importance of having a diverse and independent board, robust risk management frameworks, aligning executive compensation with long-term performance, strengthening internal controls and auditing processes, enhancing transparency and disclosure requirements, and engaging with stakeholders, including depositors. Initiatives such as the Basel Committee on Banking Supervision's guidelines and the European Union's Capital Requirements Directive IV (CRD IV) have aimed to strengthen governance frameworks and promote best practices within the banking industry. These reforms mandate the establishment of dedicated risk committees, stress testing practices, clawback provisions in remuneration structures, and the implementation of effective compliance and auditing functions. Effective implementation of corporate governance reforms is crucial for enhancing financial stability, mitigating systemic risks, and protecting depositors' interests. By promoting responsible and ethical practices, strengthening oversight mechanisms, and aligning incentives with long-term sustainability, these reforms aim to restore public confidence in the banking industry and contribute to the overall resilience of the financial system. Keywords: Corporate Governance, Banking Regulations, Risk Management, Transparency, Financial Stability

Problem Loans and Working Out the Pinnacle of Bank Failures in Nigeria

This study was designed to evaluate managing problem loans and work out the pinnacle of bank failures in Nigeria. One of the recommendations of the Basel Committee on Banking Supervision was credit risk management which is the optimization of the bank’s risk-adjusted rate of return by maintaining credit risk exposure within an acceptable level. Descriptive survey research was used and data were collected via annual reports of the sampled bank within the period of 2011–2016. The population of the research included the Deposit Money Banks. Pearson Coefficient of Correlation was the statistical tool used to analyse the hypotheses and this was done with the aid of Statistical Package for Social Sciences (SPSS). The researcher concluded that there is no significant relationship between credit risk management and bank failure in Nigeria. However, there were traces of weak negative relationships which keen interest should be given to because of the sensitive nature of the banking sector.

Basel framework for corporate governance of banks

The Basel framework for bank corporate governance is a set of international guidelines and standards established by the Basel Committee on Banking Supervision, which plays a crucial role in setting the corporate governance practices of banks around the world, actively contributing to improving stability, risk management and compliance with national and international regulations applicable to banks. This regulatory framework outlines the principles and requirements related to risk management, capital adequacy, internal controls, transparency of bank shareholders and customer relations, but there is a strong emphasis on board oversight, accountability and the alignment of incentives with long-term sustainability. Banks are currently implementing Basel IV - the continuation of Basel III standards, developed in response to the deficiencies in financial regulation revealed by the 2007 financial crisis, with the aim of strengthening bank capital requirements by increasing minimum capital requirements, holding high-quality liquidity and decrease in bank leverage.

Basel core principles for effective banking supervision: an update after a decade of experience

The Basel Committee on Banking Supervision’s Core Principles for Effective Banking Supervision (BCPs) are a universally applicable minimum standard for sound prudential regulation and supervision of banks and banking systems. Supervisors use these principles to assess the quality of their regulatory and supervisory frameworks, while the International Monetary Fund (IMF) and the World Bank use them, as part of their Financial Sector Assessment Programme, to assess the efficacy of the banking supervision framework and supervisory approach in each jurisdiction. Since they were first introduced in 1997, the BCPs have undergone two revisions (in 2006 and 2012). In April 2024 the Basel Committee on Banking Supervision published a modification of the standard to account for developments over the last decade, the impact of structural trends in the sector and the lessons learned from previous implementations of the core principles. This article takes a look at the key aspects of this update, the main changes of which refer to new risks, such as climate-related financial risks and the digitalisation of finance, operational resilience, non-banking financial intermediation, financial risk, risk management practices, and systemic risk and macroprudential oversight.

Khuôn khổ giám sát rủi ro tài chính liên quan đến biến đổi khí hậu của Ngân hàng Nhà nước Việt Nam

Climate change is happening rapidly and poses a significant risk to the global economy. International organizations have issued many regulations to manage and supervise climate-related financial risk (CRFR) to ensure the financial system’s safety. This paper uses the content analysis method to evaluate the CRFR monitoring framework of the State Bank of Vietnam compared with the Basel Committee on Banking Supervision. The results show that the CRFR supervision framework in Vietnam is still under development; the regulations and guidelines are not specific and not yet in line with the international framework, such as not clearly defining the responsibilities of senior management in CRFR monitoring, not providing guidance on the implementation, evaluation, and monitoring of the results of scenario analysis and stress testing on the resilience of banks to climate change, not clearly announcing the monitoring objectives and improving the quality of supervisors, and not requiring financial institutions to disclose information related to CRFR.

Corporate Governance in Bancassurance Context: An In-Depth Analysis of external Control Mechanisms

Governance stands as a multifaceted area of interest, attracting attention in both political and academic realms on a global scale. Its significance, particularly in economics and management, has been increasingly emphasized due to a series of scandals that have resonated across various contexts, often highlighting common issues associated with power struggles and conflicting interests within organizations. The quest for effective governance demands the implementation of multiple control mechanisms to address and prevent power-related challenges within organizations. In this article, we focus on the governance of companies operating in the context of bancassurance. Indeed, bancassurance companies are of major importance to any economy, which explains the scope of our research that explores the rules and governance mechanisms governing this sector worldwide, as well as their manifestation in our research context. A comprehensive review of the Basel Committee on Banking Supervision forms an integral part of this discussion. This committee plays a central role in setting global banking standards and its governance structure. Notably, the article highlights Bank Al-Maghrib's adoption of Basel III provisions in the Moroccan context and underscores the significant role played by the Credit Institutions Rating Assistance System. Furthermore, the article delves into the pivotal role of the Insurance and Social Welfare Supervisory Authority within the insurance sector, emphasizing the intrinsic connection between solvency and governance. It explores the historical importance of Solvency I and its evolution towards Solvency II, with a focus on the impact of this directive on the European insurance industry. Finally, the paper thoroughly examines the strategic application of the risk-based solvency approach in Moroccan bancassurance, stressing its contribution to enhancing financial robustness and its tailored assessment within the national context.

Simulating Credit Loss Distributions: Empirical Versus the Vasicek Model

Because credit losses can be substantial, managing credit risk is a focus area of risk measurement and management. It is important for financial institutions to select credit risk models that accurately forecast losses. The Basel Committee on Banking Supervision (BCBS) chose the closed-form single risk factor Vasicek model for regulatory capital calculations. In this article, its forecast accuracy is compared with empirical loss distributions using simulated probabilities of default and losses given default. The effect of altering probabilities of default on asset correlations was analysed and how this affects credit portfolio loss distributions. The robustness of the Vasicek model against five different portfolios with unique compositions was explored: results highlight two key findings. Firstly, the Vasicek model is a good approximation of credit losses for a portfolio that does not contain dominating loans (it is, after all, based on the assumption of large-scale homogeneity). Secondly, the Vasicek model is a good approximation for expected loss (ELs) but lacks accuracy when determining extreme unexpected losses (ULs). Finally, credit capital requirements as a function of two variables are presented which reveals novel ways of viewing these values.

Estimating Value at Risk and Expected Shortfall: A Kalman Filter Approach

Value at Risk (VaR) estimates the maximum loss a portfolio may incur at a given confidence level over a specified time, while expected shortfall (ES) determines the probability weighted losses greater than VaR. VaR has recently been replaced by (but remains a crucial step in the computation of) ES by the Basel Committee on Banking Supervision (BCBS) as the primary metric for banks to forecast market risk and allocate the relevant amount of regulatory market risk capital. The aim of the study is to introduce a more accurate approach of measuring VaR and hence ES determined using loss forecast accuracy. VaR (hence ES) is unobservable and depends on subjective measures like volatility, more accurate (loss forecast) estimates of both are constantly sought. Modelling the volatility of asset returns as a stochastic process, so a Kalman filter (which distinguishes and isolates noise from data using Bayesian statistics and variance reduction) is used to estimate both market risk metrics. A variety of volatility estimates, including the Kalman filter's recursive approach, are used to measure VaR and ES. Loss forecast accuracy is then computed and compared. The Kalman filter produces the most accurate loss forecast estimates in periods of both calm and volatile markets. The Kalman filter provides the most accurate forecasts of future market risk losses compared with standard methods which results in more accurate provision of regulatory market risk capital.

Multivariate Spectral Backtests of Forecast Distributions under Unknown Dependencies

Under the revised market risk framework of the Basel Committee on Banking Supervision, the model validation regime for internal models now requires that models capture the tail risk in profit-and-loss (P&L) distributions at the trading desk level. We develop multi-desk backtests, which simultaneously test all trading desk models and which exploit all the information available in the presence of an unknown correlation structure between desks. We propose a multi-desk extension of the spectral test of Gordy and McNeil, which allows the evaluation of a model at more than one confidence level and contains a multi-desk value-at-risk (VaR) backtest as a special case. The spectral tests make use of realised probability integral transform values based on estimated P&L distributions for each desk and are more informative and more powerful than simpler tests based on VaR violation indicators. The new backtests are easy to implement with a reasonable running time; in a series of simulation studies, we show that they have good size and power properties.

РАЗВИТИЕ КРИТЕРИЕВ ОЦЕНКИ ЭФФЕКТИВНОСТИ СИСТЕМ ВНУТРЕННЕГО КОНТРОЛЯ В СОВРЕМЕННЫХ УСЛОВИЯХ

The relevance of the study is due to the need to improve the effectiveness of internal control systems in a rapidly changing external environment and increasing requirements for transparency and reliability of the organization’s activities. The authors of the article emphasize the importance of the problems of determining the criteria for the effectiveness of internal control, which have become the object of research by many domestic and foreign scientists, due to the need to improve this tool for managing economic activity. The article examines the approaches of various authors to the definition of criteria for evaluating the effectiveness of internal control systems. Based on the analysis, interpretations of the content of the most frequently used criteria for evaluating the effectiveness of the internal control system (effectiveness, efficiency, cost-effectiveness, expediency, timeliness) are formulated. The author conducts a study of criteria defined by leading international professional organizations (COSO, the Basel Committee on Banking Supervision, the Institute of Internal Auditors, the Association of Audit and Control of Information Systems). According to the author, the criteria for the effectiveness of the internal control system should not only reflect the current state of the internal control system, but also serve as a basis for its further development and improvement. As a result of the study, a systematization of the criteria for the effectiveness of the internal control system was proposed, which includes five groups involving an assessment of the level of organization of the internal control system; the level of human resources involved in the internal control system; the level of information, technical, technological and financial support for the internal control system; the state of the environment of the internal control system; the level of quality of internal control measures control within the framework of the internal control system. The proposed systematization of the criteria for the effectiveness of the internal control system allows for a deeper understanding of the essence and content of internal control and can become an effective management tool and contribute to the achievement of the tasks set. The systematization proposed by the author of the study can serve as a basis for the development and improvement of internal control systems in organizations. The results of the study can be useful for managers and specialists in the field of risk management, audit and control, as well as for anyone interested in improving the efficiency of organizations.

CBDCs, Regulated Stablecoins and Tokenized Traditional Assets under the Basel Committee Rules on Cryptoassets

CBDCs, Regulated Stablecoins and Tokenized Traditional Assets under the Basel Committee Rules on Cryptoassets

Bank opacity, systemic risk and financial stability

This paper examines the impact of bank opacity on European financial stability. Based on a panel dataset of listed European banks covering the period 2002–2018, I find that bank opacity has a significant influence on the institution-specific contribution to the ∆Conditional Value at Risk and Marginal Expected Shortfall. The enforcement mechanism and the policies introduced by accounting standard setters and regulators for the risk disclosure of banks have a positive impact on the reduction of systemic risk. Both the risk reporting in accordance with IFRS 7 and the measures introduced by the Basel Committee in the form of the Basel Pillar 3 regulation led to an increase in transparency and thus an improvement in financial market stability. As an independent enforcement mechanism, the country-specific strength of the external auditing profession plays a significant role in fostering stability. The results are robust, by using both alternative opacity measures and instrumental-variable estimations (2SLS) to control for potential endogeneity.

Improving economic security of the commercial banks based on internal control of the operational risk

New regulation of the operational risks established by Bank of Russia Regulation No. 744-P dated December 7, 2020 “On the procedure for calculating the amount of operational risk (“Basel III”) creates new opportunities for the banking sector for capital optimization to cover this type of risk. However, in recent years, financial operating losses (the damage from crimes committed in the credit and financial sector in Russia in 2021 exceeded 386 million rubles) confirm the fact that the risk from the realization of risks is more significant. The reasons are wide variety of the operational risks, high dynamics in the detection of new types, as well as their more secretive nature in detection with other risks, which has a sharply negative impact on the security of the bank. Nevertheless, the optimization is impossible without countering threats to economic security. In our opinion, the set conditions are best met by a risk-based internal control system within a particular credit institution. The Basel Committee underpin the need for building an internal control system based on the recognition and assessment of the risks assumed by the bank, and their relationship with the goals set for the credit institution. Thus, risk-based internal control system, which allows timely identification of shortcomings and violations in its activities, as well as prompt response to changes in the internal and external environment to prevent negative results, could provide such countering for the bank.

ELPR: A New Measure of Capital Adequacy for Commercial Banks

ABSTRACT We develop and evaluate an accounting-based Loan Portfolio Risk (LPR) variable that captures time-varying contagion effects in default risk for a portfolio of bank loans. Our results show that an Equity-to-LPR ratio (ELPR) is additive in predicting bank failure up to five years in advance, after controlling for all the capital adequacy, asset quality, management experience, earnings, liquidity, and sensitivity to market risks (CAMELS) variables as well as other fundamental-based bank risk measures from prior studies. Further, we find that publicly listed banks with higher ELPR have lower market-implied costs of capital, especially under market stress conditions. We conclude that ELPR captures key aspects of bank risk that are missing in current Basel Committee risk-weighted-asset calculations. JEL Classifications: E32; G14; G21; K23; M41; M48.

On the wicked problem of quantifying and managing non-financial risks and the role of digital technology in providing solutions

The management of operational risk in financial institutions has all the characteristics of a ‘wicked problem’. Certainly, the repeated efforts of the Bank of International Settlements, (BIS) Basel Committee on Banking Supervision (BCBS) to have banks control and mitigate their operational risks speak to the tractability of extant approaches to addressing them effectively. The original ‘Principles for the Sound Management of Operational Risk’1 and its recent revisions,2 the BCBS ‘Principles for Effective Risk Data Aggregation and Risk Reporting’3 and the ‘Principles for Operational Resilience’,4 collectively offer a sound foundation for addressing this enduring problem. Why then are solutions so elusive for banks to implement? This paper first outlines the institutional and social web of conditions and factors that contribute to the existence of this ‘wicked problem’. It then identifies how AI-based digital technologies can once and for all effectively address the problem of operational risk in large banks. Nevertheless, as powerful as today's digital technologies are, they require an organising vision, particularly if they are to contribute to the management of operational risk. This paper informs such a vision and identifies a comprehensive artificial intelligence-based digital architecture to realise it.

Operational Risk framework and Standardised Measurement Approach (SMA)

On December 2017, the Basel Committee published the “Basel III: Finalising post-crisis reforms” (also known as Basel IV) that introduces the Standardised Measurement Approach (SMA) to define the Pillar I operational risk capital requirement that is foreseen to entry into force on the 1st of January 2025, replacing all the existing approaches. This approach not only introduces a new method to be used to calculate the operational risk capital requirement but details several updates that have to be applied to the main components of the framework such as Governance, Loss Data Collection and Risk Self-Assessment. With the entry into force of the SMA, banks have the chance to fully re-think their operational risk Management Framework (ORMF) integrating the different components and making it more efficient and effective in terms of data governance, process management and reporting. This paper describes the SMA methodology to be implemented to calculate the Pillar I operational risk capital requirement and provides an overview of the expected impact on the different components of the ORMF of the banks.