Guidelines for identifying and dealing with weak banks released by the Basel Committee
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.
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. The guidelines published today supersede the Committee's 2002 guidance on the topic.