Climate change-related financial risks embraced in revision of core principles for banking supervision

Posted on May 5, 2024 by Editor

The Basel Committee on Banking Supervision (BCBS) has published an updated version of its Core Principles for Effective Banking Supervision – the first update in 14 years. The new Core Principles address emerging supervisory challenges, regulatory developments, and risk mitigation, including those related to digitalisation and climate change.

The Core Principles are a set of global supervisory standards, setting a crucial basis for governments and regulators to draw on when establishing or revising their own rules and regulations. Their revision, which reflects an extensive consultation process, marks a significant development in banking supervision.

Three new topics have been explicitly included in the Core Principles: operational resilience, business model sustainability, and climate-related financial risks. These additions underscore a global consensus on the significance of these risks and the need for supervisors to take proactive measures.

With the heightened focus on operational resilience, supervisors seek to ensure banks’ ability to withstand various operational threats, including pandemics, cyber incidents, and technology failures.

Recognising the importance of sound business strategies, the revised Core Principles also includes the assessment of business model sustainability, aiming to foster banks’ long-term viability.

The update also addresses the systemic risks posed by climate change. Recognising the urgency of climate-related threats, supervisors now have explicit mandates to assess and mitigate these risks in their supervisory practices. The revised Core Principles provide a framework for identifying, measuring, and monitoring climate-related financial risks, aligning with global efforts to enhance sustainability and resilience in the financial sector.

By integrating these three new pillars of action into the supervisory toolkit, regulators aim to build a more resilient and sustainable banking system capable of navigating the challenges of the 21st century.

Read the press release here and commentary here.

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