Weak banks need to be dealt with promptly – Basel Committee
(20 July 2015 – Global) The Basel Committee on Banking Supervision updated its guidance on weak banks on 16 July, stating that supervisors dealing with weak banks should intervene early and act quickly.
A weak bank is one whose liquidity or solvency is already impaired or soon will be “unless there is a major improvement in its financial resources, risk profile, business model, risk management systems and controls, and/or quality of governance and management in a timely manner,” the global regulator said.
The Committee said if the lender was no longer viable it should be wound down before it causes disruption to the wider financial system, preventing taxpayers from exposure to the loss.
At the same time, supervisors’ must act proportionately and their interventions must fit the scale of the problem, it said.
“International experience has shown that bank problems can worsen rapidly if not promptly addressed,” the Basel committee said.
“It is therefore important to establish incentives that encourage supervisory authorities to take early and decisive action in response to problems.”
Political pressure and lobbying can get in the way of prompt action, so the guidelines underline the importance of supervisors acting fast and of giving them discretion to intervene without waiting for thresholds to be breached.
Incentives should be established to encourage moves to pre-empt deterioration, according to the committee.
“The most basic cause for inaction is that all parties may be reluctant –- in good faith –- to take the measures needed to remedy the situation in the hope that the problems will rectify themselves,” the committee said.
“The supervisor may be under explicit or implicit pressures from politicians or lobby groups to postpone measures.”
The guidelines also emphasize the need for banks to hold sufficient capital to support their businesses, saying a decline to, or approaching, minimum ratios should trigger formal action to restore them.
They identify four potential causes for declining ratios, including a rapid increase in risk-weighted assets, redemptions, typically of subordinated debt, operating losses and foreign-exchange rate movements.
“Improving the capital position addresses the symptom,” according to the committee.
“To determine whether other measures are needed, the supervisor should also seek to understand in each instance why the capital ratio fell.”
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