BCBS Integrates Culture into Supervision Guidelines

The Basel Committee on Banking Supervision (BCBS) has initiated a public consultation on proposed revisions to its Core Principles for Effective Banking Supervision. The Core Principles, originally established in 1997 and updated in 2012, are the recognized minimum standards for prudent regulation and supervision of banks and banking systems.

The BCBS embarked on a review of the Core Principles in April 2022, aiming to incorporate changes reflecting advancements in supervision and regulation, structural shifts impacting banking systems, and insights garnered from Financial Sector Assessment Programs (FSAPs). FSAPs are reviews conducted by the International Monetary Fund (IMF) and World Bank into the resilience of a country's financial sector. 

The amendments cover a wide range of topics, including climate, digitalization, interest rate risk, cyber risk, and counterparty credit risk. The Core Principles also now include guidelines for the supervision of bank culture, recognizing its importance to risk management and resilience by integrating it into two core principles: CP14 on corporate governance: and CP15 on risk management processes. These additions are in the form of new "essential criteria" — guidelines for effective supervision that can be used in self-assessments and FSAPs. 

"Reflecting evolving risks and broader medium- and long-term trends, it is critical that banks institute a sound risk culture, maintain strong risk management practices, and adopt and implement sustainable business models," the BCBS wrote in the consultative document.

In CP14, these new criteria include that supervisors determine that the "bank's board approves and oversees implementation of the bank's strategic direction, risk appetite and strategy, and related policies, establishes and communicates corporate culture and values." And CP15 requires supervisors to determine that banks "have appropriate risk management strategies that have been approved by the bank's board." Supervisors must also verify that the board ensures that:

• A sound risk culture is established throughout the bank, to promote the development and execution of its strategy;
• Uncertainties attached to risk measurement are recognized; and
• Senior managers take the steps necessary to monitor and control all material risks (including climate-related financial risks and emerging risks)

"While responsibility for designing and implementing sustainable business strategies lies with a bank's board, supervisors have an important role to play, as assessing the robustness of banks' risk culture and business models is a key component of effective supervision," the BCBS wrote.