Global Banking Regulators Target Mismanagement in Handling Risks from Clients

Global banking regulators on Tuesday proposed stricter standards for banks when assessing risks from customers to avoid the mismanagement highlighted by the collapse of Archegos, and episodes of volatility in commodities and Britain’s government bond market.

The Basel Committee, made up of banking regulators from the G20 economies and elsewhere, said banks needed to improve how they manage counterparty credit risks (CCR) presented by clients.

It is the latest sign of how regulators are scrutinising links between lenders and the vast “non-bank” sector made up of private equity, insurers, investment funds and family investment offices.
“Weaknesses pertain to due diligence, both at initial onboarding and on an ongoing basis; credit risk mitigation practices such as margining; risk measurement practices related to potential future exposure and stress testing; and the governance and senior management oversight of CCR,” Basel said in a consultation paper.

“The greatest potential benefit in terms of improvements in CCR management are expected to be in cases where banks have high-risk exposures to non-bank financial intermediary counterparties.”

There have been cases of “significant mismanagement” of counterparty credit risk (CCR) in recent years, including events linked to the failure of Archegos Capital Management in March 2021, which caused over $10 billion in losses across numerous financial institutions, Basel said.

Other cases include commodities market volatility after Russia’s invasion of Ukraine in 2022 which upended the London Metal Exchange’s nickel market, and disruption in the UK government bond market after Prime Minister Liz Truss’s package of unfunded tax cuts. “These incidents have made it clear that certain fundamental CCR practices remain inadequate relative to supervisory expectations,” Basel said.

The revised draft guidance, out to public consultation until August, says it puts particular emphasis on banks conducting a comprehensive due diligence at both the initial onboarding of a new customer, and then on an ongoing basis.

Banks should use “robust contractual terms” and “risk-sensitive margining” to mitigate risks from customers, Basel said. Lenders should also use a wide range of metrics to measure, control and limit exposures.

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Reporting by Huw Jones, editing by Ed Osmond, Reuters