World banking regulators goal mismanagement in dealing with dangers from purchasers By Reuters

By Huw Jones

LONDON (Reuters) – World banking regulators on Tuesday proposed stricter requirements for banks when assessing dangers from prospects to keep away from the mismanagement highlighted by the collapse of Archegos, and episodes of volatility in commodities and Britain’s authorities bond market.

The Basel Committee, made up of banking regulators from the G20 economies and elsewhere, stated banks wanted to enhance how they handle counterparty credit score dangers (CCR) introduced by purchasers.

It’s the newest signal of how regulators are scrutinising hyperlinks between lenders and the huge “non-bank” sector made up of personal fairness, insurers, funding funds and household funding workplaces.

“Weaknesses pertain to due diligence, each at preliminary onboarding and on an ongoing foundation; credit score threat mitigation practices akin to margining; threat measurement practices associated to potential future publicity and stress testing; and the governance and senior administration oversight of CCR,” Basel stated in a session paper.

“The best potential profit when it comes to enhancements in CCR administration are anticipated to be in instances the place banks have high-risk exposures to non-bank monetary middleman counterparties.”

There have been instances of “important mismanagement” of counterparty credit score threat (CCR) lately, together with occasions linked to the failure of Archegos Capital Administration in March 2021, which precipitated over $10 billion in losses throughout quite a few monetary establishments, Basel stated.

Different instances embrace commodities market volatility after Russia’s invasion of Ukraine in 2022 which upended the London Steel Alternate’s nickel market, and disruption within the UK authorities bond market after Prime Minister Liz Truss’s package deal of unfunded tax cuts.

“These incidents have made it clear that sure basic CCR practices stay insufficient relative to supervisory expectations,” Basel stated.

The revised draft steering, out to public session till August, says it places specific emphasis on banks conducting a complete due diligence at each the preliminary onboarding of a brand new buyer, after which on an ongoing foundation.

Banks ought to use “sturdy contractual phrases” and “risk-sensitive margining” to mitigate dangers from prospects, Basel stated. Lenders must also use a variety of metrics to measure, management and restrict exposures.