Are Basel Standards and guidelines mandatory on internationally active banks?
Hesham Amin FRM, ORM, TOT and Machine learning
Operational Risk Associate at QNB
As a risk management professional, it is quite normal to conduct a discussion with head of departments – for instance – to elaborate the importance of applying an internal control toward a weakened process. Enhancing a process is not always welcomed by some of them. Because they may perceive “applying a new internal control” into one logical outcome, which is additional workload.
Therefore, one of the magical tactics that risk management professionals may use to persuade managers to apply internal controls is stating the importance of such control through the following statement:
-???????“If you do not apply such internal control, it may breach (XYZ) regulation/instruction”.
Of course, the sky is the limit to replace (XYZ) and cite it with whatever a name supervisory authority. Some may say, the internal control should be applied as it complies with (Central bank) regulation. Others may say, it fulfills Basel Committee instruction requirements. Sometimes, such statements are like one-punch Knockout in MMA matches??.
Yet, what is Basel Committee?
According to its official website: “The Basel Committee on Banking Supervision (BCBS) The BCBS is the primary global standard setter for the prudential regulation of banks and provides a forum for cooperation on banking supervisory matters. Its mandate is to strengthen the regulation, supervision, and practices of banks worldwide with the purpose of enhancing financial stability” (https://www.bis.org/bcbs/charter.htm).
But wait a minute, is Basel committee’s standards obligatory? Let’s find out.
To answer the question, let’s consider and define one of the most recent Basel Committee guidelines in operational risk management, which is Standardized Measurement Approach (SMA), or it is also called standardized approach (SA). Then, we will conduct a comparison between SMA/SA, which was launched by Basel committee, and how central banks and/or other financial authorities apply SMA/SA in their jurisdiction. Our targeted countries are:
However, what is Standardized Measurement Approach (SMA)?
According to Basel Committee “It is a single non-model-based method for the estimation of operational risk capital. It combines the simplicity and comparability of a standardized approach and embodies the risk sensitivity of an advanced approach. The combination, in a standardized way, of financial statement information and banks' internal loss experience promotes consistency and comparability in operational risk capital measurement.”?(https://www.bis.org/bcbs/publ/d355.htm).
SMA differs from previous applied measurement as follows:
Let’s now conduct the comparison:
Central Bank of Egypt (CBE) & Qatar Financial Centre (QFC) requested banks to apply SMA and replaced previous applied approach, which was Basic Indicator Approach (BIA), as of 2022 (in Egypt) and in 2023 (in Qatar). After reviewing the standards (CBE, QFC & Basel committee) are similar except the following:
Accordingly, the observations are in favor the hypothesis that the guidelines of Basel Committee are not mandatory, and they can be changed based on countries circumstances.
??????????????European Banking Authority (EBA) has stated clearly that Basel committee guidelines are voluntary in nature, however EBA published a decision on 16th March 2021 that Basel 3 guidelines would be compulsory.
??????????????In summary, according to the mentioned observation above, Basel committee guidelines are voluntary.
On the other hand, there is an exception for the mentioned summary above and it is that If a central bank or financial authority is a member in Basel committee, therefore the standards are mandatory.
Do you want to know who are Basel committee members? Check the link. https://www.bis.org/bcbs/membership.htm
So, in comments, please share with us the smart tactics to persuade department heads to apply/enhance an internal control?