Building Resilient Financial Institutions
The Basel III package of reforms is the centrepiece of the international community’s work to build more resilient financial institutions. The Basel Committee on Banking Supervision (BCBS) has largely completed the design of the reforms and it continues to enhance its implementation monitoring. Full, timely and consistent implementation of Basel III is fundamental to a sound and properly functioning banking system that is able to support economic recovery and growth on a sustainable basis. Consistent implementation of Basel standards will also foster a level playing field for internationally active banks.
Read more on the BCBS international regulatory framework for banks (Basel III)
Risk management is a critical first line of defence in the resilience of financial institutions. The FSB, standard-setting bodies (SSBs) and national authorities are working to strengthen risk management practices, including through increased regulatory and supervisory focus as well as additional guidance on firms’ risk culture and governance practices. Implementation of these reforms is ongoing and will require additional efforts by national authorities and financial institutions.
Compensation Practices
Compensation practices at large financial institutions were a key contributing factor to the global financial crisis. High short-term profits led to generous bonus payments to employees without adequate regard to the longer-term risks they imposed on their firms. These perverse incentives amplified the excessive risk-taking that severely threatened the global financial system and left firms with fewer resources to absorb losses as risks materialised. The FSB work on compensation practices are intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes. Any compensation system must work in concert with other management tools in pursuit of prudent risk taking.
