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THE ADOPTION OF POR AND PSMOR

28 November 2023
Knowledge Base



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This article provides information on the Basel Committee’s assessment of the
adoption of the Principles for Operational Resilience and the revised Principles
for the Sound Management of Operational Risk. The Committee believes the
information provided may be useful for both supervisors and banks in their
day-to-day activities. This document is for informational purposes only and does
not constitute new supervisory guidance or expectations. The Committee assessed
the adoption of the Principles for Operational Resilience (POR) and the revised
Principles for the Sound Management of Operational Risk (PSMOR, or collectively,
“the Principles”) published in March 2021. The assessment is meant to promote
the adequate and timely adoption of the Principles. The assessment found that
the effectiveness and maturity of POR and PSMOR adoption vary across banks and
jurisdictions.

The mapping of interconnections and interdependencies for critical operations,
and the definition of tolerances for disruption to these operations are the most
common challenges that banks face when adopting the Principles. Full adoption of
the Principles will require adequate resourcing and prioritisation. The
Committee strongly encourages full adoption and will continue to support
adoption by carefully monitoring progress. The Basel Committee published the POR
and the revised PSMOR in March 2021 to promote banks’ ability to withstand
operational risk-related events that could cause significant operational
failures or wide-scale disruptions in financial markets; and banks’
effectiveness of operational risk management. To evaluate the adoption of the
Principles, the Committee carried out an assessment among its members in early
2023. The results indicate that the effectiveness and maturity of POR and
PSMOR[*1] adoption vary between banks:

*While banks’ operational risk management governance (PSMOR 3, 4, 5) is well
established, board members’ roles and responsibilities and capabilities for
operational resilience are still under development (POR 1).
*Banks have leveraged Risk and Control Self-Assessments (RCSAs) to identify
threats and vulnerabilities to the delivery of critical operations (POR 2), but
there are gaps in capabilities and effectiveness.
*In most jurisdictions, banks’ mapping of interconnections and interdependencies
(POR 4) does not provide a sufficiently granular end-to-end view of critical
operations, their complexity, and supporting people, processes and systems.
*Business continuity practices and frameworks are generally well established in
most banks, which is reflected in the level of adoption of the PSMOR on business
continuity (PSMOR 11) and Information and Communication Technologies (ICT)
(PSMOR 10). For the corresponding POR on business continuity and testing (POR 3)
and ICT (POR 7), however, banks are still facing challenges (eg consideration of
end-to-end delivery of critical operations, and the plausibility and severity of
scenarios). Some banks have started to incorporate operational resilience into
existing ICT risk management frameworks.
*The Principles on the management of third parties and dependencies, as well as
the alignment of third parties with resilience expectations (POR 5 and PSMOR 9),
are considered to be among the most significant challenges for banks. For some
banks, there is still work to do on developing appropriate business continuity
and contingency plans and exit procedures where third parties provide critical
operations.
*The continuous growth of operational risk-related events that could cause
significant operational failures or wide-scale disruptions in recent years (such
as those arising from pandemics, cyber incidents, technology failures or natural
disasters) has heightened the necessity for banks to identify and respond to
these incidents and crises, resulting in generally well established incident
management practices (POR 6) in nearly all jurisdictions.

Despite progress in adopting the Principles, further effort is needed by banks
to enhance practices, which will require adequate resourcing and prioritisation.
In some jurisdictions, full adoption of the POR and revised PSMOR may take until
at least 2025. The challenges that banks in all jurisdictions face when adopting
the Principles include the mapping of interconnections and interdependencies for
critical operations, and the definition of tolerances for disruption to these
critical operations. If mapping and tolerances are not defined and implemented
effectively, the reliability of other activities such as risk management and
testing is called into question, potentially compromising operational
resilience. This is further exacerbated by deficiencies in capturing,
structuring and using data on critical operations that may have originally been
collected for resolution and recovery planning, business continuity or some
other purpose.

The assessment also revealed several themes that have proved to be particularly
relevant for the adoption of the Principles. First, it is crucial for banks to
leverage all aspects of operational risk management to achieve operational
resilience and to recognise its importance alongside financial resilience.
Furthermore, banks should acknowledge that operational resilience is more than
just business continuity. A key differentiator is the critical operations lens,
in conjunction with the end-to-end view, the focus on impact, the use of the
tolerance for disruption to drive decisions about resilience investment, and the
consideration of third parties’ resilience. Finally, banks should establish and
maintain accurate data at an appropriate level of granularity on critical
operations and recognise the foundational role of mapping interconnections and
interdependencies for successfully adopting the Principles.

The Committee strongly encourages the full adoption of the POR and PSMOR into
banks’ operational risk management practices and regulatory and supervisory
frameworks in order to strengthen their ability to withstand operational
risk-related events and enhance operational resilience. New guidance and
regulations issued by national authorities will contribute to the adoption of
the Principles. The Committee will continue to support the adoption of the POR
and PSMOR by carefully monitoring progress.

[*1] The assessment of banks’ adoption of the revised PSMOR focused on
Principles 9,10 and 11.

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