Basel Committee on Banking Supervision …

1 Basel Committee on Banking Supervision Consultative Document Core principles for effective Banking Supervision Issued for comment by 20 March 2012 December 2011 The final version of this document was published in September 2012. The final version of this document was published in September 2012. This publication is available on the BIS website ( ). Bank for International Settlements 2011. All rights reserved. Brief excerpts may be reproduced or translated provided the source is cited.

2 ISBN 92-9131-075-1 (print) ISBN 92-9197-075-1 (online) The final version of this document was published in September 2012. The final version of this document was published in September 2012. Core principles for effective Banking Supervision i Contents I. Foreword to the review ..4 General Approach toward emerging trends and developments ..5 Structure and assessment of Core principles ..7 Consistency and implementation ..9 II. The Core III. Preconditions for effective Banking Supervision ..14 Sound and sustainable macroeconomic Well established framework for financial stability policy formulation.

3 15 Well developed public infrastructure ..15 Clear framework for crisis management, recovery and resolution ..15 Appropriate level of systemic protection (or public safety net) ..16 effective market discipline ..16 IV. Assessment Use of the methodology ..17 Assessment of Practical considerations in conducting an assessment ..19 V. Criteria for assessing compliance with the Core principles ..21 Supervisory powers, responsibilities and functions ..21 Principle 1: Responsibilities, objectives and powers ..21 Principle 2: Independence, accountability, resourcing and legal protection for supervisors.

4 22 Principle 3: Cooperation and Principle 4: Permissible activities ..25 Principle 5: Licensing Principle 6: Transfer of significant ownership ..27 Principle 7: Major acquisitions ..28 Principle 8: Supervisory Principle 9: Supervisory techniques and Principle 10: Supervisory reporting ..32 Principle 11: Corrective and sanctioning powers of supervisors ..34 Principle 12: Consolidated Supervision ..35 Principle 13: Home-host relationships ..37 The final version of this document was published in September 2012. ii Core principles for effective Banking Supervision Prudential regulations and requirements.

5 39 Principle 14: Corporate governance ..39 Principle 15: Risk management process ..40 Principle 16: Capital adequacy ..44 Principle 17: Credit Principle 18: Problem assets, provisions and reserves ..48 Principle 19: Concentration risk and large exposure limits ..49 Principle 20: Transactions with related parties ..51 Principle 21: Country and transfer Principle 22: Market risk ..53 Principle 23: Interest rate risk in the Banking book ..55 Principle 24: Liquidity risk ..56 Principle 25: Operational Principle 26: Internal control and audit ..60 Principle 27: Financial reporting and external Principle 28: Disclosure and transparency.

6 63 Principle 29: Abuse of financial services ..64 Annex 1: Comparison between the revised and 2006 versions of the Core principles ..67 Annex 2: Structure and guidance for assessment reports prepared by the International Monetary Fund and the World Bank ..69 The final version of this document was published in September 2012. Core principles for effective Banking Supervision 1 Core principles for effective Banking Supervision (The Basel Core principles ) The Basel Committee welcomes comments on all aspects of this consultative document by 20 March 2012.

7 Comments should be sent by e-mail to Alternatively, comments may be addressed to the following address: Basel Committee on Banking Supervision , Bank for International Settlements, Centralbahnplatz 2, CH-4002 Basel , Switzerland. All comments may be published on the BIS website unless a commenter specifically requests confidential treatment. Executive summary 1. The Core principles for effective Banking Supervision (Core principles ) are the de facto minimum standard for sound prudential regulation and Supervision of banks and Banking systems.

8 Originally issued by the Basel Committee on Banking Supervision (the Committee )1 in 1997, they are used by countries as a benchmark for assessing the quality of their supervisory systems and for identifying future work to achieve a baseline level of sound supervisory practices. The Core principles are also used by the International Monetary Fund (IMF) and the World Bank, in the context of the Financial Sector Assessment Programme (FSAP), to assess the effectiveness of countries Banking supervisory systems and practices. 2. The Core principles were last revised by the Committee in October 2006 in cooperation with supervisors around the world.

9 In its October 2010 Report to the G20 on response to the financial crisis, the Committee announced its plan to review the Core principles as part of its ongoing work to strengthen supervisory practices worldwide. 3. In March 2011, the Core principles Group2 was mandated by the Committee to review and update the Core principles . The Committee s mandate was to conduct the review taking into account significant developments in the global financial markets and regulatory landscape since October 2006, including post-crisis lessons3 for promoting sound supervisory systems.

10 The intent was to ensure the continued relevance of the Core principles for promoting effective Banking Supervision in all countries over time and changing environments. 1 The Basel Committee on Banking Supervision consists of senior representatives of bank supervisory authorities and central banks from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.