Tuesday, December 27, 2011

Basel Committee Issues New Core Principles for Effective Banking Supervision


Author: David Schwartz J.D. CPA David Schwartz J.D. CPA

The Basel Committee on Banking Supervision has issued for consultation its revised Core Principles for Effective Banking Supervision. The consultative paper updates the Committee's 2006 Core Principles document as well as the associated Core Principles Methodology, merging the two into a single comprehensive document. The revised set of twenty-nine Core Principles have also been reorganized to foster their implementation through a more logical structure, highlighting the difference between what supervisors do themselves and what they expect banks to do.

  • Principles 1 to 13 address supervisory powers, responsibilities and functions, focusing on effective risk-based supervision, and the need for early intervention and timely supervisory actions.

  • Principles 14 to 29 cover supervisory expectations of banks, emphasizing the importance of good corporate governance and risk management, as well as compliance with supervisory standards.

The principles have been enhanced for supervisory practices and risk management practices, with close given to addressing many of the significant risk management weaknesses and other vulnerabilities highlighted in the last crisis. In addition, the review incorporates key trends and developments that emerged during the last few years of market turmoil:

  1. the need for greater intensity and resources to deal effectively with systemically important banks;

  2. the importance of applying a system-wide, macro perspective to the microprudential supervision of banks to assist in identifying, analyzing and taking pre-emptive action to address systemic risk; and

  3. the increasing focus on effective crisis management, recovery and resolution measures in reducing both the probability and impact of a bank failure. 

Given fundamental deficiencies in banks' corporate governance that were exposed in the last crisis, the Basel Committee has added a new Core Principle on corporate governance by bringing together existing corporate governance criteria in the assessment methodology and giving greater emphasis to sound corporate governance practices. Similarly, the Committee reiterated the key role of robust market discipline in fostering a safe and sound banking system expanding the Principles to include two new ones dedicated respectively to greater public disclosure and transparency, and enhanced financial reporting and external audit.

The consultation period for this document closes on March 20, 2012.
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