Transcript Revenue Administration Sector

Update on Basel II Implementation in the
Caribbean: Convergence of BCPs and
Basel II
Credit Union Regulator’s Meeting
and Workshop
Kingstown, St. Vincent
August 20-22, 2014
COURTNEY CHRISTIE-VEITCH
CARTAC
Background: The BCPs
 Core Principles for Effective Banking Supervision:
 Flexible and globally applicable
 Based on the concept of proportionality
 Minimum standards for sound prudential regulation and
supervision for banks and banking systems and benchmark for
Credit Union Supervision
 Originally issued by BCBS in 1997
 Uses
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Used by countries to assess the quality of supervisory
systems
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Used to identify future work to achieve baseline level for sound
supervisory practices
Used by IMF and World Bank for FSAP purposes
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Background: The BCPs
 Structure of BCPs
 Supervisory powers, responsibilities and functions
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Objectives
Independence
Powers
Responsibilities
Prudential regulations and requirements/Supervisory
expectations of banks
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Adequate Capital to cover risks
Good corporate governance
Good risk management processes and internal controls
Compliance with supervisory standards
Prudential Supervision and Regulation
Core Principles 1 – 13
Supervisory
Functions
Supervisory
Responsibilities
Supervisory
Powers
Basel Core Principles
Supervisory Powers, Responsibilities and Functions
Principle 1:
Responsibilities,
objectives and powers
Principle 2:
Independence,
accountability, resourcing
and legal protection for
supervisors
Principle 3: Cooperation
and collaboration
• Clear responsibilities and objectives for each authority involved
in supervision of banks/groups
• Legal powers to authorize banks, conduct ongoing supervision,
address compliance with laws, undertake timely corrective
actions to address safety and soundness concerns
• Operational independence, transparent processes, sound
governance, autonomous budgeting processes, adequate
resources
• Legal protection for supervisors
• Legal framework for cooperation and collaboration
• Regulations and other arrangements to facilitate cooperation and
collaboration
• Arrangements reflect the need to protect confidential
information
Basel Core Principles
Supervisory Powers, Responsibilities and Functions
Principle 4:
Permissible
Activities
Principle 5:
Licensing Criteria
Principle 6: Transfer
of significant
ownership
• Clearly defined permissible activities
• Use of word “bank” controlled
• Power to set licensing criteria
• Power to reject firms that do not meet established criteria
• Min. criteria: assessment of ownership structure and
governance, fitness and propriety of board and senior mgn on a
solo and group basis; assess strategic and operational plans;
internal controls, risk management, projected financial positions
• Obtain prior consent from home supervisors for foreign
operations
• Supervisory power to review, reject and impose
prudential conditions on any proposals to transfer
significant ownership / controlling interests held
directly or indirectly in existing banks or other parties
Basel Core Principles
Supervisory Powers, Responsibilities and Functions
Principle 7: Major
Acquisition
• Supervisory power to approve or reject major acquisition or
investments
• Power to impose prudential conditions on major
acquisitions
• Include establishment of cross border operations and
• Determine that structures /affiliations do not expose banks
to undue risk or hinder supervision
Principle 8:
Supervisory
approach
• Requirements for supervisors to develop and maintain
forward looking assessment of risk profile of banks and
banking groups, proportionate to systemic importance
• Framework to identify, assess and address risks from banks
and banking systems
• Framework for early intervention and plans in place to take
actions for early intervention/resolve of problem banks in
an orderly manner
Principle 9:
Supervisory
techniques and tools
• Supervisors uses appropriate range of techniques and tools
to conduct supervision
• Deploys supervisory resources on a proportionate basis,
based on risk profile and systemic importance of banks
Basel Core Principles
Supervisory Powers, Responsibilities and Functions
Principle 10: Supervisory
reporting
Principle 11: Corrective
and sanctioning powers
Principle 12:
Consolidated
Supervision
Principle 13: Home-host
relationships
• Supervisor collects, reviews and analyze prudential reports and
returns from banks on solo and consolidated basis
• Supervisor independently verifies reports through onsite
examinations or use of external experts
• Supervisor acts at an early stage to address unsafe and unsound
practices or activities that could pose risks to banks or banking
systems
• Supervisor has and uses adequate range of supervisory tools to
bring about timely corrective actions
• Ability to revoke or recommend revocation of banking licence
• Supervision of banking group on a consolidated basis
• Adequately monitor and apply prudential standards to all aspects
of business conducted by banking group worldwide
Home and host supervisors share information on cross-border banking
groups for ongoing supervision and effective handling of crisis
situations
Supervisors require local operations of foreign banks to be conducted to
the same standards as domestic banks.
Prudential Supervision and Regulation
Core Principles 14 – 29
Compliance with
Supervisory Standards
Risk Management
Corporate Governance
Basel Core Principles
Prudential Regulations and Requirements
Principle 14:
Corporate
Governance
• Supervisor determines that banks and banking groups have
robust corporate governance policies covering strategic direction
group and organizational structure, control environment,
responsibilities of the banks ’board and senior management and
compensation
• Policies and processes are commensurate with risk profile and
systemic importance of the bank
Principle 15: Risk
Management
Process
• Supervisors determines that banks have a comprehensive risk
management process (including effective board and senior
management oversight), to identify, measure, evaluate, monitor,
report and control or mitigate all material risks on a timely basis
• Comprehensive RM process to assess the adequacy of their capital and
liquidity in relation to their risk profile and market and
macroeconomic conditions
• RM process to develop and review contingency arrangements and
recovery plans
• RM process commensurate with risk profile and systemic importance
of the bank
Principle 16:
Capital Adequacy
• Supervisor sets prudent and appropriate capital adequacy
requirements for banks that reflect the risks undertaken by, and
presented by, a bank in the context of market and macroeconomic
conditions in which it operates
• Supervisors defines components of capital bearing in mind loss
absorbency
• Capital requirements should not be less that applicable Basel
Standards
Basel Core Principles
Prudential Regulations and Requirements
Principle 17: Credit
Risk
• Supervisor determines that banks have an adequate credit risk
management process that takes into account risk appetite, risk
profile and market and macroeconomic conditions
• CRMP takes into account prudent policies and processes to
identify, measure, evaluate, monitor, report and control or
mitigate credit risk on a timely basis.
• Policies and processes should cover credit life cycle i.e.
underwriting, evaluation, management of loan and investment
portfolios
Principle 18: Problem
assets, provisions and
reserves
• Supervisor determines that banks have adequate policies
and processes for the early identification and management
of problem assets
• Policies and processes for the maintenance of adequate
provisions and reserves
Principle 19:
Concentration risk and
large exposure limits
• Supervisors determines that banks have adequate policies and
processes to identify, measure, evaluate, monitor, report and
control or mitigate concentrations of risks on a timely basis
• Supervisors set prudential limits to restrict bank’s exposures to
single counter parties or groups of connected counterparties.
Basel Core Principles
Prudential Regulations and Requirements
Principle 20:
Transactions
with related
parties
• Supervisor determines that banks enter into arrangements
with related parties on an arms length basis
• Supervisors ensures that banks monitor related party
transactions and take appropriate steps to control or
mitigate the risks and write off exposures to related parties
in accordance with standard policies and procedures
Principle 21:
Country and
Transfer Risks
• Supervisor determines that banks have adequate policies
and processes to identify, measure, evaluate, monitor, report
and control or mitigate country risk in their international
lending and investment activities on a timely basis
Principle 22:
Market Risks
• Supervisors determines that banks have adequate policies
and processes to identify, measure, evaluate, monitor, report
and control or mitigate market risks, taking into account risk
appetite, risk profile and market and macroeconomic
conditions and the risk of a significant deterioration in
market liquidity
Basel Core Principles
Prudential Regulations and Requirements
Principle 23:
Interest Rate Risk
in the Banking
Book
• Supervisor determines that banks have an adequate risk
management framework that takes into account their risk
appetite, risk profile and market and macroeconomic conditions
• Supervisors determine that banks have prudent policies and
processes to identify, measure, evaluate, monitor, report and
control or mitigate interest rate risk in the banking book on a
timely basis
Principle 24:
Liquidity Risk
• Supervisor sets prudent and appropriate liquidity requirements
(qualitative or quantitative) that reflects liquidity needs of the bank
• Supervisor determines that banks have a strategy that enables
prudent management of liquidity risks and compliant with liquidity
requirements
• Banks strategy takes into account its risk profile as well as market and
macro economic conditions
• Supervisors determines that banks have adequate policies and
processes to identify, measure, evaluate, monitor, report and control
or mitigate liquidity risk over an appropriate set of time horizons and
should not be lower than applicable Basel Standards
Principle 25:
Operational Risk
• Supervisors determines that banks have adequate policies and
processes to identify, assess, evaluate, monitor, report and control or
mitigate operational risks, taking into account risk appetite, risk profile
and market and macroeconomic conditions.
Basel Core Principles
Prudential Regulations and Requirements
Principle 26:
Internal
control and
audit
Principle 27:
Financial
reporting and
external audit
• Supervisor determines that banks have adequate internal control
frameworks to establish and maintain an properly control operating
environment for the conduct of business taking into account risk
profile.
• Clear arrangements for delegating authority and responsibilities
• Separation of functions that involve committing the bank, paying
away its funds, and accounting for its assets and liabilities
• Safeguarding the bank’s assets
• Appropriate independent internal audit and compliance functions to
test adherence to applicable laws, regulations, as well as internal
processes.
• Supervisor determines that banks and banking group maintain
adequate and reliable records, prepare financial statements in
accordance with accounting policies and practices, widely accepted
internationally
• Supervisor determines that banks annually publishes information that
fairly reflects their financial conditions and performance and bears an
independent external auditor’s opinion
• Supervisors determines that banks and parent companies have
adequate oversight and governance of the external audit function.
Basel Core Principles
Prudential Regulations and Requirements
Principle 28:
Disclosure
and
Transparency
Principle 29:
Abuse of
Financial
Services
• Supervisor determines that banks and banking groups
regularly publishes information on a consolidated and
solo basis, that is easily accessible and fairly reflects
their:
• financial condition,
• performance,
• risk exposure,
• risk management strategies and
• corporate governance policies and procedures.
• Supervisor determines that banks have adequate
policies and processes, including strict customer due
diligence rules to promote high ethical and professional
standards in the financial sector and prevent the bank
from being used intentionally or unintentionally for
criminal activities
• Supervisors determines that banks have adequate
policies and processes to identify, assess, evaluate,
monitor, report and control money laundering and
terrorism financing activities.
The Basel Capital Framework
Basel I
•
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1988 Accord – Credit Risk and Operational Risk
1996 – Market Risk Amendment
8% capital adequacy ratio (one size fits all)
Focus on micro prudential monitoring
Most Caribbean jurisdictions are currently operating under the 1988 standard
Basel II
• 2006 International Convergence of Capital Measurement and Capital Standards: A Revised
Framework
• Three Pillars :
• Minimum Capital Requirements (Pillar I)
• Supervisory review process (Pillar II)
• Market discipline (Pillar III)
Basel III
• Effective 1 January 2013
• Improve banks/banking sector's ability to absorb shocks arising from financial and economic
stress
• Improve risk management and governance
• Improve market discipline/Strengthen transparency and disclosures.
Comparison between Basel II and the Basel Core
Principles (Revised and 2006 Versions)
BCP 2006
BCP 2011
Basel II
• Supervisory powers, responsibilities and
functions
• Prudential Regulations Requirements
• Capital adequacy, Governance, internal controls
and risk management
• Revised in response to the financial crisis
• BCPs increased from 25 to 29
• Supervisory powers, responsibilities and
functions
• Prudential Regulations Requirements
• Strengthen supervisory practice and risk
management
• Minimum capital standards
• Supervisory review process / governance
internal control and risk management
• Market discipline – disclosure and transparency
Supervisory Powers, Responsibilities and
Functions
BCP 2006
BCP 2011
Basel II
• Objectives,
independence, powers,
transparency and
cooperation (CP1)
• Responsibilities,
objectives and powers
(CP1)
• Independence,
accountability,
resourcing and legal
protection for
supervisors (CP2)
• Cooperation and
collaboration (CP3)
• Powers to set minimum
capital for individual
banks (solo and consol)
based on risk (pillar I)
• Powers to request
prudential information
and bank’s own self
assessments/ICAAP
(pillar II)
• Require and encourage
Market Discipline /
Transparency and
Disclosure
Requirements (pillar
III)
Supervisory Powers, Responsibilities and
Functions
BCP 2006
BCP 2011
Basel II
• CP2: Permissible
activities
• CP3: Licensing criteria
• CP4: Transfer of
significant ownership
• CP5: Major acquisitions
• CP19: supervisory
Approach
• CP20: Supervisory
techniques
• CP21 Supervisory
reporting
• CP4: Permissible
activities
• CP5: Licensing Criteria
• CP6: Transfer of
significant ownership
• CP7 Major Acquisitions
• CP8 Supervisory
Approach
• CP9: Supervisory
techniques and tools
• CP10 Supervisory
Reporting
• Pillar II – Supervisory
Review Process
• Risk-based supervision
• Process for assessing
overall capital adequacy
• Strategy to maintain
capital levels even under
stressed conditions
• Supervisors can impose
higher capital for risk
exposures as appropriate
• Banks self assessment /
ICAAP
• Key risks not covered
under pillar 1
Supervisory Powers, Responsibilities and
Functions
BCP 2006
BCP 2011
Basel II
• CP23: Corrective and
remedial powers of
supervisors
• CP24: Consolidated
Supervision
• CP25: Home-host
relationships
• CP11: Corrective and
sanctioning powers
of supervisors
• CP12: Consolidated
Supervision
• CP13: Home-host
relationships
• Pillar II – Supervisory
Review Process
• Require prompt
corrective actions
• Sanctioning powers
under SRP
• Consolidated
supervision
• Home –host
relationships
/Supervisory colleges
Prudential Regulations and Requirements
BCP 2006
BCP 2011
Basel II
• CP14: Corporate
Governance
• CP15: Risk
Management Process
• CP16: Capital
Adequacy
• CP17: Credit Risk
• CP18: Problem
Assets, Provisions
and Reserves
• CP7: Risk
management process
• CP6: Capital
Adequacy
• CP8: Credit Risk
• CP9: Problem Assets,
provisions and
reserves
• Pillar II – Supervisory
Review Process –
ICAAP risk
management section
• Pillar I – Capital
Adequacy (credit,
market and
operational risks)
• Pillar I - Credit Risk
• Pillar I – Problem
Assets, Provisions and
Reserves (credit and
investments)
Prudential Regulations and Requirements
BCP 2006
BCP 2011
Basel II
• CP19: Concentration
risk and large
exposure limits
• CP20: Transactions
with related party
• CP21: Country and
Transfer risks
• CP22: Market Risk
• CP23: Interest Rate
Risk in the Banking
Book
• CP10: Large exposure
limits
• CP11: Exposure to
related party
• CP12: Country and
Transfer risks
• CP13: Market Risk
• CP16: Interest Rate
Risk in the Banking
Book
• Pillar I – Market Risk
• Pillar II – SRP/ICAAP
• Pillar II risks –
Concentration risks,
Large Exposure /
single name limits,
exposures to related
party, country risks /
geography
concentration,
balance sheet
profile/business
lines
• Pillar II risks –
IRRBB
Prudential Regulations and Requirements
BCP 2006
BCP 2011
Basel II
• CP14: Liquidity risk
• CP15: Operational risk
• CP17: Internal Control
and Audit
• CP22: Accounting and
Disclosure
• CP18: Abuse of
financial services
• CP24: Liquidity risk
• CP25: Operational risk
• CP26: Internal control
and audit
• CP27: Financial
reporting and external
audit
• CP28: Disclosure and
transparency
• CP29: Abuse of
financial services
• Pillar I risk –
Operational risk
• Pillar II – SRP/ICAAP
• Pillar II risks –
Liquidity risk
• SRP/ICAAP –
Governance, Internal
Control and Risk
Management
• Pillar III – Market
Discipline
• Accounting and
disclosure
• Abuse of financial
services
The End
Thanks
for your participation
Any Questions??