Country Compliance with the Basel Core Principles on Bank Supervision

Transcription

1 International Seminar on Basel II and Financial Stability Bali, Indonesia, September 21-23, 23, 2006 Country Compliance with the Basel Core Principles on Bank Supervision José De Luna Martínez The World Bank

2 Contents 1. What is the Financial Sector Assessment Program (FSAP)? 2. How does the FSAP assess country compliance with best practices on banking supervision? 3. Country compliance with the BCPs Strenghts and Weaknesses 4. Conclusions

3 1. What is the Financial Sector Assessment Program (FSAP)?

4 Financial Sector Assessment Program (FSAP) Background information FSAP is a response to calls by the international community to facilitate early detection of financial sector vulnerabilities and development needs. FSAP started in April FSAP is a voluntary program FSAP provides a comprehensive assessment of a country s s financial sector. FSAP is jointly conducted by the IMF-World Bank

5 FSAP - Areas of Assessment Rules and Regulations Financial System Financial Intermediaries Macroeconomic Environment Financial Markets Observance of internationally accepted standards and codes. How well the country s s financial institutions would handle adversity? Macro-prudential indicators to identify vulnerabilities. Obstacles preventing depth and outreach of financial systems

6 Internationally Accepted Standards and Codes assessed under the FSAP Code of Good Practices on Transparency in Monetary and Financial Policies (MFP) Basel Core Principles for Effective Banking Supervision (BCP) Core Principles for Systemically Important Payment Systems (SIPS) IOSCO s Objectives and Principles of Securities Regulation Insurance Core Principles Anti-money laundering

7 Other Internationally Accepted Standards and Codes Data Dissemination: IMF s Special Data Dissemination Standard/General Data Dissemination System (SDDS/GDDS). Fiscal Transparency: IMF s Code of Good Practices on Fiscal Transparency. Corporate Governance: : OECD Principles of Corporate Governance. Accounting: : International Accounting Standards. Auditing: : International Federation of Accountants' International Standards on Auditing. Insolvency and creditor rights

8 Country FSAPs Country Participation since 1999 (as of March ) Initial assessments Updates 101 countries 13 countries

9 How does the FSAP assess compliance with best practices on financial sector supervision?

10 Assessment of Basel Core Principles Process is fully based on the use of the BCP methodology developed by the Basel Committee. Gradings: a) Compliant b) Largely compliant c) Materially non-compliant d) Non-compliant e) Not applicable

11 3. Country Compliance with the BCPs

12 Developing Country Compliance with the BCPs No. of BCPs Developing Country Compliant Largely compliant Materially non-compliant Non-compliant Not applicable

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14 BCPs: Strengths and Weaknesses of Developing Countries As a group, developing countries seem to be strong in terms of their: a) General legal framework for bank supervision b) Objectives of the supervisory agency c) Licensing criteria for banks d) Overall framework on on-site and off-site supervision But, developing countries are extremely weak in the areas of: consolidated supervision, management of market and operational risks, anti-money laundering, among other areas.

15 Developing Country Compliance with BCPs on Independence and Legal Protection or Bank Supervisors BCP 1.2 Independence 53% BCP 1.5 Legal protection 59% 47% Compliant or largely compliant Materially non compliant or non compliant 41% Compliant or largely compliant Materially non compliant or non compliant

16 Developing Country Compliance with BCPs on Capital Adequacy and Banks Credit-Granting Policies BCP 6 Capital adequacy rules 59% BCP 7 Supervisor requires prudent credit-granting policies 61% 41% Compliant or largely compliant Materially non compliant or non compliant 39% Compliant or largely compliant Materially non compliant or non compliant

17 Developing Country Compliance with BCP # 10 on Limits to Connected Lending BCP 10. Limits to Connected Lending 51% 49% Compliant or largely compliant Materially non compliant or non compliant Widespread connected and government-directed lending. Lax management controls. Poor credit risk management techniques. Lack of consolidated supervision which allows banks to hide connected exposures. Inadequate rules for valuation of collateral.

18 BCP 12 Market Risks Developing Country Compliance Non-compliant or Materially non compliant 64% Compliant or largely compliant 36% Lack of tools and expertise to monitor these types of risks No capital charges for market risks, as recommended by the Basel Committee

19 BCP 15 Anti -Money Laundering Developing Country Compliance Non-compliant or Materially non compliant 63% Compliant or largely compliant 37% Limited understanding of vulnerability of banks to AML problems. Many countries are still in the process of issuing or preparing to enforce compliance with AML/CFT standards Know your customer requirements are not always sufficiently detailed and tested in practice.

20 BCP 20 on Consolidated Supervision Compliant or largely compliant 24% Not applicable 14% Non-compliant or Materially non compliant 62% Weak legal basis (banks are not required to submit data on a consolidated basis) No consolidated accounting No prudential rules on a consolidated basis Poor arrangements for information-sharing among supervisors No authority of supervisor over other entities of a banking group or financial conglomerate

21 CP 22: Remedial Measures CP 22 requires the supervisor to have, and promptly apply, adequate remedial measures for banks when they do not meet prudential requirements, or are otherwise threatened. Among others, remedial measures include: restricting the current activities of the bank, withholding approval of new activities or acquisitions, restricting or suspending payments to shareholders restricting asset transfers, barring individuals from banking, replacing or restricting the powers of managers, directors, or controlling owners, arranging a takeover by or merger with a healthier institution, and imposing conservatorship.

22 Developing Country Compliance with BCP # 22 on Remedial Measures for Weak Banks BCP 22. Remedial Measures Some financial institutions are deemed too large or complex to fail. 51% 49% Due to lack of legal protection, authorities are afraid of taking corrective measures before a bank collapses. Compliant or largely compliant Materially non compliant or non compliant Official administration of insolvent banks occurs too late. Decisions of the regulator are often overturned by courts

23 BCP Assessments Final Remarks There is a large scope for improvement of banking regulation and supervision across countries BCP assessments are a useful basis for preparing national strategies and action plans to improve bank supervision FSAP updates confirm that most countries are moving rapidly to improve bank supervision BCPs compliance is strongly associated to financial stability

24 International Seminar on Basel II and Financial Stability Bali, Indonesia, September 21-23, 23, 2006 Country Compliance with the Basel Core Principles on Bank Supervision José De Luna Martínez The World Bank