BASEL COMMITTEE ON BANKING SUPERVISION | FREE AML KYC STUDY MATERIAL
BASEL COMMITTEE ON BANKING SUPERVISION
BCBS is an international committee that has been formed for the development of standards to regulate the banking sector.
This committee consists of Central Banks & banking regulatory authorities from a total of 28 jurisdictions and has a total of 45 members.
UNDERSTANDING THE BASEL COMMITTEE ON BANKING SUPERVISION
Central Banks of G10 countries came together to build a new International Financial structure with the intention to replace the recently collapsed Bretton Woods system in 1974.
The headquarters of this committee are in the offices of Bank for International Settlements (BIS) in Basel, Switzerland.
The countries which are members to this committee include India, Canada, China, Brazil, Hong Kong, Italy, Korea, Germany, Argentina, Australia, Russia, Saudi Arabia, Sweden, Japan, Singapore, South Africa, Spain, Turkey, Netherlands, Mexico, Belgium, Argentina, Australia, United States, The United Kingdom and Luxembourg.
Main purpose of the Basel Committee on Banking Supervision was to resolve the problems which the globalisation presented in the financial and banking markets while at the same time banks are regulated by the national regulatory bodies. Primarily, the BCBS serves to help national banking and financial markets supervisory bodies move toward a more unified, globalized approach to solving regulatory issues.
It was formed without a founding treaty and it is not a multilateral organisation but simply a committee whose main purpose lies in providing a forum to the Banking & supervisory authorities. The participating authorities intend to enhance the quality of Banking supervision worldwide as well as try to increase the level of understanding of the issues which are important in the supervisory sphere of Banking.
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The committee has provided recommendations which are highly influential and are now known as Basel Accords. These are not binding on any of its members but to make them enforceable, they need to be adopted by the policy makers. These accords provide a basis to make the capital requirement for banks of countries which are presented by the committee or beyond.
It was in 1988 that first Basel Accords were finalized and got implemented in the G10 countries by the 1992 to some extent. Methodologies to develop, to assess the banks credit risk which would be based on the risk weighted Assets and publications were made for the suggested minimum Capital requirement so that banks can be kept solvent at the time of financial stress.
This Basel Accord -1 was followed by Basel Accord – 2 in the year 2004, which was actually in the process of being implemented when the financial crisis hit in 2008.
The purpose of Basel -III was to correct the miscalculations in risks which were thought to have contributed to the crisis by making it a requirement for the banks to hold a higher percentage of their assets in the liquid form as well as to gather more funds from equity instead of debt.
The agreement on Basel Accord – III was agreed in 2011 & was to be implemented by 2015 but even by 2017, the organisations that work on our few issues. One of the issues was the extent to which the banks were required to make their own assessment of their asset risk which can be inconsistent from the regulators. France and Germany preferred that there should be a lower ‘output floor’ so that greater descriptions could be tolerated between banks and regulars in the assessment of risk while the United States wanted the floor to be higher.
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THE CORE PRINCIPLES
These principles are the things which are required so that the supervisory system can work effectively. These principles have been categorised into two groups:
- First 1 to 13 principal’s main focus lies on the supervisor’s powers, responsibilities and their functions;
- The rest of the principles’, 14 to 29, lies on the regulations & requirements of banks as prudential norms.
THE CORE PRINCIPLES ARE EXPLAINED UNDERNEATH:
1 – Responsibilities, objectives and powers:
For the banking system to work effectively, it must have responsibilities and objectivity is defined for each authority which is involved in the process of supervision of banks and banking groups. There should also be a suitable legal framework for the supervision of parents so that all the needed legal powers can be provided to authorize the banks, for the conductance of ongoing supervision, deal with the legal compliances as well as corrective actions for the maintenance of safety and to address other concerns.
2 – Independence, accountability, resourcing and legal protection for supervisors:
The supervisor should have all the operational independence, do the processes transparently, and have sound governance so that the system does not undermine the autonomy and the adequacy of resources. This supervisor will be accountable to discharge its duty and for the use of its resources. The legal framework also provides legal protection to the supervisor.
3 – Cooperation and collaboration:
The Framework should be such that the laws, regulations or other arrangements should make room for cooperation and collaboration to the domestic authorities and foreign supervisors. The Framework should also provide for the protection of confidential information.
4 – Permissible activities:
The system should also clearly define the activities which the institutions are licensed to perform as well as the activities which will be subject to supervision.
5 – Licensing criteria:
Licensing authority should have the power to set the criteria and if that isn’t being followed, then it should have the power to reject the applications as well. The process of licensing should have an assessment procedure to assess the ownership structure and governance of the bank and its wider group including its strategic and operating plans, internal controls, risk management as well as projected financial conditions.
In Situations where the parent organisation or the proposed owner turns out to be a foreign bank, the bank would be required to take up prior consent of its home supervisor.
6 – Transfer of significant ownership:
The supervisors also need to have the power to review, reject and impose conditions of Prudential nature on the proposals which propose to transfer the controlling interest on a significant part of ownership which has been held directly or indirectly in the existing banks to some other parties.
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7 – Major acquisitions:
The supervisors also need to have the power whether to approve or reject any major acquisition or investment by a bank which are done against the prescribed criteria whether it is for the establishment of cross-border operations or how to determine the corporate affiliations or structures which do not hinder the effective supervision.
So, these are 7 principles of the 29 core principles on which the committee has been set up. The rest of the principles will be discussed in the next part of the article.
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