Last Friday, September 14, 2012, the Basel Committee on Banking Supervision published a new set of “Core Principles for Effective Banking Supervision.”1 This publication culminates the Committee’s review of the previous set of principles, issued in 2006, in the light of the financial crisis. The formal purpose of the Core Principles is to provide a set of standards by which the International Monetary Fund and the World Bank review the effectiveness of a country’s banking supervision regime as part of the agencies’ Financial Sector Assessment Program. Of course, the Core Principles provide benchmarks by which regulators may judge their own supervisory efforts.
U.S. banking organizations will not be surprised by the content of the Core Principles. The principles nevertheless help to illuminate the priorities of bank regulators on a global basis after the financial crisis. The Committee identified four themes that have emerged from the crisis and that animate many of the Core Principles. These principles and the chief U.S. actions that reflect these principles are as follows:
- Systemically important banks. The Core Principles focus on the regulators rather than the banks themselves that present systemic risk: “the expectations on, and of, supervisors will need to be of a higher order for [systemically important banks], commensurate with the risk profile and systemic importance of these banks.” Several elements of the Dodd-Frank Act address this issue, including the creation of the Financial Stability Oversight Council, enhanced prudential standards, and resolution planning.
- Macroprudential issues and systemic risks. According to the Core Principles, regulators must give greater attention to the prevailing macroeconomic environment, business trends, and the build-up of concentration risk. Additionally, they must have the authority to take pre-emptive action to address systemic risk. The Dodd-Frank Act does not address macroprudential issues directly, but the Federal Reserve Board has repeatedly emphasized the importance of this issue as part of its banking supervision work.
- Crisis management, recovery, and resolution. The supervisory responsibility is to limit the probability and impact of bank failures but not to prevent them entirely, according to the Core Principles. Doing so requires two different efforts, crisis management planning by the regulators and contingency funding and resolution planning by the banks. The Committee also emphasizes the need for international cooperation. Resolution planning by U.S. banks has been a priority of the Federal Deposit Insurance Corporation and is an ongoing process. Large U.S. banks historically have planned for liquidity issues; the proposed enhanced prudential standards would impose a more structured liquidity planning process. International cooperation appears to be a work in progress, although the FDIC has indicated that the critical cooperative effort will be a bilateral agreement with the United Kingdom.
- Corporate governance, disclosure, and transparency. Concerns about failures in governance and the lack of transparency have prompted the Committee to include two new principles. In the United States, new governance requirements are included in the final rules on stress testing, capital planning, and living wills, as well as in the proposed enhanced prudential standards. These standards also require greater disclosure.
The Core Principles now number 29 and are enumerated in the Appendix to this bulletin. Last Friday’s publication is devoted to explaining how national regulators should implement the principles.
Click here to view the Appendix.