APPENDIX
Appendix 1: Loan loss provisioning in selected emerging
markets
Appendix 1: (continued)
Appendix 1: (concluded)
Annex 2: The 25 core principles of the Basel Committee
on Banking Supervision
Principle 1: An effective system of banking
supervision will have clear responsibilities and objectives
for each agency involved in the supervision of banks. Each
such agency should possess operational independence and adequate resources.
A suitable legal framework for banking supervision is also necessary,
including provisions relating to authorisation of banking establishments and
their ongoing supervision; powers to address compliance with laws as well as
safety and soundness concerns; and legal protection for supervisors.
Arrangements for sharing information between supervisors and protecting
the confidentiality of such information should be in place.
Principle 2: The permissible activities of
institutions that are licensed and subject to supervision as banks must be
clearly defined, and the use of the word «bank» in names should be
controlled as far as possible.
Principle 3: The licensing authority must
have the right to set criteria and reject applications for
establishments that do not meet the standards set. The licensing process, at a
minimum, should consist
of an assessment of the banking organisation's ownership
structure, directors and senior management,
its operating plan and internal controls, and its projected
financial condition, including its capital base; where the proposed owner
or parent organisation is a foreign bank, the prior consent of its
home country supervisor should be obtained.
Principle 4: Banking supervisors must have
the authority to review and reject any proposals to transfer
significant ownership or controlling interests in existing banks to other
parties.
Principle 5: Banking supervisors must
have the authority to establish criteria for reviewing major
acquisitions or investments by a bank and ensuring that corporate
affiliations or structures do not expose the bank to undue risks or hinder
effective supervision.
Principle 6: Banking supervisors must set
minimum capital adequacy requirements for banks that reflect the risks
that the bank undertakes, and must define the components of capital, bearing in
mind
its ability to absorb losses. For internationally active banks,
these requirements must not be less than those established in the Basel Capital
Accord.
Principle 7: An essential part of any
supervisory system is the independent evaluation of a bank's policies,
practices and procedures related to the granting of loans and making of
investments and the ongoing management of the loan and investment
portfolios.
Principle 8: Banking supervisors must be
satisfied that banks establish and adhere to adequate policies,
practices and procedures for evaluating the quality of assets and the adequacy
of loan loss provisions and reserves.
Principle 9: Banking supervisors must be
satisfied that banks have management information systems that enable
management to identify concentrations within the portfolio and
supervisors must set prudential limits to restrict bank exposures to single
borrowers or groups of related borrowers.
Principle 10: In order to prevent
abuses arising from connected lending, banking supervisors must have in
place requirements that banks lend to related companies and individuals on an
arm's-length basis, that such extensions of credit are effectively
monitored, and that other appropriate steps are taken to control or
mitigate the risks.
Principle 11: Banking supervisors must be
satisfied that banks have adequate policies and procedures
for identifying, monitoring and controlling country risk and
transfer risk in their international lending and investment activities, and for
maintaining appropriate reserves against such risks.
Principle 12: Banking supervisors must be
satisfied that banks have in place systems that accurately measure, monitor
and adequately control market risks; supervisors should have powers to
impose specific limits and /or a specific capital charge on market risk
exposures, if warranted.
Principle 13: Banking supervisors must
be satisfied that banks have in place a comprehensive risk management
process (including appropriate board and senior management oversight)
to identify, measure, monitor and control all other material risks and, where
appropriate, to hold capital against these risks.
Principle 14: Banking supervisors must
determine that banks have in place internal controls that are adequate for
the nature and scale of their business. These should include clear
arrangements for delegating authority and responsibility; separation of the
functions that involve committing the bank, paying away its funds, and
accounting for its assets and liabilities; reconciliation of these processes;
safeguarding its assets; and appropriate independent internal or
external audit and compliance functions to test adherence to these controls
as well as applicable laws and regulations.
Principle 15: Banking supervisors must
determine that banks have adequate policies, practices and procedures
in place, including strict «know-your-customer» rules that
promote high ethical and professional standards in the financial sector
and prevent the bank being used, intentionally or unintentionally, by
criminal elements.
Principle 16: An effective banking supervisory
system should consist of some form of both on-site and off-site supervision.
Principle 17: Banking supervisors must have
regular contact with bank management and a thorough understanding of the
institution's operations.
Principle 18: Banking supervisors must have
a means of collecting, reviewing and analysing prudential reports and
statistical returns from banks on a solo and consolidated basis.
Principle 19: Banking supervisors must have
a means of independent validation of supervisory information either
through on-site examinations or use of external auditors.
Principle 20: An essential element of banking
supervision is the ability of the supervisors to supervise the banking group on
a consolidated basis.
Principle 21: Banking supervisors must be
satisfied that each bank maintains adequate records drawn
up in accordance with consistent accounting policies and
practices that enable the supervisor to obtain
a true and fair view of the financial condition of the bank and
the profitability of its business, and that the bank publishes on a regular
basis financial statements that fairly reflect its condition.
Principle 22: Banking supervisors must have
at their disposal adequate supervisory measures to bring about timely
corrective action when banks fail to meet prudential requirements
(such as minimum capital adequacy ratios), when there are regulatory
violations, or where depositors are threatened in any other way. In extreme
circumstances, this should include the ability to revoke the banking license
or recommend its revocation.
Principle 23: Banking supervisors
must practise global consolidated supervision over their
internationally active banking organisations, adequately monitoring
and applying appropriate prudential norms to all aspects of the business
conducted by these banking organisations worldwide, primarily at their foreign
branches, joint ventures and subsidiaries.
Principle 24: A key component of consolidated
supervision is establishing contact and information exchange with the various
other supervisors involved, primarily host country supervisory authorities.
Principle 25: Banking supervisors must require
the local operations of foreign banks to be conducted
to the same high standards as are required of
domestic institutions and must have powers to share information needed
by the home country supervisors of those banks for the purpose of carrying out
consolidated supervision.
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