Nota Editorial

The Basel Committee on Banking Supervision is in the process of revising the Basel Core Principles for Effective Banking Supervision. The proposed revisions are expected to be formally adopted at the International Conference of Banking Supervisors, in Merida, Mexico in October 2006.

Background and Present Status

In 1997, The Basel Committee for Banking Supervision published the document "Core Principles for Effective Banking Supervision" (Core Principles). Since then, the Core Principles have become the most important global standard for prudential regulation and supervision and have been used by countries as a benchmarking tool for assessing the quality of their supervisory regimes and to establish priorities for future work to strengthen supervisory practices.

There are 25 Core Principles pertaining to seven broad areas related to:

• Preconditions for effective banking supervision

• Licensing and structure

• Prudential norms and requirements

• Methods for ongoing banking supervision

• Information requirements

• The supervisors' formal powers

• Cross border banking

The International Monetary Fund (IMF) and the World Bank (WB) have evaluated various countries' degree of compliance with the Core Principles and these assessments have assisted individual countries with strengthening their supervisory regimes and promoting macro economic and financial stability. For instance, substantive changes in legal and regulatory frameworks, including the legal authority of banking supervisory regimes, have been necessary in many countries and many countries in the region have taken measures to adapt their legal and regulatory frameworks in line with the Core Principles.

Notwithstanding these positive developments, data from external evaluations by the IMF and the World Bank regarding compliance with the Basel Core Principles suggest the region's overall compliance level should improve in particular areas.

"A typical Latin American country does not comply with 50% of the Core principles" and the region is particularly deficient in three key areas:

• Only 10% and 20% of the countries included comply, respectively, with principles 1(2) (operational independence and resources of the supervising entity) and 1(5) (adequate legal framework and legal protection for supervisors), and only 20% comply with principle 22 (adoption of corrective measures).

• Only 10% of the countries comply with principles 6, 8, 9 and 12, and none complies with principle 13. This latter one refers to norms and prudential requirements and of capital sufficiency (principle 6), credit evaluation and constitution of reserves for uncollectible credits (principles 8 and 9), and market and other types of risks, including the interest rate and liquidity risks (principles 12 and 13).

• There is also a tendency towards non-compliance with Core principles 20 and 23, which refer to a supervision consolidated at the national and international levels, respectively. In particular, links between banks and other financial companies, including extra territorial entities (known as offshore) remain an Achilles' heel for the region."

Importantly, some supervisory organizations in the region lack the authority to operationalize the current Core Principles. The Basel Committee and multilateral institutions believe it is essential for national lawmakers in these countries to give urgent consideration to the legal and regulatory changes required to ensure that the Core Principles can be applied.

Modification of the Core Principles Project

The Basel Committee has indicated that modifications to the Basel Core Principles are necessary given the dynamic changes and developments in the banking industry since 1997, particularly in the areas of risk management.

The structure of the 25 Core Principles would be modified as follows:

Principle 1: Objectives, independence and powers

Principle 2: Permissible activities

Principle 3: Licensing criteria

Principle 4: Transference of significant property

Principle 5: Major acquisitions

Principle 6: Capital adequacy

Principle 7: Risk management process

Principle 8: Credit risk

Principle 9: Problem assets, provisions and reserves

Principle 10: Limits to great exposures

Principle 11: Exposures with related parties

Principle 12: Country and transference risks

Principle 13: Market risk

Principle 14: Liquidity risk

Principle 15: Operational risk

Principle 16: Interest rate risk

Principle 17: Internal control and audit

Principle 18: Abuse of financial services

Principle 19: Supervision approach

Principle 20: Supervision techniques

Principle 21: Supervision reports

Principle 22: Accounting and revelation

Principle 23: Supervisors' corrective powers

Principle 24: Consolidated supervision

Principle 25: Relationship between home and host supervisors

As part of the revision process, the Basel Committee requested regional groups of bank supervisors to comment on the proposed revisions to the Core Principles. In response to this request, ASBA organized a High Level Meeting of its Associate Members in December 2005 for the purpose of obtaining feedback from regional supervisors on the proposed revisions.

In general, regional supervisors agree that the proposed revisions to the Basel Core Principles reflect the dynamic changes and developments in risk management that have occurred in the banking industry during the last decade. In addition, the changes reinforce supervision based on risks concepts and should strengthen and help stabilize financial systems.

Some supervisory authorities in the region recognize that they will be challenged in the near term to reach a better compliance level with new Core Principles. Effective implementation of the new Core Principles will require a reasonable time period for implementation and in some cases, greater human and financial resources. In addition, it will require increased cooperation among domestic and international supervisors.

Arriba