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Basel Committee on Banking Supervision

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Basel Committee on Banking Supervision Basel Committee on Banking Supervision Birgit Rost I. Introduction Given globalized fi nancial markets, there is no alternative to transnationally coordinated regulation. Banks are not limited to one jurisdiction in terms of assets, capital, or regulation. Negative externalities that occur when the failure of an institution in one country imposes losses on another provide a justifi cation for cooperation. Failures do not need to occur to impose costs on others. Higher risks to institutions in diff erent countries can impact their businesses, customers, and governments. Crisis management is a special case where crises spill over to other jurisdictions, potentially in a systemic fash- ion. Th ese considerations help to explain why international cooperation has advanced furthest among international bank supervisors in the Basel Com- mittee on Banking Supervision. Th e Basel Committee developed as a cross-country regulatory response to the globalization of fi nancial institutions and markets, which would other- wise connect national safety nets in an uncontrolled way. It provides a forum for regular cooperation on banking supervisory matters. Its main objectives are to enhance understanding of key supervisory issues and to improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. Th e Committee’s Secretariat is located at the Bank for International Settlements in Switzerland. II. Origins and Development Prior to the 1970s, public offi cials believed that they could monitor bank safety and soundness unilaterally, without reference to such emerging trends as globalization. Th e rapid market changes of that decade, however, led regulators to recognize the growing worldwide interdependence of banks and the diminishing eff ectiveness of national controls. Two major banking crises in 1974, the failures of the Herstatt Bank in Germany and the Franklin National Bank in New York, were crucial in bringing about a paradigmatic 320 Birgit Rost change in the attitudes of national banking offi cials. As worldwide networks of correspondent banks reeled from these failures, regulators learned that traditional approaches to banking safety had become inadequate. In direct response to the bank failures, central bankers of the G10 countries and Swit- zerland formed the Standing Committee on Banking Regulations and Super- visory Practices in 1974. In 1990 this body was renamed the Basel Committee on Banking Supervision. Its initial stated goals were to deal with the immedi- ate problems which arose with the crisis in international fi nancial markets, to develop general principles for banking supervision and to improve contacts between bank supervisors. Th e central bankers therefore declared that the primary purpose of the committee would be to provide its members with a regular forum for airing cooperative approaches to the supervision of mul- tinational banks. Th e fi rst of the Basel Committee’s major statements was the Basel Concordat of September 1975, which was modifi ed in 1983, 1990, and 1992. It was concerned with delineating the distribution of supervisory responsibilities for foreign banks between host and home authorities. Th e revised Basel Concordat of May 1983 was an attempt to meet the perceived weakness of its 1975 predecessor and attempted a fuller elaboration of prin- ciples for handling the problems posed by divergent supervisory standards and the complex structures of many international banking groups. As well as constructing a basic cross-border banking supervisory frame- work, the Committee has been able to issue a more complete supervisory and regulatory model for national banking systems. Th e Core Principles for Eff ective Banking Supervision, issued in September 1997, are intended to serve as a basic reference for supervisory and other public authorities within all countries and across national borders. Th ey are designed for national supervisory authorities, many of which are actively seeking to strengthen their current supervisory regime, to review their existing supervisory arrange- ments, and to initiate a programme designed to address any defi ciencies as quickly as is practical within their legal authority. Th e Principles have been designed to be verifi able by supervisors, regional supervisory groups, and the market at large. Th e Core Principles comprise 25 basic Principles that need to be in place for a supervisory system to be eff ective. Th e Principles relate to: – Preconditions for Eff ective Banking Supervision (Principle 1); – Licensing and Structure (Principles 2 to 5); – Prudential Regulations and Requirements (Principles 6 to 15); – Methods of Ongoing Banking Supervision (Principles 16 to 20); – Information Requirements (Principle 21); – Formal Powers of Supervisors (Principle 22); and – Cross-Border Banking (Principles 23 to 25)..
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