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1 The Basle Committee on Banking Supervision is a Committee of banking supervisory authorities which was established by the central bank Governors of the Group of Ten countries in 1975. It consists of senior representatives of banking supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg; Netherlands, Sweden, Switzerland, United Kingdom and the United States. It usually meets at the Bank for International Settlements in Basle, where its permanent Secretariat is located.

2 In countries where non-bank financial institutions provide financial services similar to those of banks, many of the Principles set out in this document are also capable of application to such non-bank financial institutions.

3 Arab Committee on Banking Supervision, Caribbean Banking Supervisors Group, Association of Banking Supervisory Authorities of Latin America and the Caribbean, Eastern and Southern Africa Banking Supervisors Group, Emeap Study Group on Banking Supervision, Group of Banking Supervisors from Central and Eastern European Countries, Gulf Cooperation Council Banking Supervisors’ Committee, Offshore Group of Banking Supervisors, Regional Supervisory Group of Central Asia and Transcaucasia, Seanza Forum of Banking Supervisors, Committee of Banking Supervisors in West and Central Africa.

4 This document refers to a management structure composed of a board of directors and senior management. The Committee is aware that there are significant differences in legislative and regulatory frameworks across countries as regards the functions of the board of directors and senior management. In some countries, the board has the main, if not exclusive, function of supervising the executive body (senior management, general management) so as to ensure that the latter fulfils its tasks. For this reason, in some cases, it is known as a supervisory board. This means that the board has no executive functions. In other countries, by contrast, the board has a broader competence in that it lays down the general framework for the management of the bank. Owing to these differences, the notions of the board of directors and the senior management are used in this document not to identify legal constructs but rather to label two decision-making functions within a bank.

5 As deposit insurance interacts with banking supervision, some basic principles are discussed in Appendix II.

6 This includes any derivations of the word “bank”, including “banking”.

7 In many countries, a “major” shareholder is defined as holding 10% or more of a bank's equity capital.

8 With regard to the “fit and proper” evaluation, where appropriate, differentiation can be made between the supervisory board and the executive board.

9 See “Minimum Standards for the supervision of international banking groups and their cross-border establishments” Volume III of the Compendium.

10 See “The Supervision of cross-border banking” (Annex B)-Volume III of the Compendium-for guidance on assessing whether a supervisor capably performs such tasks.

11 These established percentages typically range between 5 and 10%.

12 See “International convergence of capital measurement and capital standards” - Volume I of the Compendium.

13 Although the Accord applies to internationally active banks, many countries also apply the Accord to their domestic banks.

14 Supervisors should, of course, also give consideration to monitoring the capital adequacy of banks on a non-consolidated basis.

15 As a guide to appropriate controls on concentrations of risk, the Basle Committee has adopted a best practices paper covering large credit exposures. This 1991 paper addresses the definitions of credit exposures, single borrowers, and related counterparties, and also discusses appropriate levels of large exposure limits, and risks arising from different forms of asset concentrations. See “Measuring and controlling large credit exposures” Volume I of the Compendium.

16 These issues were addressed in a 1982 Basle Committee paper “Management of banks’ international lending” Volume I of the Compendium.

17 In January 199.6 the Basle Committee issued a paper amending the Capital Accord and implementing a new capital charge related to market risk. This capital charge comes into effect by the end of 1997. In calculating the capital charge, banks will have the option of using a standardised method or their own internal models. The G-10 supervisory authorities plan to use “backtesting” (i.e., expost comparisons between model results and actual performance) in conjunction with banks’ Internal risk measurement systems as a basis for applying capital charges. See “Overview of the Amendment to the Capital Accord to incorporate market risks”, “Amendment to the Capital Accord to incorporate market risks”, and “Supervisory framework for the use of ‘backtesting’ in conjunction with the internal models approach to market risk capital requirements” Volume II of the Compendium.

18 See “Supervision of banks’ foreign exchange positions” - Volume I of the Compendium.

19 The Basle Committee has recently established a sub-group to study issues related to risk management and internal controls and to provide guidance to the banking industry.

20 The Basle Committee has recently issued a paper related to the management of interest rate risk that outlines a number of principles for use by supervisory authorities when considering interest rate risk management at individual banks. See “Principles for the management of interest rate risk’ - Volume I of the Compendium.

21 The Basle Committee has issued a paper that sets out the main elements of a model analytical framework for measuring and managing liquidity. Although the paper focuses on the use of the framework by large, internationally-active banks, it provides guidance that should prove useful to all banks. See “A framework for measuring and managing liquidity” - Volume I of the Compendium.

22 In some countries, supervisors recommend that banks establish an “audit committee” within the board of directors. The purpose of this committee is to facilitate the effective performance of board oversight.

23 See “Prevention of criminal use of the banking system for the purpose of money-laundering” - Volume I of the Compendium.

24 In some countries, external auditors hired by the supervisory agency to conduct work on its behalf are referred to as reporting accountants.

25 The Basle Committee has reviewed the relationship between bank supervisors and external auditors and has developed best practices for supervisors with regard to their interaction with external auditors. See ‘The Relationship between bank supervisors and external auditors” - Volume III of the Compendium.

26 The Basle Committee recommended supervision on a consolidated basis in its paper “Consolidated supervision of banks’ international activities” - Volume I of the Compendium.

27 The types of information considered sensitive vary from country to country; however, this typically includes Information related to individual customer accounts as well as problems that the supervisor is helping the bank to resolve.

28 The Basle Committee has recently established a sub-group to study issues related to disclosure and to provide guidance to the banking industry

29 See “Principles for the supervision of banks’ foreign establishments”, “Minimum standards for the supervision of international banking groups and their cross-border establishments”, and “The supervision of cross-border banking”, all contained in Volume III of the Compendium.

30 This can include, savings banks and cooperative banks. These banks are different, however, from “policy” banks that typically specialise in certain types of lending or target certain sectors of the economy.

31 Some form of banking deposit insurance exists in all of the member countries of the Basle Committee. The experiences of these countries should prove useful in designing a deposit insurance programme. See “Deposit protection schemes in the G-10 countries” - See Volume III of the Compendium.