COURSE TITLE:

MONETARY ECONOMICS
AND BANKING
 BANK SUPERVISION

A PRESENTATION BY

MOHAMMAD MASOOM HASAN CDCS, CITF

SR. ASSTT. VICE PRESIDENT & HEAD OF
MTB INTERNATIONAL TRADE SERVICES (MITS), CHITTAGONG
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 Bank supervision: Bank regulation refers to the

written rules that define acceptable behavior and
conduct for financial institutions set by the
regulatory authority.
 Bank supervision refers to the enforcement of

these rules supervisory authority.

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 Have you ever been in a panic? Your heart

pounds, you start to sweat, and your stomach
feels queasy. Imagine hearing that the bank
holding your life savings is running out of
money. Imagine the panic you feel as you run to
that bank to get whatever you can before the
doors are closed and locked forever.
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 Now, imagine having nothing but your savings to

support you through your later years. Social
Security doesn't exist and you don't have a
pension. All you have is your savings, and now it
could be gone. Forever.
 
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 The nation's periodic episodes of banking

panics were one of Congress' most serious
concerns in creating the Federal Reserve and led
to one of the Fed's main responsibilities: to
foster safe, sound, and competitive practices in
the nation's banking system.
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 To accomplish this, Congress included the Fed

responsible for regulating the banking system
and supervising financial institutions.
 For the Fed, supervising banks generally means

helping to establish safe and sound banking

practices and protecting consumers in financial
transactions. 
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 In USA Federal Reserve System conduct the

activities of bank supervision. In addition to the
Federal Reserve, the Federal Deposit Insurance
Corporation (FDIC) and the Office of the
Comptroller of the Currency (OCC) also
supervise financial institutions.
 In Bangladesh, Central Bank, ie, Bangladesh

Bank conduct the activities of bank supervision.

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 The Banking sector is an important part of the

national economy. Banks take deposits, support
the payment system and provide the greatest
source of funds on the market. Therefore, stable
and safe banking are curtail importance for
development of safe and stable economy. The
concept of bank supervision is widely accepted
throughout the world.
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 Risk management function is gaining importance in

banking sector. In addition to the credit risk, banks are
exposed to other risks such as: market risk, liquidity
risk, interest rate risk, currency risk, operational risk and
a line of other risk. The monitoring and supervising of
the banks activities is therefore of utmost and crucial
thing for every economy, so the concept of bank
supervision is getting more importance worldwide.
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 Types of Bank Supervision: There are two types of bank

supervision,
1) Off-Site Supervision
2) On-Site Supervision
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 Off-Site Supervision :
Off-site supervision is a fundamental in monitoring the
conduct of business activities of licensees / banks. The
Off-site supervision of the banks operations is conducted
on the basis of data and reports submitted by the banks
to the regulatory and supervisory body of banks. It
entails reviewing and analysing of the audited financial
statements, statutory returns and any other reports
submitted by licensees / banks.
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 Off-Site Supervision :
The review allows the regulator or supervisor :
 The compliance status of licensees with relevant laws or

regulations;
 financial soundness and solvency position of licensees,

and
 ongoing assessment of licensees.
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 On-Site Supervision :
On-site supervision is another fundamental in monitoring
the conduct of business activities of licensees / banks.
The On-site supervision of the banks operations is
conducted on the basis of on-site examination the
carried out at the banks’ premises and involve
examination of their business books and assessment of
their technical, professional and organizational
resources.
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 On-Site Supervision:
Key objectives of on-site supervision or inspections
include:
 Banks adherence to the regulations or rules
 assessing the market conduct of licensees for fairness
and transparency;
 ensuring soundness of corporate governance of
licensees;
 evaluating risk management processes established by
licensees;
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 On-Site Supervision:
 evaluating the internal control procedures established by
licensees.
 checking adherence of licensees to AML/CFT
legislation;
 CAMELS Rating
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 CAMELS Rating: The CELS ratings or Camels

rating is a supervisory rating system originally
developed in the U.S. to classify a bank’s overall
condition. It is applied to every bank and credit union in
the U.S. (approximately 8,000 institutions) and is also
implemented outside the U.S. by various banking
supervisory regulators.
 The ratings are assigned based on a ratio analysis of
the financial statements, combined with on-site
examinations made by a designated supervisory
regulator.
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 CAMELS Rating: Ratings are not released to the

public but only to the top management to prevent a
possible bank run on an institution which receives a
CAMELS rating downgrade. Institutions with
deteriorating situations and declining CAMELS ratings
are subject to ever increasing supervisory scrutiny.
Failed institutions are eventually resolved via a formal
resolution process designed to protect retail depositors.
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The components of a bank's condition that are assessed:

 C = Capital adequacy

 A = Assets

 M = Management Capacity

 E = Earnings

 L = Liquidity (also called asset liability management)

 S = Sensitivity (sensitivity to market risk, especially

interest rate risk)

 Ratings are given from 1 (best) to 5 (worst) in each of

the above categories.

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 Capital adequacy: This sets forth the statutory net

worth categories, and risk-based net worth requirements
for banks and federally insured credit unions.
References are made in this Letter to the five net worth
categories which are: "well capitalized," "adequately
capitalized", "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized."
 Banks and Credit unions that are less than "adequately
capitalized" must operate under an approved net worth
restoration plan.
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 Capital adequacy The examiner assesses the degree to

which credit, interest rate, liquidity, transaction,
compliance, strategic, and reputation risks may impact
on the banks and credit union's current and future capital
position. The examiner also considers the
interrelationships with the other areas:
 Capital level and trend analysis;
 Compliance with risk-based net worth requirements;
 Composition of capital;
 Interest and dividend policies and practices;
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 Capital
 Adequacy of the Allowance for Loan and Lease Losses
account;
 Quality, type, liquidity and diversification of assets, with
particular reference to classified assets;
 Loan and investment concentrations;
 Growth plans;
 Volume and risk characteristics of new business
initiatives;
 Ability of management to control and monitor risk,
including credit and interest rate risk;
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 Capital
 Earnings. Good historical and current earnings
performance enables a credit union to fund its growth,
remain competitive, and maintain a strong capital
position;
 Liquidity and funds management;
 Extent of contingent liabilities and existence of pending
litigation; and
 Economic environment.
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 Asset quality: Asset quality is high loan concentrations that

present undue risk to the bank and the credit union;
 The appropriateness of investment policies and practices;
 The investment risk factors when compared to capital and
earnings structure; and
 The effect of fair (market) value of investments vs. book
value of investments.
The asset quality rating is a function of present conditions
and the likelihood of future deterioration or improvement
based on economic conditions, current practices and trends.
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 The examiner assesses banks and credit union's

management of credit risk to determine an appropriate
component rating for Asset Quality. Interrelated to the
assessment of credit risk, the examiner evaluates the
impact of other risks such as interest rate, liquidity,
strategic, and compliance.
 The quality and trends of all major assets must be
considered in the rating. This includes loans,
investments, other real estate owned (ORE0s), and any
other assets that could adversely impact a credit union's
financial condition.
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 Management : Management is the most forward-

looking indicator of condition and a key determinant of
whether a bank and a credit union possesses the ability
to correctly diagnose and respond to financial stress. An
assessment of management is not solely dependent on
the current financial condition of the bank.
 Reflected in this component rating is both the board of
directors' and management's ability to identify, measure,
monitor, and control the risks of a bank’s or a credit
union’s activities over the time period to
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ensure its safe and sound operations, and ensure

compliance with applicable laws and regulations.
Management practices should address some or all of the
following risks: credit, interest rate, liquidity,
transaction, compliance, reputation, strategic, and other
risks.
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 Earnings : The continued viability of a bank or a credit

union depends on its ability to earn an appropriate return
on its assets which enables the institution to fund
expansion, remain competitive, and replenish and/or
increase capital.
 In evaluating and rating earnings, it is not enough to
review past and present performance alone. Future
performance is of equal or greater value, including
performance under various economic conditions.
Examiners evaluate "core" earnings: that is the long-run
earnings ability of a bank or a credit union discounting
temporary fluctuations in income and one-time items.
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 A review for the reasonableness of the credit union's

budget and underlying assumptions is appropriate for
this purpose. Examiners also consider the
interrelationships with other risk areas such as credit and
interest rate.
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 Key factors to consider when assessing the banks or

credit union's earnings are:
 Level, growth trends, and stability of earnings, particularly
return on average assets;
 Quality and composition of earnings;
 Adequacy of valuation allowances and their effect on
earnings;
 Adequacy of budgeting systems, forecasting processes,
and management information systems, in general;
 Future earnings prospects under a variety of economic
conditions;
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 Net interest margin;

 Net non-operating income and losses and their effect on
earnings;
 Quality and composition of assets;
 Net worth level;
 Sufficiency of earnings for necessary capital formation;
and
 Material factors affecting the bank’s or credit union's
income producing ability such as fixed assets and other
real estate owned ("OREOs").
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 Liquidity risk : Liquidity risk is the risk of not being

able to efficiently meet present and future cash flow
needs without adversely affecting daily operations.
Liquidity is evaluated on the basis of the bank’s or credit
union's ability to meet its present and anticipated cash
flow needs, such as, funding loan demand, share
withdrawals, and the payment of liabilities and
expenses. Liquidity risk also encompasses poor
management of excess funds.
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 Liquidity risk : The examiner considers the current level

of liquidity and prospective sources of liquidity compared
to current and projected funding needs. Funding needs
include loan demand, share withdrawals, and the payment
of liabilities and expenses. Examiners review reliance on
short-term, volatile sources of funds, including any undue
reliance on borrowings; availability of assets readily
convertible into cash; and technical competence relative
to liquidity and cash flow management. Examiners also
review the impact of excess liquidity on the credit union's
net interest margin, which is an indicator of interest rate
risk.
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 Liquidity risk : Key factors to consider in evaluating

the liquidity management include:
 Balance sheet structure;
 Contingency planning to meet unanticipated events
 Contingency planning to handle periods of excess
liquidity;
 Cash flow budgets and projections; and
 Integration of liquidity management with planning and
decision-making.
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 Sensitivity – sensitivity to market risk, especially

interest rate risk : Sensitivity to 'market risk', the "S" in
CAMELS is a complex and evolving measurement area.
It was added in 1995 by Federal Reserve primarily to
address interest rate risk, the sensitivity of all loans and
deposits to relatively abrupt and unexpected shifts in
interest rates. In 1995 they were also interested in banks
lending to farmers, and the sensitivity of farmers ability
to make loan repayments as specific crop prices
fluctuate.
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 Sensitivity – sensitivity to market risk, especially

interest rate risk : Unlike classic ratio analysis, which
most of CAMELS system was based on, which relies on
relatively certain, historical, audited financial
statements, this forward look approach involved
examining various hypothetical future price and rate
scenarios and then modeling their effects. The variability
in the approach is significant.
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 CAMELS Rating: Ratings are given from 1 (best) to 5

(worst) in each of the above categories.
 Rating 1: Indicates strong performance and risk
management practices that consistently provide for safe
and sound operations. Management clearly identifies all
risks and employs compensating factors mitigating
concerns. The historical trend and projections for key
performance measures are consistently positive. Banks
and credit unions in this group resist external economic
and financial disturbances and withstand the unexpected
actions of business conditions more ably than banks and
credit unions with a lower composite rating.
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Any weaknesses are minor and can be handled in a

routine manner by the board of directors and
management. These banks and credit unions are in
substantial compliance with laws and regulations.
Such institutions give no cause for supervisory
concern.
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 Rating 2:
 Reflects satisfactory performance and risk
management practices that consistently provide for
safe and sound operations. Management identifies most
risks and compensates accordingly. Both historical and
projected key performance measures should generally
be positive with any exceptions being those that do not
directly affect safe and sound operations. Banks and
credit unions in this group are stable and able to
withstand business fluctuations quite well;
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however, minor areas of weakness may be present

which could develop into conditions of greater concern.
These weaknesses are well within the board of
directors' and management's capabilities and
willingness to correct. These banks and credit unions
are in substantial compliance with laws and
regulations. The supervisory response is limited to the
extent that minor adjustments are resolved in the
normal course of business and that operations
continue to be satisfactory.
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 Rating 3:
 Represents performance that is flawed to some degree
and is of supervisory concern. Risk management
practices may be less than satisfactory relative to the
bank's or credit union's size, complexity, and risk
profile. Management may not identify and provide
mitigation of significant risks. Both historical and
projected key performance measures may generally be
flat or negative to the extent that safe and sound
operations may be adversely affected.
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 Banks and credit unions in this group are only nominally

resistant to the onset of adverse business conditions and
could easily deteriorate if concerted action is not effective
in correcting certain identifiable areas of weakness.
Overall strength and financial capacity is present so as to
make failure only a remote probability. These banks and
credit unions may be in significant noncompliance with
laws and regulations. Management may lack the ability
or willingness to effectively address weaknesses within
appropriate time frames. Such banks and credit unions
require more than normal supervisory attention to
address deficiencies.
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 Rating 4:
Refers to poor performance that is of serious
supervisory concern. Risk management practices are
generally unacceptable relative to the bank's or credit
union's size, complexity and risk profile. Key
performance measures are likely to be negative. Such
performance, if left unchecked, would be expected to
lead to conditions that could threaten the viability of the
bank or credit union. There may be significant
noncompliance with laws and regulations. The board
of directors and management are not satisfactorily
resolving the weaknesses and problems.
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A high potential for failure is present but is not yet

imminent or pronounced. Banks and credit unions in
this group require close supervisory attention.
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 Rating 5:
 Considered unsatisfactory performance that is
critically deficient and in need of immediate remedial
attention. Such performance, by itself or in combination
with other weaknesses, directly threatens the viability of
the bank or credit union. The volume and severity of
problems are beyond management's ability or
willingness to control or correct. Banks and credit
unions in this group have a high probability of failure
and will likely require liquidation and the payoff of
shareholders, or some other form of emergency
assistance, merger, or acquisition.
 Basel Committee on Banking
46 Supervision (BCBS)
 The Basel Committee on Banking
Supervision (BCBS) is a committee of banking
supervisory authorities that was established by the central
bank governors of the Group of Ten countries in 1974.
[ The Group of Ten or G-10 refers to the group of
countries that agreed to participate in the General
Arrangements to Borrow (GAB), an agreement to provide
the International Monetary Fund (IMF)with additional
funds to increase its lending ability. The GAB was
established in 1962, when the governments of eight IMF
members —Belgium, Canada, France, Italy, Japan, the 
Netherlands,
 Basel Committee on Banking
47 Supervision (BCBS)
 the United Kingdom, and the United States—and the
central banks of two others, Germany and Sweden. The
G-10 grew in 1964 by the association of the eleventh
member, Switzerland, but the name of the G10 remained
the same.]
 The Basel Committee on Banking
Supervision (BCBS) provides a forum for regular
cooperation on banking supervisory matters. Its
objective is to enhance understanding of key supervisory
issues and improve the quality of banking supervision
worldwide.
 Basel Committee on Banking
48 Supervision (BCBS)
 The Committee frames guidelines and standards in
different areas - some of the better known among them
are the international standards on capital adequacy, the
Core Principles for Effective Banking Supervision and
the Concordat on cross-border banking supervision. The
Committee's Secretariat is located at the Bank for
International Settlements (BIS) in Basel, Switzerland.
However, the BIS and the Basel Committee remain two
distinct entities.
  Basel Committee on Banking Supervision (BCBS)
49 Headquarters
 Core Principles for Effective Banking
50 Supervision
 The Core Principles for Effective Banking Supervision
(Core Principles) are the de facto (in fact; in reality)
minimum standard for sound prudential regulation and
supervision of banks and banking systems. Originally
issued by the Basel Committee on Banking Supervision in
1997, they are used by countries as a benchmark for
assessing the quality of their supervisory systems and for
identifying future work to achieve a baseline level of sound
supervisory practices. The Core Principles are also used by
the International Monetary Fund (IMF) and the World
Bank, in the context of the Financial Sector Assessment
Programme (FSAP), to assess the effectiveness of
 Core Principles for Effective Banking
51 Supervision
 countries’ banking supervisory systems and practices.
 The Core Principles were last revised by the Committee in
October 2006 in cooperation with supervisors around the
world. In its October 2010 Report to the G20 on response
to the financial crisis, the Committee announced its plan
to review the Core Principles as part of its ongoing work
to strengthen supervisory practices worldwide. In March
2011, the Core Principles Group was mandated by the
Committee to review and update the Core Principles. As a
result of this review, the number of Core Principles has
increased from 25 to 29.
 Core Principles for Effective Banking
52 Supervision
 The revised Core Principles will continue to provide a
comprehensive standard for establishing a sound
foundation for the regulation, supervision, governance
and risk management of the banking sector. Given the
importance of consistent and effective standards
implementation, the Committee stands ready to encourage
work at the national level to implement the revised Core
Principles in conjunction with other supervisory bodies
and interested parties.
 Core Principles for Effective Banking
53 Supervision
 The revised Core Principles strengthen the requirements
for supervisors, the approaches to supervision and
supervisors’ expectations of banks. This is achieved
through a greater focus on effective risk-based
supervision and the need for early intervention and timely
supervisory actions. Supervisors should assess the risk
profile of banks, in terms of the risks they run, the
efficacy of their risk management and the risks they pose
to the banking and financial systems.
 Core Principles for Effective Banking
54 Supervision
 The Core Principles set out the powers that supervisors
should have in order to address safety and soundness
concerns. It is equally crucial that supervisors use these
powers once weaknesses or deficiencies are identified.
Adopting a forward-looking approach to supervision
through early intervention can prevent an identified
weakness from developing into a threat to safety and
soundness. This is particularly true for highly complex
and bank-specific issues (eg liquidity risk) where effective
supervisory actions must be tailored to a bank’s individual
circumstances.
 Core Principles for Effective Banking
55 Supervision
 In recognition of the universal applicability of the Core
Principles, the Committee conducted its review in close
cooperation with members of the Basel Consultative
Group which comprises representatives from both
Committee and non-Committee member countries and
regional groups of banking supervisors, as well as the
IMF, the World Bank and the Islamic Financial Services
Board. The Committee consulted the industry and public
before finalising the text.
 Core Principles for Effective Banking
56 Supervision
 The first Core Principle sets out the promotion of safety
and soundness of banks and the banking system as the
primary objective for banking supervision. Jurisdictions
may assign other responsibilities to the banking
supervisor provided they do not conflict with this primary
objective. It should not be an objective of banking
supervision to prevent bank failure. However, supervision
should aim to reduce the probability and impact of a bank
failure.
 Core Principles for Effective Banking
57 Supervision
 The Core Principles are a framework of minimum
standards for sound supervisory practices and are
considered universally applicable. The Committee issued
the Core Principles as its contribution to strengthening the
global financial system. Weaknesses in the banking
system of a country, whether developing or developed,
can threaten financial stability both within that country
and internationally. The Committee believes that
implementation of the Core Principles by all countries
would be a significant step towards improving financial
stability domestically and internationally, and provide a
 Core Principles for Effective Banking
58 Supervision
 good basis for further development of effective
supervisory systems. The vast majority of countries have
endorsed the Core Principles and have implemented them.
 Core Principles for Effective Banking
59 Supervision
 The revised 29 Core Principles are broadly categories into
2 Groups:
 The First Group: Principle 1 to 13: focus on power,
responsibilities and functions of supervisors
 While the Second Group: Principle 14 to 29 focus on
prudential regulations and requirements for banks
 Core Principles for Effective Banking
60 Supervision
 Principle 1 – Responsibilities, objectives and powers:
An effective system of banking supervision has clear
responsibilities and objectives for each authority involved
in the supervision of banks and banking groups. A suitable
legal framework for banking supervision is in place to
provide each responsible authority with the necessary
legal powers to authorise banks, conduct ongoing
supervision, address compliance with laws and undertake
timely corrective actions to address safety and soundness
concerns.
 Core Principles for Effective Banking
61 Supervision
 Principle 2 – Independence, accountability, resourcing
and legal protection for supervisors:
The supervisor possesses operational independence,
transparent processes, sound governance, budgetary
processes that do not undermine autonomy and adequate
resources, and is accountable for the discharge of its
duties and use of its resources. The legal framework for
banking supervision includes legal protection for the
supervisor.
 Core Principles for Effective Banking
62 Supervision
 Principle 3 – Cooperation and collaboration:
Laws, regulations or other arrangements provide a
framework for cooperation and collaboration with
relevant domestic authorities and foreign supervisors.
These arrangements reflect the need to protect
confidential information.
 Principle 4 – Permissible activities:
The permissible activities of institutions that are licensed
and subject to supervision as banks are clearly defined
and the use of the word “bank” in names is controlled.
 Core Principles for Effective Banking
63
Supervision
 Principle 5 – Licensing criteria:
The licensing authority has the power to set criteria and reject
applications for establishments that do not meet the criteria. At
a minimum, the licensing process consists of an assessment of
the ownership structure and governance (including the fitness
and propriety of Board members and senior management) of
the bank and its wider group, and its strategic and operating
plan, internal controls, risk management and projected
financial condition (including capital base). Where the
proposed owner or parent organisation is a foreign bank, the
prior consent of its home supervisor is obtained.
 Core Principles for Effective Banking
64
Supervision
 Principle 6 – Transfer of significant ownership:
The supervisor has the power to review, reject and impose
prudential conditions on any proposals to transfer significant
ownership or controlling interests held directly or indirectly in
existing banks to other parties.
 Principle 7 – Major acquisitions: The supervisor has the power
to approve or reject and impose prudential conditions on, major
acquisitions or investments by a bank, against prescribed criteria,
including the establishment of cross-border operations, and to
determine that corporate affiliations or structures do not expose
the bank to undue risks or hinder effective supervision.
 Core Principles for Effective Banking
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Supervision
 Principle 8 – Supervisory approach:
An effective system of banking supervision requires the
supervisor to develop and maintain a forward-looking
assessment of the risk profile of individual banks and
banking groups, proportionate to their systemic
importance; identify, assess and address risks emanating
from banks and the banking system as a whole; have a
framework in place for early intervention; and have plans
in place, in partnership with other relevant authorities, to
take action to resolve banks in an orderly manner if they
become non-viable.
 Core Principles for Effective Banking
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Supervision
 Principle 9 – Supervisory techniques and tools: The
supervisor uses an appropriate range of techniques and
tools to implement the supervisory approach and deploys
supervisory resources on a proportionate basis, taking
into account the risk profile and systemic importance of
banks.
 Principle 10 – Supervisory reporting: The supervisor
collects, reviews and analyses prudential reports and
statistical returns from banks on both a solo and a
consolidated basis, and independently verifies these
reports through either on-site examinations or use of
external experts.
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Supervision

 Principle 11 – Corrective and sanctioning powers of

supervisors: The supervisor acts at an early stage to
address unsafe and unsound practices or activities that
could pose risks to banks or to the banking system. The
supervisor has at its disposal an adequate range of
supervisory tools to bring about timely corrective actions.
This includes the ability to revoke the banking licence or
to recommend its revocation.
 Core Principles for Effective Banking
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Supervision

 Principle 12 – Consolidated supervision: An essential

element of banking supervision is that the supervisor
supervises the banking group on a consolidated basis,
adequately monitoring and, as appropriate, applying
prudential standards to all aspects of the business
conducted by the banking group worldwide.
 Core Principles for Effective Banking
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Supervision

 Principle 13 – Home-host relationships: Home and host

supervisors of cross-border banking groups share
information and cooperate for effective supervision of the
group and group entities, and effective handling of crisis
situations. Supervisors require the local operations of
foreign banks to be conducted to the same standards as
those required of domestic banks.
 Core Principles for Effective Banking
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Supervision

 Prudential regulations and requirements

 Principle 14 to 29
 Core Principles for Effective Banking
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Supervision

 Principle 14 – Corporate governance: The supervisor

determines that banks and banking groups have robust
corporate governance policies and processes covering, for
example, strategic direction, group and organisational
structure, control environment, responsibilities of the
banks’ Boards and senior management, and
compensation. These policies and processes are
commensurate with the risk profile and systemic
importance of the bank.
 Core Principles for Effective Banking
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Supervision

 Principle 15 – Risk management process: The supervisor

determines that banks have a comprehensive risk
management process (including effective Board and
senior management oversight) to identify, measure,
evaluate, monitor, report and control or mitigate all
material risks on a timely basis and to assess the adequacy
of their capital and liquidity in relation to their risk profile
and market and macroeconomic conditions. This extends
to development and review of contingency arrangements
(incuding robust and credible recovery plans where
 Core Principles for Effective Banking
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Supervision

warranted) that take into account the specific

circumstances of the bank. The risk management process
is commensurate with the risk profile and systemic
importance of the bank.
 Core Principles for Effective Banking
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Supervision

 Principle 16 – Capital adequacy: The supervisor sets

prudent and appropriate capital adequacy requirements
for banks that reflect the risks undertaken by, and
presented by, a bank in the context of the markets and
macroeconomic conditions in which it operates. The
supervisor defines the components of capital, bearing in
mind their ability to absorb losses. At least for
internationally active banks, capital requirements are not
less than the applicable Basel standards.
 Core Principles for Effective Banking
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Supervision

 Principle 17 – Credit risk: The supervisor determines

that banks have an adequate credit risk management
process that takes into account their risk appetite, risk
profile and market and macroeconomic conditions. This
includes prudent policies and processes to identify,
measure, evaluate, monitor, report and control or mitigate
credit risk (including counterparty credit risk) on a timely
basis. The full credit lifecycle is covered including credit
underwriting, credit evaluation, and the ongoing
management of the bank’s loan and investment portfolios.
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Supervision
 Principle 18 – Problem assets, provisions and reserves:
The supervisor determines that banks have adequate
policies and processes for the early identification and
management of problem assets, and the maintenance of
adequate provisions and reserves.
 Principle 19 – Concentration risk and large exposure
limits: The supervisor determines that banks have adequate
policies and processes to identify, measure, evaluate,
monitor, report and control or mitigate concentrations of
risk on a timely basis. Supervisors set prudential limits to
restrict bank exposures to single counterparties or groups
of connected counterparties.
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Supervision

 Principle 20 – Transactions with related parties: In

order to prevent abuses arising in transactions with
related parties and to address the risk of conflict of
interest, the supervisor requires banks to enter into any
transactions with related parties on an arm’s length basis;
to monitor these transactions; to take appropriate steps to
control or mitigate the risks; and to write off exposures to
related parties in accordance with standard policies and
processes.
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Supervision

 Principle 21 – Country and transfer risks: The

supervisor determines that banks have adequate policies
and processes to identify, measure, evaluate, monitor,
report and control or mitigate country risk and transfer
risk in their international lending and investment
activities on a timely basis.
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Supervision

 Principle 22 – Market risks: The supervisor determines

that banks have an adequate market risk management
process that takes into account their risk appetite, risk
profile, and market and macroeconomic conditions and
the risk of a significant deterioration in market liquidity.
This includes prudent policies and processes to identify,
measure, evaluate, monitor, report and control or mitigate
market risks on a timely basis.
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Supervision

 Principle 23 – Interest rate risk in the banking book:

The supervisor determines that banks have adequate
systems to identify, measure, evaluate, monitor, report
and control or mitigate interest rate risk in the banking
book on a timely basis. These systems take into account
the bank’s risk appetite, risk profile and market and
macroeconomic conditions.
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Supervision
 Principle 24 – Liquidity risk: The supervisor sets prudent
and appropriate liquidity requirements (which can include
either quantitative or qualitative requirements or both) for
banks that reflect the liquidity needs of the bank. The
supervisor determines that banks have a strategy that
enables prudent management of liquidity risk and
compliance with liquidity requirements. The strategy takes
into account the bank’s risk profile as well as market and
macroeconomic conditions and includes prudent policies
and processes, consistent with the bank’s risk appetite, to
identify, measure, evaluate, monitor, report and control or
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Supervision
mitigate liquidity risk over an appropriate set of time
horizons. At least for internationally active banks,
liquidity requirements are not lower than the applicable
Basel standards.
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Supervision

 Principle 25 – Operational risk: The supervisor

determines that banks have an adequate operational risk
management framework that takes into account their risk
appetite, risk profile and market and macroeconomic
conditions. This includes prudent policies and processes
to identify, assess, evaluate, monitor, report and control or
mitigate operational risk on a timely basis.
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Supervision

 Principle 26 – Internal control and audit: The

supervisor determines that banks have adequate internal
control frameworks to establish and maintain a properly
controlled operating environment for the conduct of their
business taking into account their risk profile. These
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 the bank’s assets; and
appropriate independent internal audit and compliance
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Supervision

functions to test adherence to these controls as well as

applicable laws and regulations.
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 Principle 27: Financial reporting and external audit:

The supervisor determines that banks and banking groups
maintain adequate and reliable records, prepare financial
statements in accordance with accounting policies and
practices that are widely accepted internationally and
annually publish information that fairly reflects their
financial condition and performance and bears an
independent external auditor’s opinion. The supervisor
also determines that banks and parent companies of
banking groups have adequate governance and oversight
of the external audit function.
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Supervision

 Principle 28 – Disclosure and transparency: The

supervisor determines that banks and banking groups
regularly publish information on a consolidated and,
where appropriate, solo basis that is easily accessible and
fairly reflects their financial condition, performance, risk
exposures, risk management strategies and corporate
governance policies and processes.
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 Principle 29 – Abuse of financial services: The

supervisor determines that banks have adequate policies
and processes, including strict customer due diligence
rules to promote high ethical and professional standards
in the financial sector and prevent the bank from being
used, intentionally or unintentionally, for criminal
activities.
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 The Core Principles are neutral with regard to different

approaches to supervision, so long as the overriding goals
are achieved. They are not designed to cover all the needs
and circumstances of every banking system. Instead,
specific country circumstances should be more
appropriately considered in the context of the
assessments and in the dialogue between assessors and
country authorities.
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Supervision

 National authorities should apply the Core Principles in

the supervision of all banking organisations within their
jurisdictions. Individual countries, in particular those with
advanced markets and banks, may expand upon the Core
Principles in order to achieve best supervisory practice.
 A high degree of compliance with the Core Principles
should foster overall financial system stability; however,
this will not guarantee it, nor will it prevent the failure of
banks. Banking supervision cannot, and should not,
provide an assurance that banks will not fail. In a market
economy, failures are part of risk-taking.
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Supervision
 The Committee stands ready to encourage work at the
national level to implement the Core Principles in
conjunction with other supervisory bodies and interested
parties. The Committee invites the international financial
institutions and donor agencies to use the Core Principles
in assisting individual countries to strengthen their
supervisory arrangements. The Committee will continue
to collaborate closely with the IMF and the World Bank in
their monitoring of the implementation of the
Committee’s prudential standards. The Committee also
remains committed to further enhancing its interaction
with supervisors from non-member countries.