Backgrounder Info: The Basel Committee Core Principles, ECCB and the New Banking Act

BRADES, November 18, 2015 -- In discussing the new uniform Banking Act for the EC Dollar region, we naturally tend to focus on local or regional concerns and issues such as capital requirements for banks, need for public consultation, etc. However, this is a case where a major driving force behind the Bill is that the region including Montserrat has a very limited window of time to introduce international standards for banking supervision developed by the Basel Committee and issued in 2012 as Core Principles for banking best practice.

But, what is this Committee? Why is it important?

In 1974, after the USA went off the gold standard and the post war Bretton Woods system for stabilising the world economy broke down, ten leading countries formed a Committee based in Basel, Switzerland, which has become[1] “the primary global standard-setter for the prudential regulation of banks” and (being hosted by the Bank for International Settlements) it also “provides a forum for cooperation on banking supervisory matters.” Its mandate is “to strengthen the regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability.”

So, after the 2008 - 9 global financial crisis – and through discussions and research led by leading thinkers and bankers from around the world – in 2012 it published an updated version of the Core Principles for Banking Supervision.[2]

These Core Principles are the basis for the changes being implemented through the new Banking Act. And, judging by remarks made by ECCB Governor Sir Dwight Venner during an interview with Observer in Antigua,[3] “while the [Central] bank was 'vigorously protesting' the threat to international banking relations, the new Banking Act is needed to reassure partners that the region in conforming to international standards.”

There is clearly a deadline being imposed on the EC region by the international banking community.

That deadline is: the end of this year.

In Sir Dwight's words:“If we get drawn out between now and December trying to get this legislation passed, we are going to be in very serious trouble.”

A regional expert has provided a handy summary of the 29 Core Principles (up from 25 in the previous version). Once we glance at them, it instantly makes sense of the provisions of the new uniform Banking Act for the EC dollar region:

Supervisory Powers, Responsibilities and Functions

Principle 1 – Powers: There must be a suitable legal framework for banking supervision. The Central Bank must be empowered to license banks, conduct ongoing supervision, address compliance with laws, and take timely corrective action to address safety and soundness concerns.

Principle 2 – Independence and legal protection: The Central Bank must possess independence and autonomy. The legal framework for banking supervision must include legal protection. That is, the law must provide protection to the Central Bank and its staff against lawsuits for actions taken, or omissions made, while discharging their duties in good faith.

Principle 3 – Cooperation: The Central Bank must be empowered to collaborate with domestic authorities and with foreign supervisors.

Principle 4 – Permissible activities: The permissible activities of licensed banks must be clearly defined in law.

Principle 5 – Licensing criteria: The Central Bank must have the power to set criteria and be able to reject applications for banking licenses where the criteria are not met.

Principle 6 – Transfer of ownership: The Central Bank must have the power to impose conditions on any proposal to transfer significant ownership of banks.

Principle 7 – Major acquisitions: The Central Bank must have power to approve or reject major investments by a bank.

Principle 8 – Supervisory approach: The Central Bank must have power to assess the risk profile of banks and to take action to resolve banks in an orderly manner if they become non-viable.

Principle 9 – Supervisory techniques and tools: The Central Bank must be given a range of techniques and tools to effect its supervisory function.

Principle 10 – Reporting: The Central Bank must collect and analyse prudential reports from banks and be able to verify those reports.

Principle 11 – Corrective powers: The Central Bank must have the power to address unsafe practices and must possess a range of supervisory tools to make timely corrections.

Principle 12 – Supervision: The Central Bank must monitor and apply prudential standards to all aspect of the business conducted by a bank.

Principle 13 – Home relationships: The Central Bank must be able to share information it holds on a foreign bank with the foreign bank’s home supervisor.

Prudential Regulations and Requirements

Principle 14 – Corporate governance: The Central Bank must ensure that banks have robust corporate governance policies and processes.

Principle 15 – Risk management process: The Central Bank must ensure that banks have an effective Board and senior management oversight able to identify and control all material risks on a timely basis.

Principle 16 – Capital adequacy: The Central Bank must ensure banks maintain adequate capital in the context of the market in which they operate.

Principle 17 – Credit risk: The Central Bank must ensure banks adequately manage credit risk.

Principle 18 – Problem assets: The Central Bank must ensure banks have adequate processes for early identification and management of problem assets and the maintenance of adequate provisions and reserves.

Principle 19 – Concentration risk: The Central Bank must ensure banks have adequate policies and processes to deal with concentrations of risk in a timely basis.

Principle 20 – Related parties: The Central Bank must prevent abuse in transactions with related parties and ensure banks take appropriate steps to control the risk of dealings with related parties.

Principle 21 – Country risk: The Central Bank must ensure that banks have adequate polices and processes to deal with country risk and transfer risk in international activities.

Principle 22 – Market risk: The Central Bank must be able to ensure banks have an adequate market risk management process.

Principle 23 – Interest rate risk: The Central Bank must ensure banks have adequate systems to deal with interest rate risk on a timely basis.

Principle 24 – Liquidity risk: The Central Bank must be able to set prudent and appropriate liquidity requirements for banks, and ensure that banks have a strategy for prudent management of liquidity risk and compliance with liquidity requirements.

Principle 25 – Operational risk: The Central Bank must ensure that banks have an adequate operational risk management framework.

Principle 26 – Internal control and audit: The Central Bank must ensure banks have adequate internal control frameworks including independent internal audit and compliance.

Principle 27 – Financial reporting and external audit: The Central Bank must ensure banks maintain adequate and reliable records and comply with accounting practices that are internationally recognised, and annually publish their accounts bearing the certificate of an independent external auditor.

Principle 28 – Disclosure and transparency: The Central Bank must ensure banks regularly publish information that fairly reflects their financial condition, performance, risk exposures, risk management strategies, and corporate governance policies and processes.

Principle 29 – Abuse of financial services: The Central Bank must ensure that banks have strict customer due diligence rules and policies and processes that prevent banks from being used for criminal activities.