BASEL COMMITTEE ON BANKING SUPERVISION
The Basel Committee’s Approach
Measures taken by International Organisations and
Central Banks to establish a sound banking system
Damascus 2 July 2005
Karl F. Cordewener
Deputy Secretary General
BASEL COMMITTEE ON BANKING SUPERVISION
Basel Committee – an overview

Established at the end of 1974 by Central Bank
Governors of G10

Committee started as forum for discussion and
information-sharing among banking supervisors

Over time, it has become standard setter
– Most noticeable when 1988 Capital Accord was published
2
BASEL COMMITTEE ON BANKING SUPERVISION
Basel Committee – its main goals

Improve the quality of banking supervision worldwide

Promote more effective corporate governance

Close gaps in international supervisory coverage

Level the playing field among international banks

Establish a safer and sounder banking system as a
precondition for sustainable growth of an economy
3
BASEL COMMITTEE ON BANKING SUPERVISION
Committee‘s worldwide focus

Committee tries to address issues relevant for all
jurisdictions worldwide

Committee has developed over time close cooperation
with non-members
– Core Principles Liaison Group (16 jurisdictions, IMF, WB)
– Sixteen Regional Groups of Banking Supervisors
– International Conferences of Banking Supervisors (ICBS)
4
BASEL COMMITTEE ON BANKING SUPERVISION
Principal policies developed by the Committee

Core Principles for Effective Banking Supervision

Capital Adequacy Framework


Principles for sharing supervisory responsibility for banks’
foreign establishments
Many other policy papers, e.g. risk management
guidelines, on the Committee’s website
(www.bis.org/bcbs)
5
BASEL COMMITTEE ON BANKING SUPERVISION
Core Principles

Committee released in 1997 a set of Core Principles
for Effective Banking Supervision

Developed in close cooperation with supervisors from
non-member countries

Comprehensive set of supervisory guidelines

Methodology issued in 1999

IMF and World Bank monitor implementation
6
BASEL COMMITTEE ON BANKING SUPERVISION
Capital Adequacy

1988 Capital Accord established minimum capital
requirements for banks
Minimum ratio:

Capital
8%
Risk weighted assets
In 1998, Committee started revising the 1988 Accord, in
order to make
– It more risk sensitive and
– More consistent with current best practice in banks’ risk
management
7
BASEL COMMITTEE ON BANKING SUPERVISION
What are the basic aims of Basel II?

To provide the right incentives for sound risk
management

To deliver a prudent amount of capital in relation to the
risk that is run

To maintain a reasonable level playing-field for all
banks to operate in
8
BASEL COMMITTEE ON BANKING SUPERVISION
Main elements of Basel II

Based on three pillars
– Specific minimum capital requirements
– Supervisors‘ evaluation of banks‘ own assessment of risks
– Disclosure requirements to foster market discipline




Revised capital requirements for credit risk, new ones for
operational risk, and hardly changed ones for market risks
Menu of approaches for the measurement of risks
Introduction of increasingly reliable estimates of the drivers
of credit risk
More emphasis on operational risk
9
BASEL COMMITTEE ON BANKING SUPERVISION
Pillar 2 – Supervisory review process
• Pillar 2 is based on four key principles:
– Banks‘ own assessment of capital adequacy
– Supervisors‘ review of banks‘ capital adequacy assessment
– Supervisory response
• Capital above regulatory minima
• Supervisory intervention
10
BASEL COMMITTEE ON BANKING SUPERVISION
Pillar 3 – Market discipline

Another lever to strengthen the safety and soundness of the
system
– Complements regulatory capital requirements and the
supervisory review process
– Reliable and timely information allowing well founded
counterparty risk assessments
– Strong incentive for banks to conduct business in a safe, sound
and efficient manner
11
BASEL COMMITTEE ON BANKING SUPERVISION
Implementation - the current process
Implementation means
• transforming the framework into enforceable rules and
• adjust it to national circumstances
Time schedule for implementation
End 2006
•
Committee member implementation of simpler
approaches
End 2007
•
Committee member implementation of advanced
approaches
2007 - ?
•
Extended transition period for other countries
12
BASEL COMMITTEE ON BANKING SUPERVISION
Time schedule for implementation

When should Basel II be implemented?
– Only national authorities can answer this question
– Timing should be determined by a country‘s own
circumstances
– Basel II may be a lesser priority compared to other efforts

For a successful implementation, greater cooperation
among supervisors across jurisdictions is necessary
13