“Guidance on the Application of the Core Principles for Effective Banking Supervision to the Regulation and Supervision of Institutions Relevant to Financial Inclusion”, published by the Basel Committee on Banking Supervision, December 2015, 55 pages, available at http://www.bis.org/bcbs/publ/d351.pdf
Written by a subcommittee of the Bank for International Settlements, an organization of 60 central banks, this document is a follow-up to the 2012 “Core Principles for Effective Banking Supervision” and suggests updated rules and regulation for supervisors that scrutinize the risks banks and non-bank financial institutions face when providing financial services to unbanked and underbanked individuals.
Part one of the report lists principles related to “supervisory powers, responsibilities and functions”.
Responsibilities, objectives, powers, legal protection (Principle 1, 2, 3, 4)
The Basel Committee recommends that each banking supervisory system have clear objectives and responsibilities for each authority involved in supervision. To provide each supervisor with the power to approve or condemn financial institutions’ actions, a legal framework should act as a basis for supervisors to cooperate with authorities.
Licensing criteria (Principle 5)
The licensing authority has the power to set criteria and reject applications for institutions that do not meet the criteria, which should address areas such as ownership structure, governance models, strategy, financial projections control and risk management systems.
Supervisory approaches, tools, reporting, sanctioning (Principles 8,9,10, 12)
The authors argue that the supervisor should document an onward assessment of the risk profile of each financial institution. In addition, it should establish a framework in partnership with other relevant authorities to take action to dissolve banks in an orderly manner if they become non-viable.
Part two of the document focuses on aspects of “prudential regulations and requirements”.
Corporate governance (Principle 14)
In order to determine the robustness of institutions’ corporate governance policies, the Basel committee advises each supervisor to: (i) “issue guidance on its expectations for sound corporate governance and disseminate such expectations to the institution’s Board of Directors; (ii) set appropriate requirements for board structures and (iii) have fit-and-proper criteria for Board members”.
Risk management (Principles 15, 16, 17,18, 24, 25)
The supervisor should determine whether banks have a risk management framework that adequately takes into account both qualitative and quantitative metrics. Addressing qualitative risks includes avoiding a lack of qualified staff and information systems that fail to properly record transactions, manage accounts and secure personal data. Controlling quantitative risks includes setting up a framework that takes into account the microfinance organizations’ credit, liquidity and operations risk appetites; risk profile; and market and macroeconomic conditions. In addition, the organization needs policies for the identification and management of problem assets as well as the amount of capital needed to absorb losses.
Disclosure, transparency and abuse of financial services (Principles 28,29)
The supervisor should determine whether financial institutions regularly publish easily accessible information that fairly reflects their financial health and policies as well as processes that address potential abuse of financial services.
By Kevin van den Brink, Research Associate
About Basel Committee on Banking Supervision
The Basel Committee on Banking Supervision 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. The Committee’s members include both public as well as private financial professionals from Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.
 “Guidance on the Application of the Core Principles for Effective Banking Supervision to the Regulation and Supervision of Institutions Relevant to Financial Inclusion”, Basel, 2006 http://www.bis.org/bcbs/publ/d351.pdf
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