The supervisor determines that the processes are consistent with the risk appetite, risk profile, systemic importance and capital strength of the bank, take into account market and macroeconomic conditions and result in prudent standards of credit underwriting, evaluation, administration and monitoring.The supervisor determines that a bank’s Board approves, and regularly reviews, the credit risk management strategy and significant policies and processes for assuming, identifying, measuring, evaluating, monitoring, reporting and controlling or mitigating credit risk (including counterparty credit risk and associated potential future exposure) and that these are consistent with the risk appetite set by the Board. The full credit lifecycle is covered including credit underwriting, credit evaluation, and the ongoing management of the bank’s loan and investment portfolios.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.
In other words, the assessment must consider the context in which the supervisory practices are applied. 1 Footnote
The Basel Accords were developed over a number of years, starting in the 1980s. The risk management process is commensurate with the risk profile and systemic importance of the bank. The supervisor assesses whether the valuation used for regulatory purposes is reliable and prudent. The concept of proportionality underpins all assessment criteria even if it is not always directly referenced.The additional criteria are suggested best practices that countries having advanced banks should aim for. In a market economy, failures are part of risk-taking.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. 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. 2 Footnotes
The supervisor also determines that the risk management function is subject to regular review by the internal audit function.The supervisor requires larger and more complex banks to have a dedicated risk management unit overseen by a Chief Risk Officer (CRO) or equivalent function. An effective system of banking supervision needs to be able to effectively develop, implement, monitor and enforce supervisory policies under normal and stressed economic and financial conditions.
For the purposes of this document, the terms “risk appetite” and “risk tolerance” are treated synonymously.Laws, regulations or the supervisor require banks to notify the supervisor as soon as they become aware of any material and bona fide information that may negatively affect the fitness and propriety of a bank’s Board member or a member of the senior management.Principle 15: 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.
For example, the remuneration of such staff should be determined independently of the business lines that they oversee.The Committee is aware that, in some jurisdictions, other authorities, such as a financial intelligence unit, rather than a banking supervisor, may have primary responsibility for assessing compliance with laws and regulations regarding criminal activities in banks, such as fraud, money laundering and the financing of terrorism.
The supervisor also determines that banks have and utilise adequate management information systems to provide the banks’ Boards, management and the dedicated officers with timely and appropriate information on such activities.Laws provide that a member of a bank’s staff who reports suspicious activity in good faith either internally or directly to the relevant authority cannot be held liable.The supervisor, directly or indirectly, cooperates with the relevant domestic and foreign financial sector supervisory authorities or shares with them information related to suspected or actual criminal activities where this information is for supervisory purposes.Unless done by another authority, the supervisor has in-house resources with specialist expertise for addressing criminal activities.
Supervisors should also, as part of their normal business, adopt measures to address the effects of such concerns on the efficiency or effectiveness of regulation and supervision of banks.a well established framework for financial stability policy formulation;a clear framework for crisis management, recovery and resolution;an appropriate level of systemic protection (or public safety net); andSound macroeconomic policies (mainly fiscal and monetary policies) are the foundation of a stable financial system.
Basel I is the round of deliberations by central bankers from around the world, and in 1988, the Basel Committee on Banking Supervision (BCBS) in Basel, Switzerland, published a set of minimum capital requirements for banks.