1. 1 Basel iii Compliance Professionals Association (BiiiCPA) 1200 G Street NW Suite 800 Washington, DC 20005-6705 USA Tel: 202-449-9750 Web: www.basel-iii-association.comDear Member,The Basel Committee on BankingSupervision has completed its review of theOctober 2006 Core principles for effectivebanking supervision and the associatedCore principles methodology.The revised Core Principles were endorsed by banking supervisors at the17th International Conference of Banking Supervisors held in Istanbul,Turkey, on 13-14 September 2012.Both the existing Core Principles and theassociated assessment methodology haveserved their purpose well in terms of helpingcountries to assess their supervisory systemsand identify areas for improvement.While conscious efforts were made tomaintain continuity and comparability to theextent possible, the revised documentcombines the Core Principles and theassessment methodology into a singlecomprehensive document Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

2. 2Bank for International SettlementsBIS, Core principles for effective banking supervisionSeptember 2012The revised set of twenty-nine Core Principles has also been reorganisedto foster their implementation through a more logical structure,highlighting the difference between what supervisors do and what theyexpect banks to do:Principles 1 to 13 address supervisory powers, responsibilities andfunctions, focusing on effective risk-based supervision, and the need forearly intervention and timely supervisory actions.Principles 14 to 29 cover supervisory expectations of banks, emphasisingthe importance of good corporate governance and risk management, aswell as compliance with supervisory standards.Important enhancements have been introduced into the individual CorePrinciples, particularly in those areas that are necessary to strengthensupervisory practices and risk management.As a result, certain "additional criteria" have been upgraded to "essentialcriteria", while new assessment criteria were warranted in otherinstances.Close attention was given to addressing many of the significant riskmanagement weaknesses and other vulnerabilities highlighted in thefinancial crisis.In addition, the review has taken account of several key trends anddevelopments that emerged during the last few years of market turmoil: - the need for greater supervisory intensity and adequate resources to deal effectively with systemically important banks; - the importance of applying a system-wide, macro perspective to the microprudential supervision of banks to assist in identifying, analysing and taking pre-emptive action to address systemic risk; and Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

3. 3 - the increasing focus on effective crisis management, recovery and resolution measures in reducing both the probability and impact of a bank failure.The Committee has sought to give appropriate emphasis to theseemerging issues by embedding them into the Core Principles, asappropriate, and including specific references under each relevantPrinciple.In addition, sound corporate governance underpins effective riskmanagement and public confidence in individual banks and the bankingsystem.Given fundamental deficiencies in banks corporate governance that wereexposed during the crisis, a new Core Principle on corporate governancehas been added by bringing together existing corporate governancecriteria in the assessment methodology and giving greater emphasis tosound corporate governance practices.Similarly, the Committee reiterated the key role of robust marketdiscipline in fostering a safe and sound banking system by expanding anexisting Core Principle into two new ones dedicated respectively togreater public disclosure and transparency, and enhanced financialreporting and external audit.As a result of the Committees review, the number of Core Principles hasincreased from 25 to 29.There are a total of 39 new assessment criteria, comprising 34 newessential criteria and 5 new additional criteria.In addition, 34 additional criteria from the existing assessmentmethodology have been upgraded to essential criteria that representminimum baseline requirements for all countries.A consultative version of the revised Core Principles was issued for publicconsultation in December 2011. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

4. 4The Committee appreciates the constructive comments received andthanks those who have taken the time and effort to express their views onthe consultative document.Core Principles for Effective Banking Supervision (The BaselCore Principles)Executive summary1. The Core Principles for Effective Banking Supervision (CorePrinciples) are the de facto minimum standard for sound prudentialregulation and supervision of banks and banking systems.Originally issued by the Basel Committee on Banking Supervision (theCommittee) in 1997, they are used by countries as a benchmark forassessing the quality of their supervisory systems and for identifyingfuture 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 SectorAssessment Programme (FSAP), to assess the effectiveness of countriesbanking supervisory systems and practices.2. The Core Principles were last revised by the Committee in October2006 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 ofits ongoing work to strengthen supervisory practices worldwide.3. In March 2011, the Core Principles Group was mandated by theCommittee to review and update the Core Principles.The Committees mandate was to conduct the review taking into accountsignificant developments in the global financial markets and regulatory Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

5. 5landscape since October 2006, including post-crisis lessons for promotingsound supervisory systems.The intent was to ensure the continued relevance of the Core Principlesfor promoting effective banking supervision in all countries over time andchanging environments.4. In conducting the review, the Committee has sought to achieve theright balance in raising the bar for sound supervision while retaining theCore Principles as a flexible, globally applicable standard.By reinforcing the proportionality concept, the revised Core Principlesand their assessment criteria accommodate a diverse range of bankingsystems.The proportionate approach also allows assessments of compliance withthe Core Principles that are commensurate with the risk profile andsystemic importance of a broad spectrum of banks (from largeinternationally active banks to small, non-complex deposit-takinginstitutions).5. Both the existing Core Principles and the associated Core PrinciplesMethodology (assessment methodology) have served their purpose wellin terms of helping countries to assess their supervisory systems andidentify areas for improvement.While conscious efforts were made to maintain continuity andcomparability as far as possible, the Committee has merged the CorePrinciples and the assessment methodology into a single comprehensivedocument.The revised set of twenty-nine Core Principles have also been reorganisedto foster their implementation through a more logical structure startingwith supervisory powers, responsibilities and functions, and followed bysupervisory expectations of banks, emphasising the importance of goodcorporate governance and risk management, as well as compliance withsupervisory standards. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

6. 66. Important enhancements have been introduced into the individualCore Principles, particularly in those areas that are necessary tostrengthen supervisory practices and risk management.Various additional criteria have been upgraded to essential criteria as aresult, while new assessment criteria were warranted in other instances.Close attention was given to addressing many of the significant riskmanagement weaknesses and other vulnerabilities highlighted in the lastcrisis.In addition, the review has taken account of several key trends anddevelopments that emerged during the last few years of market turmoil: - the need for greater intensity and resources to deal effectively with systemically important banks; - the importance of applying a system-wide, macro perspective to the microprudential supervision of banks to assist in identifying, analysing and taking pre-emptive action to address systemic risk; - and the increasing focus on effective crisis management, recovery and resolution measures in reducing both the probability and impact of a bank failure.The Committee has sought to give appropriate emphasis to theseemerging issues by embedding them into the Core Principles, asappropriate, and including specific references under each relevantPrinciple.7. In addition, sound corporate governance underpins effective riskmanagement and public confidence in individual banks and the bankingsystem.Given fundamental deficiencies in banks corporate governance that wereexposed in the last crisis, a new Core Principle on corporate governancehas been added in this review by bringing together existing corporate Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

7. 7governance criteria in the assessment methodology and giving greateremphasis to sound corporate governance practices.Similarly, the Committee reiterated the key role of robust marketdiscipline in fostering a safe and sound banking system by expanding anexisting Core Principle into two new ones dedicated respectively togreater public disclosure and transparency, and enhanced financialreporting and external audit.8. At present, the grading of compliance with the Core Principles is basedsolely on the essential criteria.To provide incentives to jurisdictions, particularly those that areimportant financial centres, to lead the way in the adoption of the highestsupervisory standards, the revised Core Principles will allow countries theadditional option of voluntarily choosing to be assessed and gradedagainst the essential and additional criteria.In the same spirit of promoting full and robust implementation, theCommittee has retained the existing four-grade scale of assessingcompliance with the Core Principles.This includes the current materially non-compliant grading that helpsprovide a strong signalling effect to relevant authorities on remedialmeasures needed for addressing supervisory and regulatory shortcomingsin their countries.9. As a result of this review, the number of Core Principles has increasedfrom 25 to 29.There are a total of 39 new assessment criteria, comprising 34 newessential criteria and 5 new additional criteria.In addition, 34 additional criteria from the existing assessmentmethodology have been upgraded to essential criteria that representminimum baseline requirements for all countries. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

8. 810. The revised Core Principles will continue to provide a comprehensivestandard for establishing a sound foundation for the regulation,supervision, governance and risk management of the banking sector.Given the importance of consistent and effective standardsimplementation, the Committee stands ready to encourage work at thenational level to implement the revised Core Principles in conjunctionwith other supervisory bodies and interested parties.I. Foreword to the review11. The Basel Committee on Banking Supervision (the Committee) hasrevised the Core Principles for Effective Banking Supervision (CorePrinciples).In conducting its review, the Committee has sought to balance theobjectives of raising the bar for banking supervision (incorporating thelessons learned from the crisis and other significant regulatorydevelopments since the Core Principles were last revised in 2006) againstthe need to maintain the universal applicability of the Core Principles andthe need for continuity and comparability.By raising the bar, the practical application of the Core Principles shouldimprove banking supervision worldwide.12. The revised Core Principles strengthen the requirements forsupervisors, the approaches to supervision and supervisors expectationsof banks.This is achieved through a greater focus on effective risk-basedsupervision and the need for early intervention and timely supervisoryactions. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

9. 9Supervisors should assess the risk profile of banks, in terms of the risksthey run, the efficacy of their risk management and the risks they pose tothe banking and financial systems.This risk-based process targets supervisory resources where they can beutilised to the best effect, focusing on outcomes as well as processes,moving beyond passive assessment of compliance with rules.13. The Core Principles set out the powers that supervisors should have inorder to address safety and soundness concerns.It is equally crucial that supervisors use these powers once weaknesses ordeficiencies are identified.Adopting a forward-looking approach to supervision through earlyintervention can prevent an identified weakness from developing into athreat to safety and soundness.This is particularly true for highly complex and bank-specific issues (egliquidity risk) where effective supervisory actions must be tailored to abanks individual circumstances.14. In its efforts to strengthen, reinforce and refocus the Core Principles,the Committee has nonetheless remained mindful of their underlyingpurpose and use.The Committees intention is to ensure the continued relevance of theCore Principles in providing a benchmark for supervisory practices thatwill withstand the test of time and changing environments.For this reason, this revision of the Core Principles builds upon thepreceding versions to ensure continuity and comparability as far aspossible.15. In recognition of the universal applicability of the Core Principles, theCommittee conducted its review in close cooperation with members of Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

10. 10the Basel Consultative Group which comprises representatives from bothCommittee and non-Committee member countries and regional groupsof banking supervisors, as well as the IMF, the World Bank and theIslamic Financial Services Board.The Committee consulted the industry and public before finalising thetext.General approach16. The first Core Principle sets out the promotion of safety andsoundness of banks and the banking system as the primary objective forbanking supervision.Jurisdictions may assign other responsibilities to the banking supervisorprovided they do not conflict with this primary objective.6 It should not be an objective of banking supervision to prevent bankfailures.However, supervision should aim to reduce the probability and impact ofa bank failure, including by working with resolution authorities, so thatwhen failure occurs, it is in an orderly manner.17. To fulfil their purpose, the Core Principles must be capable ofapplication to a wide range of jurisdictions whose banking sectors willinevitably include a broad spectrum of banks (from large internationallyactive banks to small, non-complex deposit-taking institutions).Banking systems may also offer a wide range of products or services andthe Core Principles are aligned with the general aim of catering todifferent financial needs.To accommodate this breadth of application, a proportionate approach isadopted, both in terms of the expectations on supervisors for the Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

11. 11discharge of their own functions and in terms of the standards thatsupervisors impose on banks.Consequently, the Core Principles acknowledge that supervisors typicallyuse a risk-based approach in which more time and resources are devotedto larger, more complex or riskier banks.In the context of the standards imposed by supervisors on banks, theproportionality concept is reflected in those Principles focused onsupervisors assessment of banks risk management, where the Principlesprescribe a level of supervisory expectation commensurate with a banksrisk profile and systemic importance.18. Successive revisions to existing Committee standards and guidance,and any new standards and guidance will be designed to strengthen theregulatory regime.Supervisors are encouraged to move towards the adoption of updated andnew international supervisory standards as they are issued.Approach toward emerging trends and developments(i) Systemically important banks (SIBs)19. In the aftermath of the crisis, much attention has been focused onSIBs, and the regulations and supervisory powers needed to deal withthem effectively.Consideration was given by the Committee to including a new CorePrinciple to cover SIBs.However, it was concluded that SIBs, which require greater intensity ofsupervision and hence resources, represent one end of the supervisoryspectrum of banks. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

12. 12Each Core Principle applies to the supervision of all banks.The expectations on, and of, supervisors will need to be of a higher orderfor SIBs, commensurate with the risk profile and systemic importance ofthese banks.Therefore, it is unnecessary to include a specific stand-alone CorePrinciple for SIBs.(ii) Macroprudential issues and systemic risks20. The recent crisis highlighted the interface between, and thecomplementary nature of, the macroprudential and microprudentialelements of effective supervision.In their application of a risk-based supervisory approach, supervisors andother authorities need to assess risk in a broader context than that of thebalance sheet of individual banks.For example, the prevailing macroeconomic environment, businesstrends, and the build-up and concentration of risk across the bankingsector and, indeed, outside of it, inevitably impact the risk exposure ofindividual banks.Bank-specific supervision should therefore consider this macroperspective.Individual bank data, where appropriate, data at sector level andaggregate trend data collected by supervisors should be incorporated intothe deliberations of authorities relevant for financial stability purposes(whether part of, or separate from, the supervisor) to assist inidentification and analysis of systemic risk.The relevant authorities should have the ability to take pre-emptive actionto address systemic risks. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

13. 13Supervisors should have access to relevant financial stability analyses orassessments conducted by other authorities that affect the bankingsystem.21. This broad financial system perspective is integral to many of the CorePrinciples. For this reason, the Committee has not included a specificstand-alone Core Principle on macroprudential issues.22. In supervising an individual bank which is part of a corporate group, itis essential that supervisors consider the bank and its risk profile from anumber of perspectives: on a solo basis (but with both a micro and macrofocus as discussed above); on a consolidated basis (in the sense ofsupervising the bank as a unit together with the other entities within thebanking group) and on a group-wide basis (taking into account thepotential risks to the bank posed by other group entities outside of thebanking group).Group entities (whether within or outside the banking group) may be asource of strength but they may also be a source of weakness capable ofadversely affecting the financial condition, reputation and overall safetyand soundness of the bank.The Core Principles include a specific Core Principle on the consolidatedsupervision of banking groups, but they also note the importance ofparent companies and other non-banking group entities in anyassessment of the risks run by a bank or banking group.This supervisory risk perimeter extends beyond accountingconsolidation concepts.In the discharge of their functions, supervisors must observe a broadcanvas of risk, whether arising from within an individual bank, from itsassociated entities or from the prevailing macro financial environment. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

14. 1423. Supervisors should also remain alert to the movement, or build-up, offinancial activities outside the regulated banking sector (the developmentof shadow banking structures) and the potential risks this may create.Data or information on this should also be shared with any otherauthorities relevant for financial stability purposes.(iii) Crisis management, recovery and resolution24. Although it is not a supervisors role to prevent bank failures,supervisory oversight is designed to reduce both the probability andimpact of such failures.Banks will, from time to time, run into difficulties, and to minimise theadverse impact both on the troubled bank and on the banking andfinancial sectors as a whole, effective crisis preparation and management,and orderly resolution frameworks and measures are required.25. Such measures may be viewed from two perspectives:(i) The measures to be adopted by supervisory and other authorities(including developing resolution plans and in terms of informationsharing and cooperation with other authorities, both domestic andcross-border, to coordinate an orderly restructuring or resolution of atroubled bank); and(ii) Those to be adopted by banks (including contingency funding plansand recovery plans) which should be subject to critical assessment bysupervisors as part of their ongoing supervision.26. To reflect, and to emphasise, the importance of crisis management,recovery and resolution measures, certain Core Principles include specificreference to the maintenance and assessment of contingencyarrangements. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

15. 15The existing Core Principle on home-host relationships has also beenstrengthened to require cooperation and coordination between home andhost supervisors on crisis management and resolution for cross-borderbanks.(iv) Corporate governance, disclosure and transparency27. Corporate governance shortcomings in banks, examples of whichwere observed during the crisis, can have potentially seriousconsequences both for the bank concerned and, in some cases, for thefinancial system as a whole.A new Core Principle, focused on effective corporate governance as anessential element in the safe and sound functioning of banks, hastherefore been included in this revision.The new Principle brings together existing corporate governance criteriain the assessment methodology and gives greater emphasis to soundcorporate governance practices.28. Similarly, the crisis served to underline the importance of disclosureand transparency in maintaining confidence in banks by allowing marketparticipants to understand better a banks risk profile and thereby reducemarket uncertainties about the banks financial strength.In recognition of this, a new Core Principle has been added to providemore direction on supervisory practices in this area.Structure and assessment of Core PrinciplesStructure29. The preceding versions of the Core Principles were accompanied by aseparate assessment methodology that set out the criteria to be used togauge compliance with the Core Principles. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

16. 16In this revision, the assessment methodology has been merged into asingle document with the Core Principles reflecting the essentialinterdependence of Core Principles and Assessment Criteria and theircommon usage.The Core Principles have also been reorganised: Principles 1-13 addresssupervisory powers, responsibilities and functions, and Principles 14-29cover supervisory expectations of banks, emphasising the importance ofgood corporate governance and risk management, as well as compliancewith supervisory standards.This re-ordering highlights the difference between what supervisors dothemselves and what they expect banks to do. For comparability with thepreceding version, a mapping table is provided in Annex 1.Assessment30. The Core Principles establish a level of sound supervisory practicethat can be used as a benchmark by supervisors to assess the quality oftheir supervisory systems.They are also used by the IMF and the World Bank, in the context of theFinancial Sector Assessment Programme (FSAP), to assess theeffectiveness of countries banking supervisory systems and practices.31. This revision of the Core Principles retains the previous practice ofincluding both essential criteria and additional criteria as part of theassessment methodology.Essential criteria set out minimum baseline requirements for soundsupervisory practices and are of universal applicability to all countries.An assessment of a country against the essential criteria must, however,recognise that its supervisory practices should be commensurate with therisk profile and systemic importance of the banks being supervised. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

17. 17In other words, the assessment must consider the context in which thesupervisory practices are applied.The concept of proportionality underpins all assessment criteria even if itis not always directly referenced.32. Effective banking supervisory practices are not static.They evolve over time as lessons are learned and banking businesscontinues to develop and expand.Supervisors are often swift to encourage banks to adopt best practiceand supervisors should demonstrably practice what they preach interms of seeking to move continually towards the highest supervisorystandards.To reinforce this aspiration, the additional criteria in the Core Principlesset out supervisory practices that exceed current baseline expectationsbut which will contribute to the robustness of individual supervisoryframeworks.As supervisory practices evolve, it is expected that upon each revision ofthe Core Principles, a number of additional criteria will migrate tobecome essential criteria as expectations on baseline standards change.The use of essential criteria and additional criteria will, in this sense,contribute to the continuing relevance of the Core Principles over time.33. In the past, countries were graded only against the essential criteria,although they could volunteer to be assessed against the additionalcriteria too and benefit from assessors commentary on how supervisorypractices could be enhanced.In future, countries undergoing assessments by the IMF and/or theWorld Bank can elect to be graded against the essential and additionalcriteria. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

18. 18It is anticipated that this will provide incentives to jurisdictions,particularly those that are important financial centres, to lead the way inthe adoption of the highest supervisory standards.As with the essential criteria, any assessment against additional criteriashould recognise the concept of proportionality as discussed above.34. Moreover, it is important to bear in mind that some tasks, such as acorrect assessment of the macroeconomic environment and the detectionof the build-up of dangerous trends, do not lend themselves to a rigidcompliant/non-compliant structure.Although these tasks may be difficult to assess, supervisors should makeassessments that are as accurate as possible given the informationavailable at the time and take reasonable actions to address and mitigatesuch risks.35. While the publication of the assessments of jurisdictions affordstransparency, an assessment of one jurisdiction will not be directlycomparable to that of another.First, assessments will have to reflect proportionality.Thus, a jurisdiction that is home to many SIBs will naturally have a higherhurdle to obtain a Compliant grading10 versus a jurisdiction which onlyhas small, non-complex deposit-taking institutions.Second, with this version of the Core Principles, jurisdictions can elect tobe graded against essential criteria only or against both essential criteriaand additional criteria.Third, assessments will inevitably be country-specific and time -dependent to varying degrees.Therefore, the description provided for each Core Principle and thequalitative commentary accompanying the grading for each Core Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

19. 19Principle should be reviewed in order to gain an understanding of ajurisdictions approach to the specific aspect under consideration and theneed for any improvements. Seeking to compare countries by a simplereference to the number of Compliant versus Non-Compliant gradesthey receive is unlikely to be informative.36. From a broader perspective, effective banking supervision isdependent on a number of external elements, or preconditions, whichmay not be within the direct jurisdiction of supervisors.Thus, in respect of grading, the assessment of preconditions will remainqualitative and distinct from the assessment (and grading) of compliancewith the Core Principles.37. Core Principle 29 dealing with the Abuse of Financial Servicesincludes, among other things, supervision of banks anti-moneylaundering/combating the financing of terrorism (AML/CFT) controls.The Committee recognises that assessments against this Core Principlewill inevitably, for some countries, involve a degree of duplication withthe mutual evaluation process of the Financial Action Task Force(FATF).To address this, where an evaluation has recently been conducted by theFATF on a given country, FSAP assessors may rely on that evaluation andfocus their own review on the actions taken by supervisors to address anyshortcomings identified by the FATF.In the absence of any recent FATF evaluation, FSAP assessors willcontinue to assess countries supervision of banks AML/CFT controls.Consistency and implementation38. The banking sector is only a part, albeit an important part, of afinancial system and in conducting this review of its Core Principles, theCommittee has sought to maintain consistency, where possible, with the Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

20. 20corresponding standards for securities and insurance (which havethemselves been the subject of recent reviews), as well as those foranti-money laundering and transparency.Differences will, however, inevitably remain as key risk areas andsupervisory priorities differ from sector to sector. In implementing theCore Principles, supervisors should take into account the role of thebanking sector in supporting and facilitating productive activities for thereal economy.II. The Core Principles39. The Core Principles are a framework of minimum standards for soundsupervisory practices and are considered universally applicable.The Committee issued the Core Principles as its contribution tostrengthening the global financial system.Weaknesses in the banking system of a country, whether developing ordeveloped, can threaten financial stability both within that country andinternationally.The Committee believes that implementation of the Core Principles by allcountries would be a significant step towards improving financialstability domestically and internationally, and provide a good basis forfurther development of effective supervisory systems.The vast majority of countries have endorsed the Core Principles andhave implemented them.40. The revised Core Principles define 29 principles that are needed for asupervisory system to be effective.Those principles are broadly categorised into two groups: the first group(Principles 1 to 13) focus on powers, responsibilities and functions of Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

21. 21supervisors, while the second group (Principles 14 to 29) focus onprudential regulations and requirements for banks.The original Principle 1 has been divided into three separate Principles,while new Principles related to corporate governance, and disclosure andtransparency, have been added.This accounts for the increase from 25 to 29 Principles.41. The 29 Core Principles are:Supervisory powers, responsibilities and functions Principle 1 Responsibilities, objectives and powers:An effective system of banking supervision has clear responsibilities andobjectives for each authority involved in the supervision of banks andbanking groups.A suitable legal framework for banking supervision is in place to provideeach responsible authority with the necessary legal powers to authorisebanks, conduct ongoing supervision, address compliance with laws andundertake timely corrective actions to address safety and soundnessconcerns. Principle 2 Independence, accountability, resourcing andlegal protection for supervisors:The supervisor possesses operational independence, transparentprocesses, sound governance, budgetary processes that do not undermineautonomy and adequate resources, and is accountable for the dischargeof its duties and use of its resources.The legal framework for banking supervision includes legal protection forthe supervisor. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

22. 22 Principle 3 Cooperation and collaboration:Laws, regulations or other arrangements provide a framework forcooperation and collaboration with relevant domestic authorities andforeign supervisors.These arrangements reflect the need to protect confidential information. Principle 4 Permissible activities:The permissible activities of institutions that are licensed and subject tosupervision as banks are clearly defined and the use of the word bank innames is controlled. Principle 5 Licensing criteria:The licensing authority has the power to set criteria and rejectapplications for establishments that do not meet the criteria.At a minimum, the licensing process consists of an assessment of theownership structure and governance (including the fitness and proprietyof Board members and senior management) of the bank and its widergroup, and its strategic and operating plan, internal controls, riskmanagement and projected financial condition (including capital base).Where the proposed owner or parent organisation is a foreign bank, theprior consent of its home supervisor is obtained. Principle 6 Transfer of significant ownership:The supervisor has the power to review, reject and impose prudentialconditions on any proposals to transfer significant ownership orcontrolling interests held directly or indirectly in existing banks to otherparties. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

23. 23 Principle 7 Major acquisitions:The supervisor has the power to approve or reject (or recommend to theresponsible authority the approval or rejection of), and impose prudentialconditions on, major acquisitions or investments by a bank, againstprescribed criteria, including the establishment of cross-borderoperations, and to determine that corporate affiliations or structures donot expose the bank to undue risks or hinder effective supervision. Principle 8 Supervisory approach:An effective system of banking supervision requires the supervisor todevelop and maintain a forward-looking assessment of the risk profile ofindividual banks and banking groups, proportionate to their systemicimportance; identify, assess and address risks emanating from banks andthe banking system as a whole; have a framework in place for earlyintervention; and have plans in place, in partnership with other relevantauthorities, to take action to resolve banks in an orderly manner if theybecome non-viable. Principle 9 Supervisory techniques and tools:The supervisor uses an appropriate range of techniques and tools toimplement the supervisory approach and deploys supervisory resourceson a proportionate basis, taking into account the risk profile and systemicimportance of banks. Principle 10 Supervisory reporting: The supervisor collects, reviews and analyses prudential reports andstatistical returns from banks on both a solo and a consolidated basis, andindependently verifies these reports through either on-site examinationsor use of external experts. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

24. 24 Principle 11 Corrective and sanctioning powers ofsupervisors:The supervisor acts at an early stage to address unsafe and unsoundpractices or activities that could pose risks to banks or to the bankingsystem.The supervisor has at its disposal an adequate range of supervisory toolsto bring about timely corrective actions.This includes the ability to revoke the banking licence or to recommendits revocation. Principle 12 Consolidated supervision:An essential element of banking supervision is that the supervisorsupervises the banking group on a consolidated basis, adequatelymonitoring and, as appropriate, applying prudential standards to allaspects of the business conducted by the banking group worldwide. Principle 13 Home-host relationships:Home and host supervisors of cross-border banking groups shareinformation and cooperate for effective supervision of the group andgroup entities, and effective handling of crisis situations. Supervisorsrequire the local operations of foreign banks to be conducted to the samestandards as those required of domestic banks.Prudential regulations and requirements Principle 14 Corporate governance: Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

25. 25The supervisor determines that banks and banking groups have robustcorporate governance policies and processes covering, for example,strategic direction, group and organisational structure, controlenvironment, responsibilities of the banks Boards and seniormanagement, and compensation.These policies and processes are commensurate with the risk profile andsystemic importance of the bank. Principle 15 Risk management process:The supervisor determines that banks have a comprehensive riskmanagement process (including effective Board and senior managementoversight) to identify, measure, evaluate, monitor, report and control ormitigate all material risks on a timely basis and to assess the adequacy oftheir capital and liquidity in relation to their risk profile and market andmacroeconomic conditions.This extends to development and review of contingency arrangements(incuding robust and credible recovery plans where warranted) that takeinto account the specific circumstances of the bank.The risk management process is commensurate with the risk profile andsystemic importance of the bank. Principle 16 Capital adequacy:The supervisor sets prudent and appropriate capital adequacyrequirements for banks that reflect the risks undertaken by, and presentedby, a bank in the context of the markets and macroeconomic conditionsin which it operates. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

26. 26The supervisor defines the components of capital, bearing in mind theirability to absorb losses.At least for internationally active banks, capital requirements are not lessthan the applicable Basel standards. Principle 17 Credit risk:The supervisor determines that banks have an adequate credit riskmanagement process that takes into account their risk appetite, riskprofile and market and macroeconomic conditions.This includes prudent policies and processes to identify, measure,evaluate, monitor, report and control or mitigate credit risk (includingcounterparty credit risk) on a timely basis.The full credit lifecycle is covered including credit underwriting, creditevaluation, and the ongoing management of the banks loan andinvestment portfolios. Principle 18 Problem assets, provisions and reserves:The supervisor determines that banks have adequate policies andprocesses 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 andprocesses to identify, measure, evaluate, monitor, report and control ormitigate concentrations of risk on a timely basis. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

27. 27Supervisors set prudential limits to restrict bank exposures to singlecounterparties or groups of connected counterparties. Principle 20 Transactions with related parties:In order to prevent abuses arising in transactions with related parties andto address the risk of conflict of interest, the supervisor requires banks toenter into any transactions with related parties on an arms length basis;to monitor these transactions; to take appropriate steps to control ormitigate the risks; and to write off exposures to related parties inaccordance with standard policies and processes. Principle 21 Country and transfer risks:The supervisor determines that banks have adequate policies andprocesses to identify, measure, evaluate, monitor, report and control ormitigate country risk and transfer risk in their international lending andinvestment activities on a timely basis. Principle 22 Market risks:The supervisor determines that banks have an adequate market riskmanagement process that takes into account their risk appetite, riskprofile, and market and macroeconomic conditions and the risk of asignificant deterioration in market liquidity.This includes prudent policies and processes to identify, measure,evaluate, monitor, report and control or mitigate market risks on a timelybasis. Principle 23 Interest rate risk in the banking book: Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

28. 28The supervisor determines that banks have adequate systems to identify,measure, evaluate, monitor, report and control or mitigate interest raterisk in the banking book on a timely basis.These systems take into account the banks risk appetite, risk profile andmarket and macroeconomic conditions. Principle 24 Liquidity risk:The supervisor sets prudent and appropriate liquidity requirements(which can include either quantitative or qualitative requirements orboth) for banks that reflect the liquidity needs of the bank.The supervisor determines that banks have a strategy that enablesprudent management of liquidity risk and compliance with liquidityrequirements.The strategy takes into account the banks risk profile as well as marketand macroeconomic conditions and includes prudent policies andprocesses, consistent with the banks risk appetite, to identify, measure,evaluate, monitor, report and control or mitigate liquidity risk over anappropriate set of time horizons.At least for internationally active banks, liquidity requirements are notlower than the applicable Basel standards. Principle 25 Operational risk:The supervisor determines that banks have an adequate operational riskmanagement framework that takes into account their risk appetite, riskprofile 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. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

29. 29 Principle 26 Internal control and audit:The supervisor determines that banks have adequate internal controlframeworks to establish and maintain a properly controlled operatingenvironment for the conduct of their business taking into account theirrisk profile.These include clear arrangements for delegating authority andresponsibility; separation of the functions that involve committing thebank, paying away its funds, and accounting for its assets and liabilities;reconciliation of these processes; safeguarding the banks assets; andappropriate independent internal audit and compliance functions to testadherence to these controls as well as applicable laws and regulations. Principle 27: Financial reporting and external audit:The supervisor determines that banks and banking groups maintainadequate and reliable records, prepare financial statements in accordancewith accounting policies and practices that are widely acceptedinternationally and annually publish information that fairly reflects theirfinancial condition and performance and bears an independent externalauditors opinion.The supervisor also determines that banks and parent companies ofbanking groups have adequate governance and oversight of the externalaudit function. Principle 28 Disclosure and transparency: The supervisor determines that banks and banking groups regularlypublish information on a consolidated and, where appropriate, solo basisthat is easily accessible and fairly reflects their financial condition, Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

30. 30performance, risk exposures, risk management strategies and corporategovernance policies and processes. Principle 29 Abuse of financial services:The supervisor determines that banks have adequate policies andprocesses, including strict customer due diligence rules to promote highethical and professional standards in the financial sector and prevent thebank from being used, intentionally or unintentionally, for criminalactivities.42. The Core Principles are neutral with regard to different approaches tosupervision, so long as the overriding goals are achieved.They are not designed to cover all the needs and circumstances of everybanking system. Instead, specific country circumstances should be moreappropriately considered in the context of the assessments and in thedialogue between assessors and country authorities.43. National authorities should apply the Core Principles in thesupervision of all banking organisations within their jurisdictions.Individual countries, in particular those with advanced markets andbanks, may expand upon the Core Principles in order to achieve bestsupervisory practice.44. A high degree of compliance with the Core Principles should fosteroverall financial system stability; however, this will not guarantee it, norwill it prevent the failure of banks. Banking supervision cannot, andshould not, provide an assurance that banks will not fail. In a marketeconomy, failures are part of risk-taking. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

31. 3145. The Committee stands ready to encourage work at the national levelto implement the Core Principles in conjunction with other supervisorybodies and interested parties.The Committee invites the international financial institutions and donoragencies to use the Core Principles in assisting individual countries tostrengthen their supervisory arrangements.The Committee will continue to collaborate closely with the IMF and theWorld Bank in their monitoring of the implementation of theCommittees prudential standards.The Committee also remains committed to further enhancing itsinteraction with supervisors from non-member countries. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

32. 32Policymaking in an interconnectedworldLuncheon speech by Jaime CaruanaGeneral Manager, Bank for InternationalSettlementsThe Federal Reserve Bank of KansasCitys 36th Economic Policy Symposiumon The changing policy landscapeJackson HoleLet me extend my thanks to PresidentGeorge and the organisers for theopportunity to address this gathering atan event that is more keenly anticipated bypolicymakers and journalists with every passing year.My question today is: Is there scope for more international cooperation inmonetary policy?After all, we see international cooperation as essential for financialregulation.Why do we reject keeping ones own house in order as a precept forfinancial regulation but accept it for monetary policy?The question is not a new one. In his famous Critical essays on monetarytheory, Sir John Hicks argued that individual central banks have onlylimited influence because: they have been national central banks. Only in a national economythat is largely self-contained, can a national central bank be a true centralbank; with the development of world markets, and (especially) of worldfinancial markets, national central banks take a step down, becomingsingle banks in a world-wide system . Thus the problem that was Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

33. 33(partially) solved by the institution of national central banks hasreappeared . on the world level.That was in 1967, during the waning days of Bretton-Woods.And financial integration over the past 45 years has made the problemthat Hicks identified even more intractable.The burden of my remarks today is that central banks need to take a moreinternational perspective, recognise their collective influence and takeinto account monetary policy spillovers.Monetary policy that contributes to financial stability needs more of thecooperation that we already practise in financial regulation.Let me break my main question into four questions and then turn to each:1. What was the state of cooperation infinancial regulation and monetary policybefore the crisis?2. Where does cooperation stand after thecrisis?3. Why is the scope for internationalcooperation in monetary policy oftenunderestimated?4. Do we need to improve the institutionalframework for monetary policycooperation? Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

34. 34Q1. What was the state of international cooperation in financialregulation and monetary policy before the crisis?Since the financial liberalisation of the 1970s, the cooperation onregulatory standards for large international banks as embodied in Basel Iand II extended well beyond any cooperation in monetary policy outsidethe euro area.This cooperation involved:(i) Exchange of information;(ii) Information-sharing based on a common understanding of how theworld works;(iii) Joint decision-making; and(iv) Standards set by an international committee.The very first papers circulated to the Basel Committee on BankingSupervision (BCBS) in 1975 surveyed the Rules and practices to protectthe banks solvency and liquidity.It turned out that these varied a great deal.Subsequently, regulators evolved a common intellectual framework andcame to speak a common language.In 1988, Basel I went one step further, to joint decision-making. It setdefinitions of capital, risk weights for assets, and, crucially, a minimumratio of capital to assets.These formulations were based on consensus, not enshrined in a treaty orin international law. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

35. 35Instead, the original Basel accord was enacted in national law andenforced by national regulators.In fact, market pressure quickly made Basel I the standard even for banksin countries not represented on the BCBS.The driving forces for this cooperation are well known.As countries liberalised their capital accounts and moved to floatingexchange rates, banks seized the opportunity to intermediateinternational capital flows.Soon after, Bankhaus Herstatt and Franklin National collapsed.These banks were not globally systemically important financialinstitutions, in todays parlance, but their messy failures did help to driveforward international cooperation on bank regulation.When, in August 1982, the big banks suddenly stopped lending to LatinAmerica, Congress increased the IMFs resources but demanded highercapital levels for big US banks.Concerns about competitive neutrality then prompted the FederalReserve to pursue joint action in what became Basel I.Basel III, to be discussed in a moment, has marked an even more explicitshift towards internalising the externalities imposed by big banks andbanks collective behaviour.By contrast, monetary policy remained mainly national after thebreakdown of Bretton Woods.Attempts at cooperation were episodic, mainly relating to exchange rates.This gave monetary cooperation a bad name especially in countries withcurrent account surpluses, which came under pressure to expanddemand. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

36. 36At the level of theory, monetary policy shifted from the 1930s focus oncompetitive devaluation, first to the post-war treatment of monetarypolicy as just one instrument in overall macroeconomic stability policy,and then in the past 25 years to the guardian of domestic price stability.Flexible exchange rates, it was thought, would provide buffers againstexternal shocks while policymakers kept their own house in order.In fact, the largest economies not only remained relatively closed but alsohad banking systems with very low proportions of foreign currency assets.To be sure, the quality of global monetary policy discussions hasadvanced over the past generation, as a common intellectual frameworkevolved.Indeed, one could argue that monetary policymakers shared a morethoroughly elaborated intellectual framework than did their counterpartsin financial regulation.Even so, this shared framework could be indifferent (or even hostile) tocooperation in monetary policy.Q2. Where does cooperation stand after the financial crisis?The short answer is that we have agreed to cooperate more deeply on theregulatory/financial stability front.But on the monetary policy front, the pre-crisis convergence of views hasbecome strained.There is little doubt that, since the crisis, we have had the widest, deepestand most far-reaching regulatory cooperation in history.Participation has broadened, coordination has intensified, andimplementation will be peer-reviewed.Institutionally, all G20 members have joined the BCBS. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

37. 37Similarly, the Financial Stability Boards membership has become moreinclusive.Emerging market representatives bring useful macroprudentialexperience to the table.And attention is being paid to vulnerabilities in the shadow bankingsystem, outside the narrow scope of the regulated sector.Cooperation has intensified with Basel IIIs requirement for more andbetter capital, backstopped by a simple leverage ratio and internationaloversight of weights and implementation.Cooperation has also widened with the inclusion of internationalstandards on liquidity management.Recognition of potential procyclicality in the operation of capitalstandards has led to the adoption of mutual recognition in the newcountercyclical capital requirement, which empowers host countryauthorities.Tougher solvency standards have been set for banks whose failure couldhave system-wide effects.We should not minimise the challenges ahead.I am acutely aware that, even as intended regulatory cooperation hasreached an all-time high, the risks of fragmenting banking along nationallines have grown.While there are long-standing differences in the tax treatment of loan-lossprovisions, national bank bonus taxes have been imposed and nowfinancial transaction taxes are being discussed regionally. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

38. 38While Dodd-Frank is improving the funding model of US-charteredbanks, other banks that rely on wholesale funding have gained marketsshare in dollar intermediation.While important advances have been made, serious obstacles remain inconcerting resolution regimes given different bankruptcy laws.A particularly troubling source of fragmentation along country lines is theinclination to put up national barriers against contagion.As Mario Draghi has said, even though each of them may be right,collectively they have been wrong.While regulatory cooperation is the prerequisite for open financialmarkets and the free flow of funds, capital controls seem to be gainingacceptance as a response to the challenge of managing currencies whenyields are zero in most major money markets.These developments threaten to segment financial markets, not only inthe euro area but around the world.Nevertheless, I remain hopeful that the movement towards globalconsistency and more harmonisation will prevail over the forces workingto fragment international banking regulation and supervision.On monetary policy cooperation, there were notable steps during thecrisis.Widespread, and ultimately in some cases, open-ended, cooperation inforeign-currency funding through central bank swaps had both themonetary goal of controlling the relevant market rates like Libor and thefinancial-stability goal of providing emergency funding.Such arrangements are temporary. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

39. 39But the willingness of central banks not least the Federal Reserve toact quickly and massively averted what could have been a meltdown.The global nature of the crisis also saw episodic cooperation in policy ratesetting.For instance, on 8 October 2008, interest rates were simultaneously cut bythe Bank of Canada, the Bank of England, the ECB, the Federal Reserve,the Riksbank, the Swiss National Bank and the Peoples Bank of China,in a concerted move that was strongly backed by the Bank of Japan.But a number of issues have strained the pre-crisis convergence of viewson monetary policy.What can monetary policy contribute to financial stability? And how doesmonetary policy work alongside macroprudential action?Q3. Why is the scope for international cooperation in monetarypolicy often underestimated?This question raises three more.First, do flexible exchange rates insulate economies as some theorysuggests?Second, are bond markets so globally integrated that policies affectingyields in major countries now have a bigger impact on yields in othercountries than they once did, possibly exerting an even larger effect thanlocal policies and conditions?And third, can central banks properly assess the aggregate impact of theiractions on global outcomes, or do they suffer from a fallacy ofcomposition? Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

40. 40Starting with exchange rates, flexible rates do of course help to insulate acountry from inflationary or deflationary shocks coming from abroad. Butthey do it imperfectly.First, since major currencies are used internationally, the policy rates setby their issuers directly affect monetary conditions elsewhere.Borrowing in foreign currencies may be rare in the biggest economies,but it can be significant elsewhere.And common monetary and risk factors affect the flow of internationalbank credit and portfolio capital.Since the crisis, while credit to US households and businesses has barelyresumed its growth, dollar loans to such borrowers in the rest of the worldhas grown at up to 20% and has reached about $7 trillion.Second, the foreign exchange markets behaviour does not always satisfythe textbook interest rate or purchasing power parity conditions.Exchange rate movements do not merely compensate for interest orinflation differentials.Instead, most of the time, currencies with an interest rate advantageactually appreciate against lower yielding currencies and can do so forsome time, making the domestic industry less competitive.The depreciation of higher-yielding currencies tends to happen fastduring episodes of stress in global asset markets, and many emergingmarket economies have found this destabilising.Next, there is the issue of international bond markets.As policy interest rates and official bond purchases affect bond yields,their effects ripple across globally integrated bond markets. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

41. 41This happens even with independent setting of policy rates and floatingexchange rates.Large-scale bond purchases can have global effects whether they are partof an explicit monetary policy or a side-effect of currency intervention.There is evidence that the large Japanese interventions of 200304lowered global bond yields, as dollars purchased in the foreign exchangemarket were invested in bonds.There is also evidence that the Federal Reserves recent large-scalebond-buying has also reduced global bond yields.So the integration of global bond markets makes for a global interest inpolicies that, intentionally or not, affect bond yields in major markets.Turning to the possibility of a fallacy of composition, I believe that aninternational perspective is essential if we are to correctly assess theimpact of central bank policies on global outcomes.The price dynamics in commodity markets which are increasinglysimilar to those in financial markets could be taken as a signal of globaldemand pressure rather than being considered by central banks as asupply shock for each of them.Similarly, each emerging market central bank might hesitate to raiseinterest rates out of concern for capital inflows, given the very low interestrates prevailing in major currencies.Indeed, if central banks were to take an international perspective, theymight discover that they would all be better off by raising rates, therebysetting global average interest rates more appropriately.These questions are not easy to answer. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

42. 42How can we cope with these spillovers: the interconnections arising fromthe behaviour of exchange rates, the globalisation of bond markets, andthe collective impact of policies?John Hicks knew that the one simple answer to the limitations heidentified a global central bank would be totally unrealistic.National central banks have national mandates, and meeting these isalready difficult enough.We know less about the workings of international linkages than we doabout domestic linkages.How interest rates will affect the major centres in other countries dependsin part on those countries own policies and institutions.And it would not be difficult to add to this list.A number of factors combine to make nation states less than willing tocooperate on monetary policy.For instance, monetary policy can be redistributional, shifting wealth andincome between creditors and debtors.This makes it even more politically charged than regulatory policy ifthat is possible.Nevertheless, I do not believe that monetary policy can be restricted tokeeping ones house in order at all times.While such house-keeping is necessary, monetary policy does requireinternational perspective and cooperation, particularly when it providesthe backing for financial stability.Q4. Do we need to improve the institutional setting for monetarycooperation? Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

43. 43We hope that the structural trend that deepens interdependence, namelythe globalisation of financial markets, continues.If it does, there will be periods, in good times and bad, when internationalspillovers will be substantial and highly relevant for monetary policy.If this notion and the underlying analysis are accepted, then the questionarises of how to strengthen cooperation in monetary policy.This does not necessarily mean monetary policy coordination at theglobal level, but it does require central banks to better appreciate,internalise and share the side effects that arise from individual monetarypolicies.This will require a shift to a more global analytical approach, one thatseeks to factor in collective behaviour, interactions and feedback effects.This would also help us to better frame international cooperation.I therefore tend to agree with the recent call from prominent academicsand practitioners for global considerations to play a more explicit role inmonetary policy frameworks.But I am more sceptical about their proposal to formalise cooperativearrangements.The major central banks would not be able to publicly outline the mutualconsistency of their policies.Drawing attention to areas of inconsistency and dissent would probablyundermine effective cooperation.Traditionally, the BIS and the various Basel committees have alwayssought to complement the domestic analysis at central banks with a moreglobal perspective. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

44. 44The informal but structured nature of the meetings that take place at theBIS has often facilitated analysis and discussion of the many internationaldimensions of monetary policies.For example, after providing support to a central bank review of globalliquidity we are working on regular indicators that seek to capture globalfinancial conditions.These and other global measures also serve as inputs to vulnerabilityanalysis and the early warning exercise conducted by the FinancialStability Board and the IMF.The IMF is playing a role as well, with its spillover reports andmacroeconomic policies consistency analysisLet me conclude by saying that much needs to be done.Moving towards a more cooperative approach makes more sense thanreversing the internationalisation of markets and segmenting thosemarkets in the hope of protecting them against spillovers.We need more research on these questions and I hope that some of thepowerful analytic talents represented here at Jackson Hole will bebrought to bear on them. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

45. 45FSA statement regarding CRD IV implementationThe draft European Union legislation to update thecapital requirements framework, known as CRD IV, hasbeen under discussion between the European Parliament,European Commission and Council of Ministers.These discussions originally aimed to finalise an agreed position by endJune 2012 enabling adoption by the European Parliament plenary in earlyJuly 2012.Following the delay of the Parliaments plenary vote and the recentstatement by the Rapporteur of the European Parliament and thediscussion of the Council of Economic and Finance Ministers, it is clearthe legislation will not be adopted earlier than autumn 2012.Following adoption it is necessary for verification, translation andsignature of the EU legislation to take place before it can be published inthe Official Journal of the European Union.Publication in the Official Journal is a necessary pre-cursor of EUlegislation entering into force.On this basis it does not appear feasible that the legislation can enter intoforce in line with the implementation date of 1 January 2013 as included inthe original European Commission proposal of July 2011.No alternative date has yet been communicated by the EU institutions.Furthermore, reflecting the delay in the negotiation process, theEuropean Banking Authority (EBA) issued a press release on 31 Julysetting out the potential need to phase-in or flexibly apply certaintechnical standards to ensure a practical approach to implementation. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

46. 46In light of these developments the FSA will keep the situation underactive review and continue to support the European institutions in theirefforts to reach a conclusion on the final version of the legislation.The FSA will continue to undertake all preparatory work that is possiblein the absence of finalised legislative text, in full expectation that the EUlegislation will follow the Basel III implementation timetable.We expect all firms in scope of CRD to do likewise.Banks must remain mindful of the vital importance of the direction set byBasel III for banking system stability.In particular the FSA will continue to undertake its supervision of banksin a manner consistent with the recommendations of the 22 June meetingof the interim Financial Policy Committee (FPC) of the Bank of England.The interim FPC recommended that: taking into account eachinstitutions risk profile, the FSA works with banks to ensure they build asufficient cushion of loss-absorbing capital in order to help to protectagainst the currently heightened risk of losses; that cushion maytemporarily be above that implied by the official transition path to BaselIII; and banks should continue to restrain cash dividends andcompensation in order to maximise the ability to build equity throughretained earnings.The FSA reminds those investment firms that are currently subject to theCapital Requirements Directive that they will be impacted by the CRD IVlegislation and that they too should prepare accordingly.The introduction of Common Reporting, which is incorporated into therequirements in CRD IV, is dependent on delivery of the necessarytechnical systems and on implementing technical standards to be draftedby EBA under CRD IV and adopted by the European Commission. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

47. 47The FSA is proceeding with the necessary preparatory work to be ready tobegin collecting data under Common Reporting for the period beginning1 July 2013, should the legislation and related standards be finalised bythis date.In line with the press release issued by EBA, the FSA will take account ofany phase-in plans incorporated into the implementing technicalstandards on supervisory reporting. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

48. 48EBA, EIOPA and ESMAJoint Consultation Paper on Draft Regulatory Technical Standards on theuniform conditions of application of the calculation methods underArticle 6.2 of the Financial Conglomerates Directive (JC/CP/2012/02)I. Responding to this ConsultationEBA, EIOPA and ESMA (the ESAs) invite comments on all matters inthis paper and in particular on the specific questions stated in theattached document Overview of questions for Consultation at the endof this paper.Comments are most helpful if they:- respond to the question stated;- indicate the specific question to which the comment relates;- contain a clear rationale;- provide evidence to support the views expressed/ rationale proposed; and- describe any alternative regulatory choices EBA should consider.II. Executive SummaryThe CRR/CRD IV proposals (the so-called Capital RequirementsRegulation - henceforth CRR- and the so-called Capital Requirements Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

49. 49Directive henceforth CRD) set out prudential requirements for banksand other financial institutions which are expected to apply from 1January 2013.In anticipation of the finalisation of the legislative texts for theCRR/CRD IV, the EBA, EIOPA and ESMA (hereafter the ESAs) throughthe Joint Committee, have developed the draft RTS in accordance withthe mandate contained in Article 46(4) of the CRR and Article 139 ofCRDIV (amending Article 21 a (2a) of the Directive 2002/87/EC) on thebasis of the European Commissions proposals.This Article provides the ESAs through the Joint Committee, to developdraft Regulatory Technical Standards (RTS) with regard to the conditionsof the application of the Article 6(2) of the Directive 2002/87/EC(hereafter the Directive).Further the ESAs have developed the draft RTS having regard to Article230 in connection with Articles 220 and 228 of the Directive2009/138/EC2.To the extent that the texts may change before their adoption, the ESAsshall adapt its draft RTS accordingly to reflect any developments.The RTS included in this consultation have to be submitted to the EUCommission by 1 January 2013.Please note that the ESAs have developed the present draft RTS based onthe European Commissions legislative proposals for the CRR/CRD IV.They have also taken into account major changes subsequently proposedby the revised texts produced by the Council of the EU and the EuropeanParliament, during the ordinary legislative procedure (co-decisionprocess).Following the end of the consultation period, and to the extent that thefinal text of the CRR/CRD IV changes before the adoption of the RTS, Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

50. 50the ESAs will adapt the draft RTS accordingly to reflect anydevelopments.Main features of the RTSThis consultation paper puts forward draft RTS in order to ensure thatinstitutions that are part of a financial conglomerate apply the appropriatecalculation methods for the determination of required capital at the levelof the conglomerate.They are based in particular on the following elements:General Principleso Elimination of multiple gearing;o Elimination of intra-group creation of own funds;o Transferability and availability of own funds; ando Coverage of deficit at financial conglomerate level having regard todefinition of cross-sector capital.Technical calculation methods1. Method 1: Accounting consolidation method:The FICOD provides in relation to Method 1 that the own funds arecalculated on the basis of the consolidated position of the group.According to this general provision, the calculation of own funds shouldbe based on the relevant accounting framework for the consolidatedaccounts of the conglomerate applicable to the scope of the Directive. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

51. 51The use of consolidated accounts eliminates all own funds intra-groupitems, in order to avoid double counting of capital instruments.According to the Directive provisions, the eligibility rules are thoseincluded in sectoral provisions.2. Method 2: Deduction and aggregation method.This method calculates the supplementary capital adequacyrequirements of a conglomerate based on the accounts of solo entities.It aggregates the own funds, deducts the book value of the participationsin other entities of the group and specifies treatment of the proportionalshare applicable to own funds and solvency requirements.All intra-group creation of own funds shall be eliminated.3. Method 3: Combination of methods 1 and 2.The use of combination of accounting consolidation method 1 anddeduction and aggregation method 2 is limited to the cases where the useof either method 1 or method 2 would not be appropriate and is subject tothe permission by the competent authorities.III. Background and rationaleThe supplementary supervision of financial entities in a financialconglomerate is covered by the Financial Conglomerates Directive2002/87/EC, hereafter known as the Directive.This Directive provides for competent authorities to be able to assess at agroup-wide level the financial situation of credit institutions, insuranceundertakings and investment firms which are part of a financialconglomerate, in particular as regards solvency (including the eliminationof multiple gearing of own funds instruments). Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

52. 52The nature of RTS under EU lawDraft RTS are produced in accordance with Article 10 of the ESAsregulation.According to Article 10(4) of the ESAs regulation, they shall be adoptedby means of Regulations or Decisions.According to EU law, EU regulations are binding in their entirety anddirectly applicable in all Member States.This means that, on the date of their entry into force, they become part ofthe national law of the Member States and that their implementation intonational law is not only unnecessary but also prohibited by EU law,except in so far as this is expressly required by them.Shaping these rules in the form of a Regulation would ensure alevel-playing field and would facilitate the cross-border provision ofservices.Background and regulatory approach followed in the draft RTSThese draft RTS are produced in accordance with CRD IV/CRRproposals, which provide that the EBA, ESMA and EIOPA (hereafter theESAs), through the Joint Committee, shall develop draft regulatorytechnical standards with regard to the conditions of the application of thecalculation methods with regard to Article 6(2) of the Directive and shallsubmit those draft regulatory technical standards to the Commission by 1January 2013.The proposed draft RTS covers the uniform conditions for the use of themethods for the determination of capital adequacy of a financialconglomerate under the Directive. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

53. 53They elaborate on Technical principles applying to all of the threemethods provided for by Directive; and also contain an Annex providingfurther detail for Method 2.The requirements contained in the draft RTS are mainly directed atinstitutions, although some of them are directed at competent authorities.IV. Draft Regulatory Technical Standards on the uniformconditions of application of the calculation methods underArticle 6.2 of the Financial Conglomerates DirectiveCommission Delegated Regulation (EU) No XX/2012supplementing Directive xx/XX/EU [CRD] of the European Parliamentand of the Council of [date], Regulation (..) No xx/XXXX [CRR] of theEuropean Parliament and of the Council of [date] and Directive2002/87/EC [Financial Conglomerates Directive] of the EuropeanParliament and of the Council of [date] with regard to regulatorytechnical standards for the uniform conditions of application of thecalculation methods under Article 6.2 of the Financial ConglomeratesDirective of XX Month 2012THE EUROPEAN COMMISSION,Having regard to the Treaty on the Functioning of the European Union,Having regard to the [proposal for a] Regulation (...) No xx/xxxx of theEuropean Parliament and of the Council of dd mm yyyy on prudentialrequirements for credit institutions and investment firms Regulationxx/xxxx [CRR] and in particular Article 46 (4) thereof.Having regard to the [proposal for a] Directive (...) No xx/xxxx of theEuropean Parliament and of the Council of dd mm yyyy on the access tothe activity of credit institutions and the prudential supervision of creditinstitutions and investment firms [CRDIV] and in particular Article 139thereof. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

54. 54Having regard to the Directive 2002/87/EC, as amended, of theEuropean Parliament and of the Council on the supplementarysupervision of credit institutions, insurance undertakings and investmentfirms in a financial conglomerate (hereinafter the Directive) and inparticular to Article 6(2) and Annex 1 thereof.Whereas:(1) Directive 2002/87/EC provides in Chapter II, Section 2, rules oncapital adequacy of financial conglomerates, such that the elements ofown funds are available at the level of a Financial Conglomerates arealways at least equal to the capital adequacy requirements as calculated inaccordance with Annex I of the Directive.(2) Regulation (...) No xx/xxx (CRR) provides in Article 46, within PartII, Chapter 2, Section 3, Sub-Section 2 and in the context of commonequityTier I rules, requirements for deduction where consolidation orsupplementary supervision are applied.This section of the CRR provides empowerments to the EuropeanCommission to adopt delegated acts (regulatory technical standards) inaccordance with articles 10-14 of the Regulation (EU) No 1093/2010establishing the European Banking Authority (EBA), Articles 10-14 ofthe Regulation (EU) No 1094/2010 establishing the European Insuranceand Occupational Pensions Authority (EIOPA), and Articles 10-14 of theRegulation (EU) No 1095/2010 (ESMA), establishing the EuropeanSecurities and Markets Authority.These acts will complete the EU single rulebook for institutions in thearea of own funds.(3) Directive (...) No xx/xxx (CRDIV) provides in Article 139 that theDirective 2002/87/EC shall be amended, such that the EBA, EIOPA andESMA through the Joint Committee, to develop draft Regulatory Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

55. 55Technical Standards (RTS) with regard to the conditions of theapplication of the Article 6(2) of the Directive.(4) For effective supervision of Financial Conglomerates, supplementarysupervision should be applied to all such conglomerates, thecross-sectoral financial activities of which are significant, which is thecase when certain thresholds are reached, no matter how they arestructured.Supplementary supervision should cover all financial activities identifiedby the sectoral financial legislation and all entities principally engaged insuch activities should be included in the scope of the supplementarysupervision, including asset management companies and alternativeinvestment fund management companies.(5) Without prejudice to sectoral rules, supplementary supervision of thecapital adequacy rules is necessary to bring more convergence in theapplication of the calculation methods listed in Annex 1 of the Directive.(6) For financial conglomerates which include significant banking orinvestment business and insurance business, multiple use of elementseligible for the calculation of own funds at the level of the financialconglomerate (multiple gearing) as well as any inappropriate intra-groupcreation of own funds must be eliminated.(7) The financial conglomerate should seek an acceptable timeframe forthe transferability of funds across entities within the financialconglomerate, which shall depend on whether the specific entity issubject to the Directive 2009/138/EC or the CRDIV/CRR.Moreover for an entity subject to the CRD IV/CRR this timeframe shouldbe expediated based on the fact that due to the nature of their activities,they are more vulnerable to a rapid deterioration in confidence and/orsudden resolution situation. Basel iii Compliance Professionals Association (BiiiCPA) www.basel-iii-association.com

56. 56(8) In addition any non-sector-specific own funds, in excess of sectoralrequirements, need to originate from entities which are not subject totransferability/availability impediments.(9) It is important to ensure that own funds are only included atconglomerate level if there are no impediments to the transfer of assets orrepayment of liabilities across different conglomerate entities, includingacross sectors.(10) If there is a deficit of own funds at the level of the financialconglomerate, the financial conglomerate should inform the coordinatoron the measures taken to cover this deficit.(11) Further