INTERNATIONAL BANKING & FINANCE: Regulation and Supervision. History of the Basel Committee. The breakdown of the Bretton Woods system of managed exchange rates in 1973 soon led to casualties. On 26 June 1974, West Germanys Federal Banking Supervisory Office withdrew Bankhaus Herstatts banking licence after finding that the banks foreign exchange exposures amounted to three times its capital. Banks outside Germany took heavy losses on their unsettled trades with Herstatt, adding an international dimension to the debacle. In October the same year, the Franklin National Bank of New York also closed its doors after racking up huge foreign exchange losses. Three months later, in response to these and other disruptions in the international financial markets, the central bank governors of the G10 countries established a Committee on Banking Regulations and Supervisory Practices. Later renamed as the Basel Committee on Banking Supervision, the Committee was designed as a forum for regular cooperation between its member countries on banking supervisory matters. Its aim was and is to enhance financial stability by improving supervisory knowhow and the quality of banking supervision worldwide. The Committee seeks to achieve its aims by setting minimum supervisory standards; by improving the effectiveness of techniques for supervising international banking business; and by exchanging information on national supervisory arrangements. And, to engage with the challenges presented by diversified financial conglomerates, the Committee also works with other standard-setting bodies, including those of the securities and insurance industries. Since the first meeting in February 1975, meetings have been held regularly three or four times a year. After starting life as a G10 body, the Committee expanded its membership in 2009 and now includes 27 jurisdictions. The Committee now reports to an oversight body, the Group of Central Bank Governors and Heads of Supervision (GHOS), which comprises central bank governors and (non-central bank) heads of supervision from member countries. Countries are represented on the Committee by their central bank and also by the authority with formal responsibility for the prudential supervision of banking business where this is not the central bank. The present Chairman of the Committee is Stefan Ingves, Governor of the Riksbank, Swedens central bank. (See list of past Basel Committee chairmen.) The Committees decisions have no legal force. Rather, the Committee formulates supervisory standards and guidelines and recommends statements of best practice in the expectation that individual national authorities will implement them. In this way, the Committee encourages convergence towards common standards and monitors their implementation, but without attempting detailed harmonisation of member countries supervisory approaches. At the outset, one important aim of the Committees work was to close gaps in international supervisory coverage so that (i) no foreign banking establishment would escape supervision; and (ii) that supervision would be adequate and consistent across member jurisdictions. A first step in this direction was the paper issued in 1975 that came to be known as the Concordat, which set out principles by which supervisory responsibility should be shared for banks foreign branches, subsidiaries and joint ventures between host and parent (or home) supervisory authorities. In May 1983, the Concordat was revised and re-issued as Principles for the supervision of banks foreign establishments . In April 1990, a supplement to the 1983 Concordat was issued with the aim of improving the cross-border flow of prudential information between banking supervisors. In June 1992, certain principles of the Concordat were reformulated as minimum standards. These standards were communicated to other banking supervisory authorities, who were invited to endorse them, and published in July 1992. In October 1996, the Committee released a report on The supervision of cross-border banking, drawn up by a joint working group that included supervisors from non-G10 jurisdictions and offshore centres. The document presented proposals for overcoming the impediments to effective consolidated supervision of the cross-border operations of international banks. Subsequently endorsed by supervisors from 140 countries, the report helped to forge relationships between supervisors in home and host countries. The involvement of non-G10 supervisors also played a vital part in the formulation of the Committees Core principles for effective banking supervision in the following year. The impetus for this document came from a 1996 report by the G7 finance ministers that had called for effective supervision in all important financial marketplaces, including those of emerging economies. As published in September 1997, the paper set out 25 basic principles that the Basel Committee believed should be in place for a supervisory system to be effective. After several revisions, most recently in September 2012, the document now embraces 29 principles, covering supervisory powers, the need for early intervention and timely supervisory actions; supervisory expectations of banks, and compliance with supervisory standards.
Posted on: Wed, 30 Jul 2014 17:09:05 +0000
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