1. Courtney Christie-VeitcH CARTAC
Update on Basel II Implementation in the Caribbean: Convergence of BCPs and Basel II
Credit Union Regulator’s Meeting and Workshop Kingstown, St. Vincent August 20-22, 2014
Courtney Christie-VeitcH
CARTAC

2. Background: The BCPs
Core Principles for Effective Banking Supervision:
Flexible and globally applicable
Based on the concept of proportionality
Minimum standards for sound prudential regulation and supervision for banks and banking systems and benchmark for Credit Union Supervision
Originally issued by BCBS in 1997
Uses
Used by countries to assess the quality of supervisory systems
Used to identify future work to achieve baseline level for sound supervisory practices
Used by IMF and World Bank for FSAP purposes

3. Background: The BCPs Structure of BCPs
Supervisory powers, responsibilities and functions
Objectives
Independence
Powers
Responsibilities
Prudential regulations and requirements/Supervisory expectations of banks
Adequate Capital to cover risks
Good corporate governance
Good risk management processes and internal controls
Compliance with supervisory standards

4. Prudential Supervision and Regulation Core Principles 1 – 13
Supervisory Functions
Supervisory Responsibilities
Supervisory Powers

5. Basel Core Principles Supervisory Powers, Responsibilities and Functions
Clear responsibilities and objectives for each authority involved in supervision of banks/groups
Legal powers to authorize banks, conduct ongoing supervision, address compliance with laws, undertake timely corrective actions to address safety and soundness concerns
Principle 1: Responsibilities, objectives and powers
Operational independence, transparent processes, sound governance, autonomous budgeting processes, adequate resources
Legal protection for supervisors
Principle 2: Independence, accountability, resourcing and legal protection for supervisors
Legal framework for cooperation and collaboration
Regulations and other arrangements to facilitate cooperation and collaboration
Arrangements reflect the need to protect confidential information
Principle 3: Cooperation and collaboration

6. Basel Core Principles Supervisory Powers, Responsibilities and Functions
Clearly defined permissible activities
Use of word “bank” controlled
Principle 4: Permissible Activities
Power to set licensing criteria
Power to reject firms that do not meet established criteria
Min. criteria: assessment of ownership structure and governance, fitness and propriety of board and senior mgn on a solo and group basis; assess strategic and operational plans; internal controls, risk management, projected financial positions
Obtain prior consent from home supervisors for foreign operations
Principle 5: Licensing Criteria
Supervisory power to review, reject and impose prudential conditions on any proposals to transfer significant ownership / controlling interests held directly or indirectly in existing banks or other parties
Principle 6: Transfer of significant ownership

7. Basel Core Principles Supervisory Powers, Responsibilities and Functions
Supervisory power to approve or reject major acquisition or investments
Power to impose prudential conditions on major acquisitions
Include establishment of cross border operations and
Determine that structures /affiliations do not expose banks to undue risk or hinder supervision
Principle 7: Major Acquisition
Requirements for supervisors to develop and maintain forward looking assessment of risk profile of banks and banking groups, proportionate to systemic importance
Framework to identify, assess and address risks from banks and banking systems
Framework for early intervention and plans in place to take actions for early intervention/resolve of problem banks in an orderly manner
Principle 8: Supervisory approach
Supervisors uses appropriate range of techniques and tools to conduct supervision
Deploys supervisory resources on a proportionate basis, based on risk profile and systemic importance of banks
Principle 9: Supervisory techniques and tools

8. Basel Core Principles Supervisory Powers, Responsibilities and Functions
Supervisor collects, reviews and analyze prudential reports and returns from banks on solo and consolidated basis
Supervisor independently verifies reports through onsite examinations or use of external experts
Principle 10: Supervisory reporting
Principle 11: Corrective and sanctioning powers
Supervisor acts at an early stage to address unsafe and unsound practices or activities that could pose risks to banks or banking systems
Supervisor has and uses adequate range of supervisory tools to bring about timely corrective actions
Ability to revoke or recommend revocation of banking licence
Principle 12: Consolidated Supervision
Supervision of banking group on a consolidated basis
Adequately monitor and apply prudential standards to all aspects of business conducted by banking group worldwide
Principle 13: Home-host relationships
Home and host supervisors share information on cross-border banking groups for ongoing supervision and effective handling of crisis situations
Supervisors require local operations of foreign banks to be conducted to the same standards as domestic banks.

9. Prudential Supervision and Regulation Core Principles 14 – 29
Compliance with Supervisory Standards
Risk Management
Corporate Governance

10. Basel Core Principles Prudential Regulations and Requirements
Supervisor determines that banks and banking groups have robust corporate governance policies covering strategic direction group and organizational structure, control environment, responsibilities of the banks ’board and senior management and compensation
Policies and processes are commensurate with risk profile and systemic importance of the bank
Principle 14: Corporate Governance
Supervisors 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
Comprehensive RM process to assess the adequacy of their capital and liquidity in relation to their risk profile and market and macroeconomic conditions
RM process to develop and review contingency arrangements and recovery plans
RM process commensurate with risk profile and systemic importance of the bank
Principle 15: Risk Management Process
Supervisor sets prudent and appropriate capital adequacy requirements for banks that reflect the risks undertaken by, and presented by, a bank in the context of market and macroeconomic conditions in which it operates
Supervisors defines components of capital bearing in mind loss absorbency
Capital requirements should not be less that applicable Basel Standards
Principle 16: Capital Adequacy

11. Basel Core Principles Prudential Regulations and Requirements
Supervisor determines that banks have an adequate credit risk management process that takes into account risk appetite, risk profile and market and macroeconomic conditions
CRMP takes into account prudent policies and processes to identify, measure, evaluate, monitor, report and control or mitigate credit risk on a timely basis.
Policies and processes should cover credit life cycle i.e. underwriting, evaluation, management of loan and investment portfolios
Principle 17: Credit Risk
Supervisor determines that banks have adequate policies and processes for the early identification and management of problem assets
Policies and processes for the maintenance of adequate provisions and reserves
Principle 18: Problem assets, provisions and reserves
Supervisors determines that banks have adequate policies and processes to identify, measure, evaluate, monitor, report and control or mitigate concentrations of risks on a timely basis
Supervisors set prudential limits to restrict bank’s exposures to single counter parties or groups of connected counterparties.
Principle 19: Concentration risk and large exposure limits

12. Basel Core Principles Prudential Regulations and Requirements
Supervisor determines that banks enter into arrangements with related parties on an arms length basis
Supervisors ensures that banks monitor related party transactions and take appropriate steps to control or mitigate the risks and write off exposures to related parties in accordance with standard policies and procedures
Principle 20: Transactions with related parties
Supervisor determines that banks have adequate policies and processes to identify, measure, evaluate, monitor, report and control or mitigate country risk in their international lending and investment activities on a timely basis
Principle 21: Country and Transfer Risks
Supervisors determines that banks have adequate policies and processes to identify, measure, evaluate, monitor, report and control or mitigate market risks, taking into account risk appetite, risk profile and market and macroeconomic conditions and the risk of a significant deterioration in market liquidity
Principle 22: Market Risks

13. Basel Core Principles Prudential Regulations and Requirements
Supervisor determines that banks have an adequate risk management framework that takes into account their risk appetite, risk profile and market and macroeconomic conditions
Supervisors determine that banks have prudent policies and processes to identify, measure, evaluate, monitor, report and control or mitigate interest rate risk in the banking book on a timely basis
Principle 23: Interest Rate Risk in the Banking Book
Supervisor sets prudent and appropriate liquidity requirements (qualitative or quantitative) that reflects liquidity needs of the bank
Supervisor determines that banks have a strategy that enables prudent management of liquidity risks and compliant with liquidity requirements
Banks strategy takes into account its risk profile as well as market and macro economic conditions
Supervisors determines that banks have adequate policies and processes to identify, measure, evaluate, monitor, report and control or mitigate liquidity risk over an appropriate set of time horizons and should not be lower than applicable Basel Standards
Principle 24: Liquidity Risk
Supervisors determines that banks have adequate policies and processes to identify, assess, evaluate, monitor, report and control or mitigate operational risks, taking into account risk appetite, risk profile and market and macroeconomic conditions.
Principle 25: Operational Risk

14. Basel Core Principles Prudential Regulations and Requirements
Supervisor determines that banks have adequate internal control frameworks to establish and maintain an properly control operating environment for the conduct of business taking into account risk profile.
Clear arrangements for delegating authority and responsibilities
Separation of functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities
Safeguarding the bank’s assets
Appropriate independent internal audit and compliance functions to test adherence to applicable laws, regulations, as well as internal processes.
Principle 26: Internal control and audit
Supervisor determines that banks and banking group maintain adequate and reliable records, prepare financial statements in accordance with accounting policies and practices, widely accepted internationally
Supervisor determines that banks annually publishes information that fairly reflects their financial conditions and performance and bears an independent external auditor’s opinion
Supervisors determines that banks and parent companies have adequate oversight and governance of the external audit function.
Principle 27: Financial reporting and external audit

15. Basel Core Principles Prudential Regulations and Requirements
Supervisor determines that banks and banking groups regularly publishes information on a consolidated and solo basis, that is easily accessible and fairly reflects their:
financial condition,
performance,
risk exposure,
risk management strategies and
corporate governance policies and procedures.
Principle 28: Disclosure and Transparency
Supervisor determines that banks have adequate policies and processes, including strict customer due diligence rules to promote high ethical and professional standards in the financial sector and prevent the bank from being used intentionally or unintentionally for criminal activities
Supervisors determines that banks have adequate policies and processes to identify, assess, evaluate, monitor, report and control money laundering and terrorism financing activities.
Principle 29: Abuse of Financial Services

16. The Basel Capital Framework
Basel I
1988 Accord – Credit Risk and Operational Risk
1996 – Market Risk Amendment
8% capital adequacy ratio (one size fits all)
Focus on micro prudential monitoring
Most Caribbean jurisdictions are currently operating under the 1988 standard
Basel II
2006 International Convergence of Capital Measurement and Capital Standards: A Revised Framework
Three Pillars :
Minimum Capital Requirements (Pillar I)
Supervisory review process (Pillar II)
Market discipline (Pillar III)
Basel III
Effective 1 January 2013
Improve banks/banking sector's ability to absorb shocks arising from financial and economic stress
Improve risk management and governance
Improve market discipline/Strengthen transparency and disclosures.

17. Comparison between Basel II and the Basel Core Principles (Revised and 2006 Versions)
Supervisory powers, responsibilities and functions
Prudential Regulations Requirements
Capital adequacy, Governance, internal controls and risk management
BCP 2006
Revised in response to the financial crisis
BCPs increased from 25 to 29
Strengthen supervisory practice and risk management
BCP 2011
Minimum capital standards
Supervisory review process / governance internal control and risk management
Market discipline – disclosure and transparency
Basel II

18. Supervisory Powers, Responsibilities and Functions
BCP 2006
Objectives, independence, powers, transparency and cooperation (CP1)
BCP 2011
Responsibilities, objectives and powers (CP1)
Independence, accountability, resourcing and legal protection for supervisors (CP2)
Cooperation and collaboration (CP3)
Basel II
Powers to set minimum capital for individual banks (solo and consol) based on risk (pillar I)
Powers to request prudential information and bank’s own self assessments/ICAAP (pillar II)
Require and encourage Market Discipline / Transparency and Disclosure Requirements (pillar III)

19. Supervisory Powers, Responsibilities and Functions
BCP 2006
CP2: Permissible activities
CP3: Licensing criteria
CP4: Transfer of significant ownership
CP5: Major acquisitions
CP19: supervisory Approach
CP20: Supervisory techniques
CP21 Supervisory reporting
BCP 2011
CP4: Permissible activities
CP5: Licensing Criteria
CP6: Transfer of significant ownership
CP7 Major Acquisitions
CP8 Supervisory Approach
CP9: Supervisory techniques and tools
CP10 Supervisory Reporting
Basel II
Pillar II – Supervisory Review Process
Risk-based supervision
Process for assessing overall capital adequacy
Strategy to maintain capital levels even under stressed conditions
Supervisors can impose higher capital for risk exposures as appropriate
Banks self assessment / ICAAP
Key risks not covered under pillar 1

20. Supervisory Powers, Responsibilities and Functions
BCP 2006
CP23: Corrective and remedial powers of supervisors
CP24: Consolidated Supervision
CP25: Home-host relationships
BCP 2011
CP11: Corrective and sanctioning powers of supervisors
CP12: Consolidated Supervision
CP13: Home-host relationships
Basel II
Pillar II – Supervisory Review Process
Require prompt corrective actions
Sanctioning powers under SRP
Consolidated supervision
Home –host relationships /Supervisory colleges

21. Prudential Regulations and Requirements
BCP 2006
CP14: Corporate Governance
CP15: Risk Management Process
CP16: Capital Adequacy
CP17: Credit Risk
CP18: Problem Assets, Provisions and Reserves
BCP 2011
CP7: Risk management process
CP6: Capital Adequacy
CP8: Credit Risk
CP9: Problem Assets, provisions and reserves
Basel II
Pillar II – Supervisory Review Process – ICAAP risk management section
Pillar I – Capital Adequacy (credit, market and operational risks)
Pillar I - Credit Risk
Pillar I – Problem Assets, Provisions and Reserves (credit and investments)

22. Prudential Regulations and Requirements
BCP 2006
CP19: Concentration risk and large exposure limits
CP20: Transactions with related party
CP21: Country and Transfer risks
CP22: Market Risk
CP23: Interest Rate Risk in the Banking Book
BCP 2011
CP10: Large exposure limits
CP11: Exposure to related party
CP12: Country and Transfer risks
CP13: Market Risk
CP16: Interest Rate Risk in the Banking Book
Basel II
Pillar I – Market Risk
Pillar II – SRP/ICAAP
Pillar II risks – Concentration risks, Large Exposure / single name limits, exposures to related party, country risks / geography concentration, balance sheet profile/business lines
Pillar II risks – IRRBB

23. Prudential Regulations and Requirements
BCP 2006
CP14: Liquidity risk
CP15: Operational risk
CP17: Internal Control and Audit
CP22: Accounting and Disclosure
CP18: Abuse of financial services
BCP 2011
CP24: Liquidity risk
CP25: Operational risk
CP26: Internal control and audit
CP27: Financial reporting and external audit
CP28: Disclosure and transparency
CP29: Abuse of financial services
Basel II
Pillar I risk – Operational risk
Pillar II – SRP/ICAAP
Pillar II risks – Liquidity risk
SRP/ICAAP – Governance, Internal Control and Risk Management
Pillar III – Market Discipline
Accounting and disclosure
Abuse of financial services

24. Thanks for your participation Any Questions??
The End
Thanks for your participation Any Questions??