International Seminar on Basel II and Financial Stability

Bali, Indonesia, September 21-23, 2006

Country Compliance with the Basel Core

Principles on Bank Supervision

Jos De Luna Martnez

The World Bank

Contents
1. What is the Financial Sector Assessment
Program (FSAP)?
2. How does the FSAP assess country compliance
with best practices on banking supervision?
3. Country compliance with the BCPs Strenghts
and Weaknesses
4. Conclusions

What is the Financial Sector

Assessment Program (FSAP)?

1.

Financial Sector Assessment Program (FSAP)

Background information

FSAP is a response to calls by the international

community to facilitate early detection of financial
sector vulnerabilities and development needs.

FSAP started in April 1999.

FSAP is a voluntary program

FSAP provides a comprehensive assessment of a

countrys financial sector.

FSAP is jointly conducted by the IMF-World

Bank

FSAP - Areas of Assessment

Rules and
Regulations

Financial System

Financial
Intermediaries

Macroeconomic
Environment

Financial
Markets

Observance of internationally accepted standards and codes.

How well the countrys financial institutions would handle adversity?
Macro-prudential indicators to identify vulnerabilities.
Obstacles preventing depth and outreach of financial systems

Internationally Accepted Standards and Codes

assessed under the FSAP

Code of Good Practices on Transparency in Monetary and

Financial Policies (MFP)

Basel Core Principles for Effective Banking Supervision (BCP)

Core Principles for Systemically Important Payment Systems

(SIPS)

IOSCOs Objectives and Principles of Securities Regulation

Insurance Core Principles

Anti-money laundering

Other Internationally Accepted

Standards and Codes

Data Dissemination: IMFs Special Data Dissemination

Standard/General Data Dissemination System (SDDS/GDDS).
Fiscal Transparency: IMFs Code of Good Practices on Fiscal
Transparency.
Corporate Governance: OECD Principles of Corporate
Governance.
Accounting: International Accounting Standards.
Auditing:
International
Federation
of
Accountants'
International Standards on Auditing.
Insolvency and creditor rights

FSAPs
Country Participation since 1999
(as of March 30 2006)

Initial assessments
Updates

101 countries
13 countries

How does the FSAP assess

compliance with best practices
on financial sector supervision?

Assessment of
Basel Core Principles
Process is fully based on the use of the
BCP methodology developed by the Basel
Committee.
Gradings:
a) Compliant
b) Largely compliant
c) Materially non-compliant
d) Non-compliant
e) Not applicable

3. Country Compliance
with the BCPs

Developing Country
Compliance with the BCPs
No. of BCPs

30

1
3

25
8

20
15

10

10
5

0
Developing Country
Compliant

Largely compliant

Materially non-compliant

Non-compliant

Not applicable

BCPs:
Strengths and Weaknesses of Developing Countries
As a group, developing countries seem to be strong in
terms of their:
a)
b)

General legal framework for bank supervision

Objectives of the supervisory agency

c)
d)

Licensing criteria for banks

Overall framework on on-site and off-site supervision

But, developing countries are extremely weak in the

areas of: consolidated supervision, management of
market and operational risks, anti-money laundering,
among other areas.

Developing Country Compliance with BCPs on

Independence and Legal Protection or Bank Supervisors

BCP 1.2 Independence

BCP 1.5 Legal protection

53%

47%
Compliant or largely compliant
Materially non compliant or non compliant

59%

41%
Compliant or largely compliant
Materially non compliant or non compliant

Developing Country Compliance with BCPs on Capital

Adequacy and Banks Credit-Granting Policies
BCP 6 Capital adequacy rules

BCP 7 Supervisor requires

prudent credit-granting policies

59%

41%
Compliant or largely compliant
Materially non compliant or non compliant

61%

39%
Compliant or largely compliant
Materially non compliant or non compliant

Developing Country Compliance with BCP # 10

on Limits to Connected Lending
BCP 10. Limits to
Connected
Lending

Widespread connected and

government-directed lending.
Lax management controls.

51%

49%

Compliant or largely compliant

Materially non compliant or non compliant

Poor credit risk management

techniques.
Lack of consolidated supervision
which allows banks to hide
connected exposures.
Inadequate rules for valuation of
collateral.

BCP 12 Market Risks

Developing Country Compliance
Compliant or
largely compliant
36%

Non-compliant or
Materially non
compliant
64%

Lack of tools
and expertise
to monitor
these types of
risks
No capital
charges for
market risks,
as
recommended
by the Basel
Committee

BCP 15 Anti -Money Laundering

Developing Country Compliance

Compliant or
largely compliant
37%

Non-compliant or
Materially non
compliant
63%

Limited understanding
of vulnerability of
banks to AML
problems.
Many countries are still
in the process of issuing
or preparing to enforce
compliance with
AML/CFT standards
Know your customer
requirements are not
always sufficiently
detailed and tested in
practice.

BCP 20 on Consolidated Supervision

Weak legal basis (banks

are not required to submit
data on a consolidated
basis)

No consolidated
accounting

No prudential rules on a
consolidated basis

Poor arrangements for

information-sharing
among supervisors

No authority of supervisor
over other entities of a
banking group or financial
conglomerate

Compliant or largely
compliant
24%

Not applicable
14%

Non-compliant or
Materially non
compliant
62%

CP 22: Remedial Measures

CP 22 requires the supervisor to have, and promptly apply,
adequate remedial measures for banks when they do not
meet prudential requirements, or are otherwise threatened.

Among others, remedial measures include:

restricting the current activities of the bank,
withholding approval of new activities or
acquisitions,
restricting or suspending payments to shareholders
restricting asset transfers,
barring individuals from banking,
replacing or restricting the powers of managers,
directors, or controlling owners,
arranging a takeover by or merger with a healthier
institution, and imposing conservatorship.

Developing Country Compliance with BCP # 22

on Remedial Measures for Weak Banks
BCP 22. Remedial
Measures

z Some financial institutions are

deemed too large or complex to

fail.
z Due to lack of legal protection,

51%

49%

authorities are afraid of taking

corrective measures before a
bank collapses.

z Official administration of

insolvent banks occurs too late.

Compliant or largely compliant
Materially non compliant or non compliant
z Decisions of the regulator are

often overturned by courts

BCP Assessments Final Remarks

There is a large scope for improvement of banking

regulation and supervision across countries
BCP assessments are a useful basis for preparing
national strategies and action plans to improve
bank supervision
FSAP updates confirm that most countries are
moving rapidly to improve bank supervision
BCPs compliance is strongly associated to
financial stability

International Seminar on Basel II and Financial Stability

Bali, Indonesia, September 21-23, 2006

Country Compliance with the Basel Core

Principles on Bank Supervision

Jos De Luna Martnez

The World Bank