(Basel Core Principles) 1. This document is a revision of the Core Principles of Effective Banking Supervision promulgated by the Basel Committee on Banking Supervision (hereinafter referred to as 1 committee [1]) in September 1997. Since then, the core principle evaluation method 2[2] has been introduced one after another. In order to meet the basic requirements of good regulatory practice, many countries regard core principles as the benchmark for evaluating the quality of their regulatory systems and defining future work requirements. Practice has proved that the self-assessment of countries' compliance with the core principles is effective, which is helpful for countries to find the problems existing in the supervision system and implementation, and to determine the focus of work to solve these problems. The revision of the Basel Core Principles once again highlights the importance of self-assessment. In recent years, the International Monetary Fund and the World Bank have been using core principles to evaluate the banking supervision systems and practices of various countries in their financial sector assessment plans. However, since 1997, great changes have taken place in the banking supervision system, and countries have accumulated rich experience by implementing the core principles. Due to many new problems in the supervision system and implementation, and people's understanding is deepening, the Committee has also promulgated many documents accordingly. Based on the above situation, it is necessary to revise the core principles and evaluation methods.
2. In revising the core principles and evaluation methods, the Committee made efforts to ensure the continuity and comparability of the overall framework of 1997 core principles. Practice has proved that the architecture of 1997 works well. Therefore, the Committee will not consider extensive revision of the core principles, but will focus on some aspects that need revision in order to keep pace with the times. The revision will not question the effectiveness of the previous work in any way, let alone the evaluation and reform programs of relevant countries according to the framework of 1997.
3. Another purpose of the revision is to improve the consistency between the core principles and securities and insurance-related standards, as well as anti-money laundering and transparency standards. However, the core principles promulgated by the above-mentioned departments are aimed at solving different important risk points and regulatory tasks between departments. Therefore, differences between principles will continue to exist.
4. In the process of revision, the Committee worked closely with the Contact Group on Core Principles (which is composed of senior officials from some member countries of the Committee, non-G-10 countries, the International Monetary Fund and the World Bank and meets regularly), fully absorbing the work done by the Contact Group. The Committee also sought the opinions of other international standard-setting bodies, including the International Association of Insurance Supervisors (IAIS), the International Organization of Securities Supervisors (IOSCO), the Financial Action Task Force (FATF) and the Committee on Payment and Clearing Systems (CPSS). At the invitation of the Committee, regional regulatory organizations also put forward opinions on the revision work [3]. Before finalizing it, the Committee also extensively solicited the opinions of state regulatory agencies, central banks, international trade associations, academia and other relevant parties. 5. The core principles are the minimum standards of good regulatory practices, which are applicable to all countries in the world. The formulation of core principles and evaluation methods is helpful to strengthen the international financial system. Whether in developing countries or developed countries, problems in the banking system will pose a threat to the financial stability of a country or even the whole world. The Committee believes that the implementation of the core principles in countries around the world will greatly improve financial stability at home and abroad and lay a good foundation for strengthening an effective supervision system.
6. The Basel Core Principles stipulate 25 principles that an effective supervision system should follow [5].
Principle1-Goal, independence, power, transparency and cooperation: An effective banking supervision system requires that every banking supervision institution has clear responsibilities and goals. Each regulatory agency should have independent business, transparent procedures, good governance structure and sufficient resources, and be responsible for the overall performance of its duties. An appropriate legal framework for bank supervision is also necessary, which includes the approval of bank establishment, the right to require banks to abide by the law, the right to operate safely and stably, and the legal protection of supervisors. In addition, it is necessary to establish information exchange and confidentiality arrangements between regulatory authorities.
Principle 2- permitted business scope: the business scope of licensed and regulated institutions must be clearly defined, and the use of the word "bank" must be strictly controlled.
Principle 3- Licensing Standards: Licensing agencies must have the right to set licensing standards and reject all applications that do not meet the standards. The licensing procedure should at least include the review of the bank's shareholding structure and governance, the qualifications of board members and senior management, the bank's strategy and business plan, internal control and risk management, and the expected financial situation including capital scale. When the owner or parent company of the bank applying for approval is a foreign bank, the consent of the regulatory authorities of its home country should be obtained in advance.
Principle 4-Large-sum ownership transfer: The banking regulatory institution has the right to examine and reject the application of the bank to directly or indirectly transfer large-sum ownership or control rights to other parties.
Principle 5-Major Acquisitions: The banking supervisory authority has the right to review large-scale acquisitions or investments of banks according to established standards, including cross-border establishment of institutions, to ensure that their subsidiaries or organizational structures will not bring excessive risks or hinder effective supervision.
Principle 6-Capital Adequacy Ratio: The banking supervisory authority must formulate prudent and appropriate minimum capital adequacy ratio regulations that reflect various risks of banks. At least for international active banks, the capital adequacy ratio should not be lower than the relevant requirements of Basel.
Principle 7- Risk Management Procedures: The banking supervisory authority must be sure that banks and banking groups have established comprehensive risk management procedures (including supervision by directors and senior management) commensurate with their scale and complexity, so as to identify, evaluate, monitor, control or mitigate major risks, and evaluate the overall capital adequacy ratio according to their own risks.
Principle 8- Credit Risk: The banking supervisory authority must be convinced that the bank has a set of procedures for managing credit risk; This procedure should consider the risk status of the bank, and cover prudent policies and procedures for identifying, measuring, monitoring and controlling credit risks (including counterparty risks).
Principle 9-Problem assets, reserves and reserve funds: The banking supervisory authority must be satisfied that the bank has established effective policy procedures for managing various assets, evaluating reserve funds and the adequacy of reserve funds, and earnestly abide by these procedures.
Principle 10- large risk exposure limit: the banking supervisory authority must be convinced that the bank's policies and procedures help the management to identify and manage risk concentration. Banking supervision authorities must set prudent limits to limit the risk exposure of banks to a single counterparty or related counterparty groups.
Principle11-Related Party Risk Exposure: In order to prevent problems caused by related party loans, the banking supervision department must stipulate that banks should provide loans to related enterprises and individuals on a commercial basis; This part of the loan should be effectively monitored; Appropriate measures should be taken to control or mitigate various risks. The cancellation of relevant loans should be carried out in accordance with standard policies and procedures.
Principle12-Country Risk and Transfer Risk: The banking supervisory authority must be convinced that the bank has effective policies and procedures for identifying, measuring, monitoring and controlling country risk and transfer risk in international credit and investment, and establish sufficient preparation and reserves for these two types of risks.
Principle13-Market Risk: The banking supervisory authority must be convinced that the bank has various policies and procedures for accurately identifying, measuring, monitoring and controlling market risks; When necessary, the banking supervision institution has the right to set specific limits and/or specific capital requirements for market risk exposure.
Principle14-Liquidity Risk: The banking supervisory authority must be convinced that the bank has a liquidity management strategy that reflects the bank's own risk status, and has established prudent policies and procedures for identifying, evaluating, monitoring and controlling liquidity risks and managing liquidity on a daily basis. Banking supervision authorities should require banks to establish contingency plans to deal with liquidity problems.
Principle15-Operational Risk: The banking supervisory authority must be convinced that the bank has risk management policies and procedures for identifying, evaluating, monitoring and mitigating operational risks commensurate with its scale and complexity.
Principle16-Interest Rate Risk: Banking regulators must be satisfied that banks have an effective system to identify, measure, monitor and control interest rate risk in bank accounts, which includes a clear strategy approved by the board of directors and implemented by senior management.
Principle17-Internal Control and Audit: The banking supervisory authority must be sure that the bank has internal control that matches the scale and complexity of its business. Various internal controls should include clear provisions on authorization and responsibility, bank commitment, separation of payment and accounting treatment functions of assets and liabilities, cross-check of the above procedures, asset protection, improvement of independent internal audit, and inspection of the above control functions and compliance with relevant laws and regulations.
Principle18-Preventing the use of financial services to engage in criminal activities: The banking supervision authorities must be convinced that banks have sound policies and procedures, including strict "know your customer" provisions, so as to promote the formation of higher professional ethics and professional standards in the financial sector and prevent the intentional or unintentional use of banks to engage in criminal activities.
Principle 19—— Supervision mode: An effective banking supervision system requires the supervision authorities to have a deep understanding of the overall situation of individual banks, banking groups and banking systems and the stability of the banking system, with emphasis on security and robustness.
Principle 20-Supervision Means: An effective banking supervision system should include on-site inspection and off-site inspection. The banking supervisory authority must keep regular contact with the bank management.
Principle 21-Regulatory Report: Banking regulatory authorities must have the means to collect, review and analyze bank prudential reports and statistical statements on a single and consolidated basis. The regulatory authorities must have the means to independently check the above statement through on-site inspection or using external experts.
Principle 22- Accounting Treatment and Disclosure: Banking supervision authorities must be convinced that banks should keep complete records in accordance with internationally recognized accounting policies and practices, and regularly publish information that fairly reflects the financial position and profitability of banks.
Principle 23—— The power of correction and rectification of the supervision institution: The banking supervision institution must have a set of tools to take corrective measures in time. These tools include revoking the bank license or proposing to revoke the bank license when appropriate.
Principle 24-Consolidated Supervision: One of the key contents of banking supervision is that the supervisory authority conducts consolidated supervision on the banking group, effectively monitors all aspects of business at the group level and puts forward prudent requirements in a timely manner.
Principle 25: Relationship between the home country and the host country: Consolidated supervision of cross-border business requires cooperation and information exchange between the banking supervision authorities of the home country and other relevant supervision authorities, especially the supervision authorities of the host country. Banking supervision authorities must require foreign banks to engage in local business according to the same standards as domestic banks.
7. As long as the main objectives can be achieved, the core principles adopt a neutral attitude towards different supervision methods. The core principles are not intended to cover the different needs and situations of various systems. On the contrary, the special situation of each country should be properly considered through the dialogue between the evaluator and the national regulatory authorities.
8. Countries should apply Core Principles6 [6] to all banks within their jurisdiction. Countries can go beyond the core principles to meet the requirements of best regulatory practices, especially in countries with developed markets and banks.
9. Raising the standards of core principles will help to improve the stability of the whole financial system. However, this may not ensure the stability of the financial system, nor will it prevent the collapse of individual banks. Banking supervision cannot and should not ensure that all banks will not fail. In the market economy, bankruptcy is one of the contents of taking risks.
10. The Committee encourages countries to cooperate with other regulators and relevant parties to implement the core principles. The Committee hopes that international financial organizations and other interested parties will use the core principles to help countries strengthen supervision. The Committee will continue to strengthen cooperation with the International Monetary Fund and the World Bank and monitor the implementation of various bank prudential standards. The Committee will also continue to strengthen cooperation with non-G-10 countries. An effective banking supervision system depends on some external factors or preconditions. Although these preconditions are not under the jurisdiction of the banking supervision authorities, they have a direct impact on the effectiveness of banking supervision in practice. If the preconditions are not perfect, the banking supervision authorities should draw the government's attention to these problems, especially their actual or potential negative impact on the realization of the supervision objectives.
Stable and sustainable macroeconomic policies;
Improve public finance infrastructure;
Effective market constraints; And (or public safety net)
12. Stable macroeconomic policies are the basis for achieving stability in the financial system. This work is not the responsibility of the banking supervision authorities. However, if we notice that the current policy is not conducive to the security and stability of the banking system, the regulatory authorities should respond.
13. If the public financial infrastructure is not perfect, the stability and development of the financial system will be affected. Perfect public finance infrastructure includes the following contents:
Long-term commercial legal system conducive to fair settlement of disputes, including company law, bankruptcy law, contract law, consumer rights protection law, private property law, etc.;
● Internationally recognized comprehensive and clear accounting standards and regulations;
● Independent auditing system for large companies to ensure that users of financial statements (including banks) believe that all kinds of accounts can truly and fairly reflect the financial situation of the company, and all kinds of accounts should be formulated according to established standards, and auditors are responsible for their work;
An effective and independent judiciary and regulated accounting, auditing and legal professions;
There are clear rules and regulations and adequate supervision for other financial markets and, where appropriate, participants in these markets.
● A safe and effective payment and settlement system ensures the settlement of financial transactions and controls the risks of counterparties.
14. Effective market restraint depends on whether market participants can obtain sufficient information, whether well-managed banks can obtain appropriate financial returns, and whether there are various arrangements to make investors responsible for their decision-making results. Many issues involved here include corporate governance structure and accurate, meaningful, timely and transparent information provided by borrowers to existing and potential investors and creditors.
15. Generally speaking, determining appropriate systematic protection is a policy issue involving other departments (including the central bank), especially when public funds are needed. Because of a good understanding of the situation of the relevant departments, the banking supervision authorities can generally play a certain role. When dealing with systemic problems, on the one hand, we should solve the confidence problem that affects the financial system and avoid the problem spreading to other healthy banks, on the other hand, we should pay attention to minimizing the distortion of market signals and market constraints. In many countries, deposit insurance system is a form of systematic protection. If the deposit insurance system is designed reasonably, it will help to reduce moral hazard, improve public confidence in the banking system and prevent the risk spread of problem banks.
1 The Basel Committee on Banking Supervision was established in 1975 by the central bank governors of the Group of Ten. The Committee is composed of banking supervisory authorities and senior officials of central banks in Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, Britain and the United States. The secretariat of the Committee is located in the Bank for International Settlements in Basel, where it often holds meetings.
2[2] In addition to the core principles, the Committee has also formulated a detailed guiding document for evaluating the compliance of the principles, that is, the evaluation method of the core principles. This document was also revised during this review.
3[3] Arab Committee on Banking Supervision, Inter-American Association of Banking Supervision (ASBA), Caribbean Organization on Banking Supervision, European Committee on Banking Supervision (CEBS), Working Group on Banking Supervision organized by Central Bank Governors Meeting in East Asia and the Pacific, Central and Eastern European Organization on Banking Supervision, French Organization on Banking Supervision, Gulf Cooperation Council on Banking Supervision, Islamic Financial Services Council, Offshore Banking Supervision Organization, Central Asia and Transcaucasia Banking Supervision Organization, Southern African Countries Banking Supervision Organization (SADC), Southeast Asia, New Zealand, Australia Central Bank Organization (SEANZA) Banking Supervision Forum, West and Central Africa Banking Supervision Committee, Pacific Countries Financial Supervision Association.
4[4] The core principle is the minimum standard of good regulatory practice, which is implemented voluntarily. Countries will be free to implement other support measures within their jurisdiction to achieve effective supervision.
5[5] For the definition and explanation of related contents of core principles, please refer to the evaluation method of core principles.
6[6] Non-bank financial institutions in some countries also provide deposit and loan services similar to banks. Many principles in this paper are also applicable to such non-bank financial institutions. However, it should be noted that the deposits absorbed by some non-bank financial institutions account for a relatively small proportion in the government-enterprise financial system, so it is not necessary to supervise such institutions in the form of bank supervision.