Consolidated Supervision - World Bank

Consolidated Supervision 

Basel Committee on Banking Supervision 

Washington 

20 October 2000 

Seminar for Senior Bank Supervisors 

Johanne C. Prévost 

Member of the Secretariat of the Basel Committee


The Basel Committee 

1. The Basel Concordat 

2. Minimum Standards 


2


The Joint Forum 

3. Supervisory Information Sharing 

4. Principles of Sharing Supervisory Information 

5. Capital Adequacy 


3


1. Basel Concordat 

Principles for the Supervision of Banks’ Foreign 

Establishments (May 1983) 

• Blueprint for collaboration between supervisors 

• Who is responsible for supervising the 

international business of a bank? 

• No gaps in the supervisory network 

• Supervision must be adequate 


4


Basel Concordat 

• Authorisation 

– Inward/Outward 

• Information flow 

– to home country 

– to host country 


5


Inward Authorisation 

• Foreign institution applies to set up banking 

operation 

Host supervisor needs to be satisfied 

Outward Authorisation 

• Domestic bank doing business abroad 

Home supervisor wants to get information from 

host supervisor 


6


Basel Concordat (cont’d) 

• Removal of bank secrecy impediments 

Four conditions: 

1. Prudential purpose 

2. Two-way, reciprocal 

3. Confidentiality by recipient 

4. Consultation prior to action 


7


Concordat rewritten 1983: 

• Consolidated supervision 

Minimum Standards (1992) 

• Practical application of Concordat 


8


Definition of consolidated supervision 

“Parent bank and parent supervisory authorities 

monitor the risk exposure of the banks or banking 

groups for which they are responsible, as well as 

the adequacy of their capital, on the basis of the 

totality of their business wherever conducted.” 


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2. Minimum Standards (1992) 

Objectives: 

● prevent risk of supervisory gaps 

● prevent double-leveraging of capital 

● 

ensure banks measure their risks globally 


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Minimum standards 

1. Consolidated supervision of all international 

banks 

• Information on the bank’s global operations 

• Prevent corporate structures that hinder 

effective supervision 

• Prevent banks from creating foreign 

banking establishments in particular 

jurisdictions. 


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2. Prior consent of supervisor for creation of 

cross-border banking establishment 

• Outward expansion: consent from homecountry 

authorities 

• Inward consent from host authority 

• Consultations between supervisors. 


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3. Information 

• Parent supervisor to get information from 

foreign branches/subsidiaries 

• Condition for giving consent to expansion 

• On-site examination or other means. 


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4. Restrictive measures 

If Minimum Standards not met: 

Prohibition of the creation of 

cross-border banking 

establishments 


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Home supervisor extends supervision to 

– Banking subsidiaries 

– Branches 

– Both domestic and foreign 


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“ No foreign bank establishment should escape 

supervision 

WHY? 


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1. Because the solvency of the banks cannot be 

adequately judged without taking account all 

their foreign establishments. 

2. Because parent banks cannot be indifferent to 

the situation of their foreign subsidiaries. 


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Bank level 

– Management 

– Data collection 

– Data verification 

– Group-wide risk management and control 


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Supervisory level 

– Management level 

– Data collection (regular) 

– Data verification 

• inspection by home supervisor 

• inspection by host supervisor 

– External auditing 


19


Supervisory level (cont’d) 

• Application of consolidated prudential 

standards 

– Capital adequacy 

– Large exposures 

–Asset quality 


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Principles 

Checklist (Annex B of the Supervision of Cross- 

Border Banking - October 1996) 

Powers to exercise global oversight 

• Does home supervisor have adequate 

powers to enable it to obtain the 

information needed to exercise consolidated 

supervision? 


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Principles 

Checklist (cont’d) 

Exercise of consolidated supervision 

• Adequate control of authorisation 

• Adequate prudential standards for capital, credit 

concentrations, asset quality, liquidity,etc. 

• Off-site capability, i.e. reporting system 

• Capability to inspect in foreign locations 

• Dialogue with mgmt of supervised entity 

• Effective remedial action when problems 


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The Joint Forum 

3. Supervisory Information sharing 

– Corner stone of consolidated supervision 

– One suggested tool: The Conglomerate 

Questionnaire 

– Information needs in emergency situation 

– Principles for Supervisory Information Sharing 


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Prerequisites for Information-Sharing 

– Adequate confidentiality provisions 

– Limited use for supervisory purposes 

– Reciprocity arrangements should be in place 


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4. Principles for Supervisory Information 

Sharing 

➊ Sufficient information available to each 

supervisor on the conglomerate. 

➋ Supervisors should be proactive in raising 

material issues with other supervisors and 

respond in a timely and satisfactory manner. 

➌ Supervisors should communicate with the 

primary supervisor in a timely manner. 


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4. Principles for Supervisory Information 

Sharing 

➍ Primary supervisor should share with other 

supervisors information affecting the regulated 

entity for which the latter have responsibility. 

➎ Supervisors should take measures to establish 

and maintain contact with other supervisors. 


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5. Capital Adequacy 

Objective 

➨ provide measurement techniques and principles to 

facilitate the assessment of capital adequacy on a 

group-wide basis 

➨ identify situations of overstatement of capital-e.g. 

double or multiple gearing 


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Basic Assumptions 

– Solo supervisors' capital requirements are taken as 

given 

– Techniques should yield broadly equivalent results 

– No single technique of capital measurement is 

promoted 

– Principles provide guidance 


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➊ 


Guiding Principles for Capital Measurement 

Techniques 

➋ 

➌ 

Detect and provide for double or multiple gearing 

Detect and provide for excessive leverage 

Consider effect of intermediate holding companies 

➍ Consider unregulated entities with activities similar 

to those of the regulated entities 

➎ Dealing with the treatment of less than 100% 

participations 


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Measurement Techniques 

Three techniques 

▼ Building block prudential approach 

▼ Risk-based aggregation 

▼ Risk-based deduction 

Fourth technique 

▼ Total deduction 


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Building-Block Approach 

▼ 

▼ 

▼ 

▼ 

Uses consolidated financial statements 

Divides statement into individual sectors or 

"blocks" 

Adds together solo capital/proxy requirements 

of each member 

Compares aggregate capital/proxy requirement 

to consolidated capital 


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Risk-Based Aggregation 

▼ 

▼ 

▼ 

▼ 

▼ 

Uses unconsolidated statements 

Adds together the capital of each entity 

Subtracts intra-group holdings of regulatory 

capital 

Subtracts aggregate capital requirement/proxy 

from adjusted group-wide capital 

Result - surplus or deficit 


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Risk-Based Deduction 

▼ 

▼ 

▼ 

▼ 

▼ 

Uses unconsolidated statements 

From parent's capital deduct the amount of 

investments in dependants 

From adjusted parent's capital add solo capital 

surplus/deduct solo capital deficits of dependants 

From adjusted parent's capital subtract parent's 

solo capital requirement 

Result: surplus or deficit 


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Consolidated Supervision - World Bank

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