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Supervisory Cooperation : HOME/HOST ISSUES AND CHALLENGES IN BASEL II

Understand the principles of supervisory cooperation between home and host supervisors in Basel II implementation. Learn about legal responsibilities, oversight, division of responsibilities, and enhanced cooperation to address cross-border banking challenges effectively.

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Supervisory Cooperation : HOME/HOST ISSUES AND CHALLENGES IN BASEL II

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  1. Supervisory Cooperation :HOME/HOST ISSUES AND CHALLENGES IN BASEL II DR. WIMBOH SANTOSO Directorate of Banking Research and Regulation BANK INDONESIA

  2. PRINCIPLES FOR SUPERVISORY COOPERATIONS

  3. High Level Principles for Supervisory Cooperation (1) In essence, home supervisors are responsible for consolidatedsupervision and host supervisors are responsible for supervision on an individual or sub-consolidated basis for entities operating in their country Principle 1 : Basel II will not change the legal responsibilities of national supervisors for the regulation of their domestic institutions or the arrangements for consolidated supervision already in place

  4. High Level Principles for Supervisory Cooperation (2) In situations where the home and host supervisors adopt different approaches, the home supervisor will have the final determination on such matters as they relate to the group on a consolidated basis. In exercising its responsibilities, the home supervisor may seek input from host supervisors. Likewise, the responsibility for Pillar 2 assessment of the consolidated group rests with the home supervisor. However, host supervisors may provide important input to the home supervisor for the group’s operations in the host countries. Principle 2 : The home supervisor is responsible for the oversight of the implementation of Basel II for a banking group on a consolidated basis.

  5. High Level Principles for Supervisory Cooperation (3) In each country, banks operating in subsidiary form must satisfy the supervisory and legal requirements of the host jurisdictions. Certain jurisdictions may also have relevant requirements in the case of foreign bank branches While host supervisors have an interest in accepting the methods/processes used by a bank at the group level, there may be situations where the host supervisors have other legitimate interests for not recognising such (e.g. the home supervisors does not exercise effective consolidated supervision) Principle 3 : Host supervisors, particularly where banks operate in subsidiary form, have requirements that need to be understood and recognised

  6. Division of Responsibilities Coordinating role played by home countries has to take into account the statutory responsibility and legitimate concerns of host countries relative to systemically foreign subs and branches. This should be made clear as to what extent the host countries may exercise their regulatory oversight that satisfy both parties interests

  7. Division of Responsibilities • Home and host supervisory authorities have some complementary interests, yet they can also have divergence in some areas, e.g. statutory objectives, perceptions of the timing of systemic crisis, views on the choice of techniques for responding to bank distress, and jurisdictional limits. • Response to a cross-border crisis should involve closer cooperation and coordination • Host countries’ respond may be in ways that enable them to protect their financial system without placing undue reliance on the actions of the home countries • Division of responsibility for the provision of liquidity support in defined circumstances • Formal understandings on the procedure/mechanism for determining when and how a joint home/host bank resolution strategy could be used to resolve a cross-border crisis

  8. High Level Principles for Supervisory Cooperation (4) Supervisors should look for ways to continue to enhance cooperation and the exchange of information (e.g. sharing of assessment/examination results). Requests by host supervisors for information on banking groups with operations in the host country should be reasonable in relation to the responsibilities and interests of both the home and host supervisors The home supervisor should develop an appropriate communication strategy with relevant host supervisors, supplementing existing cooperative agreements where necessary Principle 4 : There will need to be enhanced and pragmatic cooperation among supervisors with legitimate interests. The home supervisor should lead this coordination effort

  9. High Level Principles for Supervisory Cooperation (5) For initial and ongoing validation and approval there is likely to be a particular need for cooperation between home and host supervisors because the nature of complex banking group structures increases the likelihood that different techniques will be used in different jurisdictions Principle 5 : Wherever possible, supervisors should avoid performing redundant and uncoordinated approval and validation work in order to reduce the implementation burden on the banks, and conserve supervisory resources

  10. Cooperation Arrangement • Formalized cooperation arrangement • Strike a balance between creating coordination in certain circumstances while maintaining flexibility for each country's authorities to take actions in protecting their own interests • Cooperation in designing and implementing supervision policy, including policy harmonization and mutual recognition as well as improving coordination of on-site and off-site supervision in certain areas (where possible) • Optimizes the use of supervisory resources and reduces regulatory burden to the extent possible

  11. Cooperation Arrangement • Supervisory Cooperation in Approval and validation of IRB Systems • The host supervisor will need specific information to establish sufficient confident in home supervisor’s validation work at the group level (e.g. how home supervisor exercises the national discretions or apply validation standards under IRB) • The home supervisor may get useful information about the IRB implementation in the host jurisdiction (e.g. some banking groups may use regional or global data in host jurisdiction to determine PD and LGD) • Home and host may have different perception of the significance of some overseas operations (e.g. may be significant to the host jurisdiction but not to the banking group) • It will be further complicated if certain host supervisors do not make available the IRB approach to banks operating in their jurisdictions (or vice versa)

  12. Cooperation Arrangement • Recognition of AMA Op-risk capital • a consensus on those subsidiaries that are deemed to be significant and necessitate stand-alone AMA charges may not reached due to different perception of the level of “significance” • determining the scope information to be shared that will facilitate the approval and oversight of AMA systems. • arrangements that would enable host supervisors to rely on the work done by home supervisors on the AMA approaches. • some host supervisors may not allow banks to adopt AMA in their jurisdictions.

  13. High Level Principles for Supervisory Cooperation (6) It is desirable for home supervisor, in cooperation with the host supervisors, to develop a plan well in advance of the implementation date detailing the practical arrangements between the home supervisor and relevant host supervisors to be followed in implementing Basel II The home supervisor will lead the development and communication of a supervisory plan Principle 6 : In implementing Basel II, supervisors should communicate the respective roles of home and host supervisors as clearly as possible to banking groups with significant cross-border operations in multiple jurisdictions.

  14. Cooperation Arrangement Basel Concordat puts a strong emphasis on the need for proper information exchange for cross-border coordination, including interventions responding to bank distress • Standard mechanism to be developed for information exchange (informal or through formal MoU provided the willingness of the counterpart supervisors) Cons of informal: lack of cooperation sustainability; very much depend on individual discretion • Scope of information to be exchanged (having considered the legal restrictions) i.e. issue on confidentiality • Information exchange on national discretion to better learn what differences exist between home and host countries

  15. BASEL II ISSUES

  16. Supervisory review process under Pillar II • Communication between countries to ensure complete assessment of home countries’ consolidated Pillar II assessment of the banking group incl. the subsidiaries (i.e. Capital Adequacy Assessment Program - CAAP) • Mechanism & types of information exchanges • Host supervisors need to know any developments or supervisory actions that may affect the calculation of capital requirements for subsidiaries in host jurisdictions. • Home supervisors need input from host supervisors in order to come up with an accurate and through consolidated Pillar 2 assessment for the banking group

  17. Other implementation issues Recognition of ECAIs under Pillar I • Different interpretation of eligibility criteria may lead to different recognition of External Credit Assessment Institutions (ECAIs). • Host countries will allow foreign bank branches/subs to use the assessments made by ECAIs recognized by home countries • Home countries will allow bank’s overseas branches/subs to use the assessment made by ECAIs recognized by the relevant host countries in the consolidated capital position

  18. SUPERVISORY EXPERIENCE

  19. Cooperation Arrangement • Crisis Management • Liquidity Provision (i.e. intra-day, short-term, and emergency) Foreign branches, regardless systemic in nature are excluded from the emergency liquidity assistance (ELA), hence should be covered by the head office • Deposit Protection Foreign branches are included in deposit protection scheme.

  20. Cooperation Arrangement • Parallel owned banking structures 1) • Such structures are by nature very difficult for consolidated supervision, hence needs close cooperation between supervisors to ensure adequate understanding and oversight of the entire group • Alternatively, appoint one supervisor to act as a leader for supervising the structure on a consolidated basis 1) Parallel banks are defined as banks licensed in different jurisdiction that have the same beneficial owners and consequently often share common management and interlinked business (Source : Parallel Owned Banking Structure, BIS, January 2003

  21. Cooperation Arrangement • Data Processing • Foreign branches and subs are currently allowed to conduct data processing offshore subject to meeting some requirements e.g. accessibility to conduct on site IT examination • Home supervisor concerns to the accessibility of data processing from overseas branches/subs for consolidated purposes, while the host supervisor still require permission.

  22. Cooperation Arrangement • Basel II related issues • Home supervisors’ initiatives for College of Supervisors • BI has communicated with home supervisors on the level of significance of host branches and roll-out plans both from banks and home supervisors • Existing MoU has not designed to include cooperation arrangement with relevant home supervisors

  23. Supervisory Cooperation :HOME/HOST ISSUES AND CHALLENGES IN BASEL II END OF PRESENTASION DR. WIMBOH SANTOSO Directorate of Banking Research and Regulation BANK INDONESIA

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