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Basel ii Accord
Sections 743 to 760 |
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4.
Monitoring and
reporting
743.
The bank should establish an adequate system for
monitoring and reporting risk
exposures
and assessing how the bank’s changing risk
profile affects the need for
capital.
The
bank’s senior management or board of directors
should, on a regular basis,
receive
reports
on the bank’s risk profile and capital needs.
These reports should allow
senior
management
to:
•
Evaluate the level
and trend of material risks and their effect on
capital levels;
•
Evaluate the
sensitivity and reasonableness of key
assumptions used in the
capital
assessment
measurement system;
•
Determine that the
bank holds sufficient capital against the
various risks and is in
compliance
with established capital adequacy goals;
and
•
Assess its future
capital requirements based on the bank’s
reported risk profile and
make
necessary adjustments to the bank’s strategic
plan accordingly.
5.
Internal control
review
744.
The bank’s internal control structure is
essential to the capital assessment
process.
Effective
control of the capital assessment process
includes an independent review
and,
where
appropriate, the involvement of internal or
external audits.
The
bank’s board of directors has a responsibility
to ensure that management establishes a system
for assessing the various risks, develops a
system to relate risk to the bank’s capital
level, and establishes a method for monitoring
compliance with internal policies.
The
board should regularly verify whether its system
of internal controls is adequate to ensure
well-ordered and prudent conduct of
business.
745.
The bank should conduct periodic reviews of its
risk management process to
ensure
its
integrity, accuracy, and reasonableness. Areas
that should be reviewed
include:
•
Appropriateness of
the bank’s capital assessment process given the
nature, scope
and
complexity of its activities;
•
Identification of
large exposures and risk
concentrations;
•
Accuracy and
completeness of data inputs into the bank’s
assessment process;
•
Reasonableness and
validity of scenarios used in the assessment
process; and
•
Stress testing and
analysis of assumptions and
inputs.
Principle 2:
Supervisors should review and evaluate banks’
internal capital
adequacy
assessments and
strategies, as well as their ability to monitor
and ensure their
compliance with
regulatory capital ratios. Supervisors should
take appropriate
supervisory action if
they are not satisfied with the result of this
process.
746.
The supervisory authorities should regularly
review the process by which a
bank
assesses
its capital adequacy, risk position, resulting
capital levels, and quality of
capital
held.
Supervisors should also evaluate the degree to
which a bank has in place a
sound
internal
process to assess capital adequacy.
The
emphasis of the review should be on the quality
of the bank’s risk management and controls and
should not result in supervisors functioning as
bank management. The periodic review can involve
some combination of:
•
On-site examinations
or inspections;
•
Off-site
review;
•
Discussions with bank
management;
•
Review of work done
by external auditors (provided it is adequately
focused on the
necessary
capital issues); and
•
Periodic
reporting.
747.
The substantial impact that errors in the
methodology or assumptions of
formal
analyses
can have on resulting capital requirements
requires a detailed review by
supervisors
of each bank’s internal
analysis.
1.
Review of adequacy of risk
assessment
748.
Supervisors should assess the degree to which
internal targets and processes
incorporate
the full range of material risks faced by the
bank. Supervisors should also
review
the
adequacy of risk measures used in assessing
internal capital adequacy and the extent
to
which
these risk measures are also used operationally
in setting limits, evaluating
business
line
performance, and evaluating and controlling
risks more generally. Supervisors
should
consider
the results of sensitivity analyses and stress
tests conducted by the institution
and
how
these results relate to capital
plans.
2. Assessment of
capital
adequacy
749.
Supervisors should review the bank’s processes
to determine that:
•
Target levels of
capital chosen are comprehensive and relevant to
the current
operating
environment;
•
These levels are
properly monitored and reviewed by senior
management;
and
•
The composition of
capital is appropriate for the nature and scale
of the bank’s
business.
750.
Supervisors should also consider the extent to
which the bank has provided for
unexpected
events in setting its capital levels. This
analysis should cover a wide range
of
external
conditions and scenarios, and the sophistication
of techniques and stress tests
used
should
be commensurate with the bank’s
activities.
3. Assessment of the
control
environment
751.
Supervisors should consider the quality of the
bank’s management information
reporting
and systems, the manner in which business risks
and activities are aggregated,
and
management’s record in responding to emerging or
changing risks.
752.
In all instances, the capital level at an
individual bank should be
determined
according
to the bank’s risk profile and adequacy of its
risk management process and
internal
controls. External factors such as business
cycle effects and the
macroeconomic
environment
should also be considered.
4.
Supervisory review of compliance with minimum
standards
753.
In order for certain internal methodologies,
credit risk mitigation techniques
and
asset
securitisations to be recognised for regulatory
capital purposes, banks will need
to
meet
a number of requirements, including risk
management standards and disclosures.
In
particular,
banks will be required to disclose features of
their internal methodologies used
in
calculating
minimum capital requirements. As part of the
supervisory review process,
supervisors
must ensure that these conditions are being met
on an ongoing basis.
754.
The Committee regards this review of minimum
standards and qualifying criteria
as
an
integral part of the supervisory review process
under Principle 2. In setting the
minimum
criteria
the Committee has considered current industry
practice and so anticipates that these minimum
standards will provide supervisors with a useful
set of benchmarks that are aligned with bank
management expectations for effective risk
management and capital
allocation.
755.
There is also an important role for supervisory
review of compliance with
certain
conditions
and requirements set for standardised
approaches. In this context, there will be
a
particular
need to ensure that use of various instruments
that can reduce Pillar 1
capital
requirements
are utilised and understood as part of a sound,
tested, and properly
documented
risk management process.
5. Supervisory
response
756.
Having carried out the review process described
above, supervisors should take
appropriate
action if they are not satisfied with the
results of the bank’s own risk
assessment
and
capital allocation. Supervisors should consider
a range of actions, such as those set
out
under
Principles 3 and 4 below.
Principle 3:
Supervisors should expect banks to operate above
the minimum
regulatory capital
ratios and should have the ability to require
banks to hold capital in
excess of the
minimum.
757.
Pillar 1 capital requirements will include a
buffer for uncertainties surrounding
the
Pillar
1 regime that affect the banking population as a
whole.
Bank-specific
uncertainties will be treated under Pillar 2. It
is anticipated that such buffers under Pillar 1
will be set to provide reasonable assurance that
a bank with good internal systems and controls,
a well-diversified risk profile and a business
profile well covered by the Pillar 1 regime, and
which operates with capital equal to Pillar 1
requirements, will meet the minimum goals for
soundness embodied in Pillar 1.
However,
supervisors will need to consider whether the
particular features of the markets for which
they are responsible are adequately covered.
Supervisors will typically require (or
encourage) banks to operate with a buffer, over
and above the Pillar 1 standard.
Banks
should maintain this buffer for a combination of
the following:
(a)
Pillar 1 minimums are anticipated to be set to
achieve a level of bank
creditworthiness
in markets that is below the level of
creditworthiness sought by
many
banks for their own reasons. For example, most
international banks appear to
prefer
to be highly rated by internationally recognised
rating agencies. Thus, banks
are
likely to choose to operate above Pillar 1
minimums for competitive
reasons.
(b)
In the normal course of business, the type and
volume of activities will change,
as
will
the different risk exposures, causing
fluctuations in the overall capital
ratio.
(c)
It may be costly for banks to raise additional
capital, especially if this needs to
be
done
quickly or at a time when market conditions are
unfavourable.
(d)
For banks to fall below minimum regulatory
capital requirements is a serious
matter.
It
may place banks in breach of the relevant law
and/or prompt non-discretionary
corrective
action on the part of
supervisors.
(e)
There may be risks, either specific to
individual banks, or more generally to
an
economy
at large, that are not taken into account in
Pillar 1.
758.
There are several means available to supervisors
for ensuring that individual
banks
are
operating with adequate levels of capital. Among
other methods, the supervisor may
set
trigger
and target capital ratios or define categories
above minimum ratios (e.g. well
capitalised
and adequately capitalised) for identifying the
capitalisation level of the
bank.
Principle 4:
Supervisors should seek to intervene at an early
stage to prevent capital
from falling below
the minimum levels required to support the risk
characteristics of a
particular bank and
should require rapid remedial action if capital
is not maintained or
restored.
759.
Supervisors should consider a range of options
if they become concerned that a
bank
is not meeting the requirements embodied in the
supervisory principles outlined
above.
These
actions may include intensifying the monitoring
of the bank, restricting the payment of
dividends, requiring the bank to prepare and
implement a satisfactory capital
adequacy
restoration
plan, and requiring the bank to raise additional
capital immediately.
Supervisors
should
have the discretion to use the tools best suited
to the circumstances of the bank
and
its
operating environment.
760.
The permanent solution to banks’ difficulties is
not always increased capital.
However,
some of the required measures (such as improving
systems and controls) may
take
a period of time to implement. Therefore,
increased capital might be used as an
interim
measure
while permanent measures to improve the bank’s
position are being put in
place.
Once
these permanent measures have been put in place
and have been seen by
supervisors
to be effective, the interim increase in capital
requirements can be
removed.
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