Basel Committee
on Banking Supervision
High-level principles for
the cross-border
implementation of the
New Accord
August 2003
3
Principle 1: The New Accord will not change the legal responsibilities of national
supervisors for the regulation of their domestic institutions or the arrangements for
consolidated supervision already put in place by the Basel Committee on Banking
Supervision ................................................................................................................. 5
Principle 2: The home country supervisor is responsible for the oversight of the
implementation of the New Accord for a banking group on a consolidated basis ....... 5
Principle 3: Host country supervisors, particularly where banks operate in subsidiary
form, have requirements that need to be understood and recognised ........................ 5
Principle 4: There will need to be enhanced and pragmatic cooperation among
supervisors with legitimate interests. The home country supervisor should lead this
coordination effort ...................................................................................................... 6
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........................................ 6
Principle 6: In implementing the New Accord, supervisors should communicate the
respective roles of home country and host country supervisors as clearly as possible
to banking groups with significant cross-border operations in multiple jurisdictions.
The home country supervisor would lead this coordination effort in cooperation with
the host country supervisors ....................................................................................... 7
4
High-level principles for the
cross-border implementation of the New Accord
1. The Basel Committee recognises that the New Accord will require more cooperation
and coordination between home country and host country supervisors, especially for
complex banking groups. The New Accord will accentuate the need for cooperation because
the new rules will be applied at each level of the banking group, so that there is a technical
requirement on the part of both home country and host country supervisors to provide a Pillar
1 and Pillar 2 assessment. In addition, there may need to be some coordination regarding
Pillar 3 requirements. Consequently, the Basel Committee encourages supervisors to
elaborate further on the practical implications of the Basel Concordat (see below) for the
implementation of the New Accord.
2. Where a banking group has operations in at least one country other than the home
country, the implementation of the New Accord may require it to obtain approval for its use of
certain approaches from relevant host country supervisors on an individual or subconsolidated
basis, as well as from its home country supervisor in respect of consolidated
supervision. The need for approval of more than one supervisor is not a precedent; the 1996
Market Risk Amendment entailed similar requirements. However, the New Accord could
significantly extend the scope of such multiple approvals and is therefore likely to create
some new implementation challenges.
3. Closer cooperation between supervisors can assist the implementation efforts of
both supervisors and banking groups. There are a variety of supervisory responsibilities
under the New Accord, including: (1) initial approval and validation of “advanced” approaches
(eg IRB, AMA) under Pillar 1; (2) the supervisory review process under Pillar 2; and (3)
ongoing assessments to verify that banking groups are applying the New Accord properly
and that the conditions for “advanced” approaches continue to be met. The degree and
nature of cooperation between supervisors may differ across these different supervisory
responsibilities. Whatever arrangements are employed, banks have an important role to play
in assisting the effective and efficient cross-border implementation efforts of supervisors.
4. While arrangements for cooperation among supervisors must be practical, the Basel
Committee has a clear interest in implementing the New Accord in a way that strengthens
the quality of bank supervision across countries. The Committee should also promote the
ability of all host supervisors, and especially of those from emerging market economies, to
exercise effective host banking supervision over foreign institutions operating in their
jurisdictions.
5. The Basel Committee believes that fostering closer practical cooperation between
supervisors is essential to implement the New Accord as effectively and efficiently as
possible. In particular, the following six principles apply:
5
Principle 1: The New Accord will not change the legal responsibilities of national
supervisors for the regulation of their domestic institutions or the arrangements for
consolidated supervision already put in place by the Basel Committee on Banking
Supervision.
6. Cross-border responsibilities of supervisors, as set out in ‘The Basel Concordat and
Minimum Standards’1 (the Basel Concordat) will continue to apply with the implementation of
the New Accord. In essence, home country supervisors are responsible for consolidated
supervision and host country supervisors are responsible for supervision on an individual or
sub-consolidated basis for entities operating in their country.
7. The implementation of the New Accord should build on the existing framework of the
Basel Concordat to achieve effective implementation across jurisdictions without imposing an
undue burden on banking groups. The degree of closer practical cooperation between
supervisors will be facilitated by certain preconditions for effective exchange of information
and practical mutual recognition (eg the degree of equivalence of regulatory and supervisory
systems, and acceptable approaches to information sharing and confidentiality).
Principle 2: The home country supervisor is responsible for the oversight of the
implementation of the New Accord for a banking group on a consolidated basis.
8. For situations where the home country and host country supervisors adopt different
approaches, the home country supervisor will have the final determination on such matters
as they relate to the group on a consolidated basis. This does not mean that the home
country supervisor will necessarily perform all of the assessment and analysis. In exercising
its responsibilities, the home country supervisor may seek input from host country
supervisors, particularly where a subsidiary in the host country is material to the group or the
subsidiary’s business differs significantly from that of the parent bank.
9. Given the nature of Pillar 2, the responsibility for Pillar 2 assessments of a
consolidated banking group must rest with the home country supervisor. However,
depending on the organisation of the banking group and the importance of activities within
the host country, host country supervisors may provide important input into the home country
assessment of Pillar 2 for the consolidated banking group. Home country supervisors should
seek host country input, where appropriate.
Principle 3: Host country supervisors, particularly where banks operate in subsidiary
form, have requirements that need to be understood and recognised.
10. In each country, banks operating in subsidiary form must satisfy the supervisory and
legal requirements of the host jurisdiction. Certain jurisdictions may also have relevant
requirements in the case of foreign bank branches.
11. Host country supervisors have an interest in accepting the methods and approval
processes that the bank uses at the consolidated level, in order to reduce the compliance
burden and avoid regulatory arbitrage. However, host country supervisors have other
legitimate interests which may prevent them from recognising for use at the subconsolidation
level an approach approved at the group level, such as, for example, limitations
1 Volume Three, Chapter I of the BCBS Compendium.
6
imposed by their legal obligations, or situations where the home country supervisor does not
perform effective comprehensive consolidated supervision.
Principle 4: There will need to be enhanced and pragmatic cooperation among
supervisors with legitimate interests. The home country supervisor should lead this
coordination effort.
12. The sharing of supervisory results is an evolving practice. Supervisors should look
for ways to continue to enhance cooperation and the exchange of information (eg sharing of
examination results). Requests by host country 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 country and host country supervisors.
Whatever arrangements are employed, the emphasis should be on those practical tools and
procedures for fostering effective cross-border cooperation.
13. Supervisors should coordinate their respective work plans as far as possible, taking
into account legal and other constraints. Over time, greater cooperation between home
country and host country supervisors will increase efficiencies for both banks and
supervisors.
14. As needed, the home country supervisor would be responsible for measures to
organise practical cooperation between supervisors responsible for the material operations of
the banking group. This would include holding discussions with the senior management of
the group about their implementation plans, communicating these plans as necessary to
relevant host country supervisors and agreeing with them the work to be undertaken by each
supervisor. The home country supervisor would also develop an appropriate communication
strategy with the relevant host country supervisors, supplementing existing cooperative
agreements where necessary. As a practical matter, the frequency and scope of
communication between supervisors would vary depending on the materiality of operations
within the host country.
15. Agreements on cooperation and exchange of information should be recorded on
whatever basis best suits individual supervisors. Some supervisors may opt for formal
arrangements (like Memoranda of Understanding (MOUs) or other bilateral agreements),
while others may prefer less formal communication strategies.
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.
16. For initial and on-going validation and approval there is likely to be a particular need
for cooperation between home country and host country supervisors because the nature of
complex banking group structures increases the likelihood that different techniques will be
used in different jurisdictions.
17. The Pillar 1 approval of a credit risk rating system for an IRB capital calculation or
an Advanced Measurement Approach for operational risk involves many bank functions. In
any given banking group, some of these functions will be carried out at the group level, while
others will be performed at the level of the individual entity. It will be highly desirable for
supervisors to coordinate their activities, as far as possible, to reflect the organisation and
management structure of a banking group, in order to improve efficiency and thereby reduce
the implementation burden on both banks and supervisors.
7
18. The degree of integration in a banking group’s risk management, the extent to which
a banking group uses a common approach, the availability of data and other factors (such as
legal responsibilities), are likely to condition the nature of desirable cross-border
arrangements. Where ‘mind and management’ are centralised in the banking group or where
techniques are consistently applied across the group, the home country supervisor will
probably be better placed to lead approval work. In such circumstances, the host country
supervisor may choose to rely entirely on approval work conducted by the home country
supervisor. Conversely, where there is limited integration or where one or more operating
companies within the group are using different techniques from the rest of the group, or
where, for example, an entity located in the host country manages a global business line, the
host country supervisor may be better placed to take the lead for approval work regarding
those techniques or those operations. But in this case the home country supervisor will need
to maintain a sufficient level of information about the banking group and its operations in the
host country, in order to allow it to meet its responsibilities under the New Accord.
Principle 6: In implementing the New Accord, supervisors should communicate the
respective roles of home country and host country supervisors as clearly as possible
to banking groups with significant cross-border operations in multiple jurisdictions.
The home country supervisor would lead this coordination effort in cooperation with
the host country supervisors.
19. It is desirable for home country supervisors, in cooperation with the host country
supervisors, to develop a plan well in advance of the implementation date, detailing, as far as
possible, the practical arrangements between the home country supervisor and relevant host
country supervisors to be followed in implementing the New Accord. This will be particularly
desirable for those “advanced” complex banking structures with significant cross-border
operations because the practical supervisory arrangements will depend on how the banking
group operates. This plan should be communicated to the affected banking group. In
communicating the supervisory plan, supervisors will take care to clarify that existing
supervisory legal responsibilities remain unchanged.
20. The home country supervisor would lead the development and communication of a
supervisory plan. The level of detail contained within such a plan should be flexible and
tailored to the individual circumstances of a banking group.
on Banking Supervision
High-level principles for
the cross-border
implementation of the
New Accord
August 2003
3
Principle 1: The New Accord will not change the legal responsibilities of national
supervisors for the regulation of their domestic institutions or the arrangements for
consolidated supervision already put in place by the Basel Committee on Banking
Supervision ................................................................................................................. 5
Principle 2: The home country supervisor is responsible for the oversight of the
implementation of the New Accord for a banking group on a consolidated basis ....... 5
Principle 3: Host country supervisors, particularly where banks operate in subsidiary
form, have requirements that need to be understood and recognised ........................ 5
Principle 4: There will need to be enhanced and pragmatic cooperation among
supervisors with legitimate interests. The home country supervisor should lead this
coordination effort ...................................................................................................... 6
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........................................ 6
Principle 6: In implementing the New Accord, supervisors should communicate the
respective roles of home country and host country supervisors as clearly as possible
to banking groups with significant cross-border operations in multiple jurisdictions.
The home country supervisor would lead this coordination effort in cooperation with
the host country supervisors ....................................................................................... 7
4
High-level principles for the
cross-border implementation of the New Accord
1. The Basel Committee recognises that the New Accord will require more cooperation
and coordination between home country and host country supervisors, especially for
complex banking groups. The New Accord will accentuate the need for cooperation because
the new rules will be applied at each level of the banking group, so that there is a technical
requirement on the part of both home country and host country supervisors to provide a Pillar
1 and Pillar 2 assessment. In addition, there may need to be some coordination regarding
Pillar 3 requirements. Consequently, the Basel Committee encourages supervisors to
elaborate further on the practical implications of the Basel Concordat (see below) for the
implementation of the New Accord.
2. Where a banking group has operations in at least one country other than the home
country, the implementation of the New Accord may require it to obtain approval for its use of
certain approaches from relevant host country supervisors on an individual or subconsolidated
basis, as well as from its home country supervisor in respect of consolidated
supervision. The need for approval of more than one supervisor is not a precedent; the 1996
Market Risk Amendment entailed similar requirements. However, the New Accord could
significantly extend the scope of such multiple approvals and is therefore likely to create
some new implementation challenges.
3. Closer cooperation between supervisors can assist the implementation efforts of
both supervisors and banking groups. There are a variety of supervisory responsibilities
under the New Accord, including: (1) initial approval and validation of “advanced” approaches
(eg IRB, AMA) under Pillar 1; (2) the supervisory review process under Pillar 2; and (3)
ongoing assessments to verify that banking groups are applying the New Accord properly
and that the conditions for “advanced” approaches continue to be met. The degree and
nature of cooperation between supervisors may differ across these different supervisory
responsibilities. Whatever arrangements are employed, banks have an important role to play
in assisting the effective and efficient cross-border implementation efforts of supervisors.
4. While arrangements for cooperation among supervisors must be practical, the Basel
Committee has a clear interest in implementing the New Accord in a way that strengthens
the quality of bank supervision across countries. The Committee should also promote the
ability of all host supervisors, and especially of those from emerging market economies, to
exercise effective host banking supervision over foreign institutions operating in their
jurisdictions.
5. The Basel Committee believes that fostering closer practical cooperation between
supervisors is essential to implement the New Accord as effectively and efficiently as
possible. In particular, the following six principles apply:
5
Principle 1: The New Accord will not change the legal responsibilities of national
supervisors for the regulation of their domestic institutions or the arrangements for
consolidated supervision already put in place by the Basel Committee on Banking
Supervision.
6. Cross-border responsibilities of supervisors, as set out in ‘The Basel Concordat and
Minimum Standards’1 (the Basel Concordat) will continue to apply with the implementation of
the New Accord. In essence, home country supervisors are responsible for consolidated
supervision and host country supervisors are responsible for supervision on an individual or
sub-consolidated basis for entities operating in their country.
7. The implementation of the New Accord should build on the existing framework of the
Basel Concordat to achieve effective implementation across jurisdictions without imposing an
undue burden on banking groups. The degree of closer practical cooperation between
supervisors will be facilitated by certain preconditions for effective exchange of information
and practical mutual recognition (eg the degree of equivalence of regulatory and supervisory
systems, and acceptable approaches to information sharing and confidentiality).
Principle 2: The home country supervisor is responsible for the oversight of the
implementation of the New Accord for a banking group on a consolidated basis.
8. For situations where the home country and host country supervisors adopt different
approaches, the home country supervisor will have the final determination on such matters
as they relate to the group on a consolidated basis. This does not mean that the home
country supervisor will necessarily perform all of the assessment and analysis. In exercising
its responsibilities, the home country supervisor may seek input from host country
supervisors, particularly where a subsidiary in the host country is material to the group or the
subsidiary’s business differs significantly from that of the parent bank.
9. Given the nature of Pillar 2, the responsibility for Pillar 2 assessments of a
consolidated banking group must rest with the home country supervisor. However,
depending on the organisation of the banking group and the importance of activities within
the host country, host country supervisors may provide important input into the home country
assessment of Pillar 2 for the consolidated banking group. Home country supervisors should
seek host country input, where appropriate.
Principle 3: Host country supervisors, particularly where banks operate in subsidiary
form, have requirements that need to be understood and recognised.
10. In each country, banks operating in subsidiary form must satisfy the supervisory and
legal requirements of the host jurisdiction. Certain jurisdictions may also have relevant
requirements in the case of foreign bank branches.
11. Host country supervisors have an interest in accepting the methods and approval
processes that the bank uses at the consolidated level, in order to reduce the compliance
burden and avoid regulatory arbitrage. However, host country supervisors have other
legitimate interests which may prevent them from recognising for use at the subconsolidation
level an approach approved at the group level, such as, for example, limitations
1 Volume Three, Chapter I of the BCBS Compendium.
6
imposed by their legal obligations, or situations where the home country supervisor does not
perform effective comprehensive consolidated supervision.
Principle 4: There will need to be enhanced and pragmatic cooperation among
supervisors with legitimate interests. The home country supervisor should lead this
coordination effort.
12. The sharing of supervisory results is an evolving practice. Supervisors should look
for ways to continue to enhance cooperation and the exchange of information (eg sharing of
examination results). Requests by host country 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 country and host country supervisors.
Whatever arrangements are employed, the emphasis should be on those practical tools and
procedures for fostering effective cross-border cooperation.
13. Supervisors should coordinate their respective work plans as far as possible, taking
into account legal and other constraints. Over time, greater cooperation between home
country and host country supervisors will increase efficiencies for both banks and
supervisors.
14. As needed, the home country supervisor would be responsible for measures to
organise practical cooperation between supervisors responsible for the material operations of
the banking group. This would include holding discussions with the senior management of
the group about their implementation plans, communicating these plans as necessary to
relevant host country supervisors and agreeing with them the work to be undertaken by each
supervisor. The home country supervisor would also develop an appropriate communication
strategy with the relevant host country supervisors, supplementing existing cooperative
agreements where necessary. As a practical matter, the frequency and scope of
communication between supervisors would vary depending on the materiality of operations
within the host country.
15. Agreements on cooperation and exchange of information should be recorded on
whatever basis best suits individual supervisors. Some supervisors may opt for formal
arrangements (like Memoranda of Understanding (MOUs) or other bilateral agreements),
while others may prefer less formal communication strategies.
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.
16. For initial and on-going validation and approval there is likely to be a particular need
for cooperation between home country and host country supervisors because the nature of
complex banking group structures increases the likelihood that different techniques will be
used in different jurisdictions.
17. The Pillar 1 approval of a credit risk rating system for an IRB capital calculation or
an Advanced Measurement Approach for operational risk involves many bank functions. In
any given banking group, some of these functions will be carried out at the group level, while
others will be performed at the level of the individual entity. It will be highly desirable for
supervisors to coordinate their activities, as far as possible, to reflect the organisation and
management structure of a banking group, in order to improve efficiency and thereby reduce
the implementation burden on both banks and supervisors.
7
18. The degree of integration in a banking group’s risk management, the extent to which
a banking group uses a common approach, the availability of data and other factors (such as
legal responsibilities), are likely to condition the nature of desirable cross-border
arrangements. Where ‘mind and management’ are centralised in the banking group or where
techniques are consistently applied across the group, the home country supervisor will
probably be better placed to lead approval work. In such circumstances, the host country
supervisor may choose to rely entirely on approval work conducted by the home country
supervisor. Conversely, where there is limited integration or where one or more operating
companies within the group are using different techniques from the rest of the group, or
where, for example, an entity located in the host country manages a global business line, the
host country supervisor may be better placed to take the lead for approval work regarding
those techniques or those operations. But in this case the home country supervisor will need
to maintain a sufficient level of information about the banking group and its operations in the
host country, in order to allow it to meet its responsibilities under the New Accord.
Principle 6: In implementing the New Accord, supervisors should communicate the
respective roles of home country and host country supervisors as clearly as possible
to banking groups with significant cross-border operations in multiple jurisdictions.
The home country supervisor would lead this coordination effort in cooperation with
the host country supervisors.
19. It is desirable for home country supervisors, in cooperation with the host country
supervisors, to develop a plan well in advance of the implementation date, detailing, as far as
possible, the practical arrangements between the home country supervisor and relevant host
country supervisors to be followed in implementing the New Accord. This will be particularly
desirable for those “advanced” complex banking structures with significant cross-border
operations because the practical supervisory arrangements will depend on how the banking
group operates. This plan should be communicated to the affected banking group. In
communicating the supervisory plan, supervisors will take care to clarify that existing
supervisory legal responsibilities remain unchanged.
20. The home country supervisor would lead the development and communication of a
supervisory plan. The level of detail contained within such a plan should be flexible and
tailored to the individual circumstances of a banking group.