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Basel's new bank supervision principles are credit positive

by William Arnold | Oct 02, 2012

On 14 September, bank regulators from more than 100 countries endorsed the Basel Committee on Banking Supervision’s new core principles for effective bank supervision. While the establishment of stricter capital and liquidity rules (as reflected in the Basel III framework) are important, the GFC also demonstrated the importance of effective supervision. The implementation of these standards will be credit positive for all banks – and their bondholders.

The updated principles intend to address weaknesses which became apparent during the GFC.  A key shortcoming was that supervision was often too focused on individual entities (micro) and not focused enough on systemic risks (macro). The revised principles emphasise that regulators need to consider both these areas in their supervision.

The new principles also seek for regulators to broaden their scope to include issues such as corporate governance, disclosure and transparency. Other elements of the new principles are the resources that regulators command and the institutional structure of supervision.

The principles will serve as a benchmark in publicly-disclosed compliance assessments by the IMF and the World Bank as part of their Financial Sector Assessment Program (FSAP). (The IMF’s FSAP is a comprehensive analysis of a country’s financial sector).