Supervisory Cooperation Information Sharing and Cross Border Issues

附件七 Supervisory Cooperation, Information Sharing and Cross Border Issues OSFI International Advisory Group 3 rd SEACEN-OSFI Seminar on Consolidated Supervision Hosted by the State Bank of Vietnam May 5 - 9, 2008 Da Nang, Vietnam Leo Querel International Advisory Group www. osfi-bsif. gc. ca

Discussion Points Benefits of Supervisory Cooperation and Information Sharing Reliance Guidance & Standards Home-Host Issues/Challenges in Basel II Questions for Supervisors to Ask Themselves 2

Benefits of Supervisory Cooperation and Information Sharing Benefits are generally beyond dispute FIs operate worldwide risks are both local and global in origin material loss/failure abroad can threaten the safety/soundness of the entire institution, both directly and indirectly through a loss of confidence 3

Benefits of Supervisory Cooperation and Information Sharing Supervisors are not only responsible for FIs based in their own jurisdictions, but also for protecting local depositors of foreign FIs supervisors have neither the time nor budgets to directly ensure that all operations outside their jurisdictions are operating in a safe/sound manner supervisors must work with and rely on the help of other supervisors through information sharing and other forms of supervisory cooperation 4

Benefits of Supervisory Cooperation and Information Sharing Supervisors increasingly being asked for confidential info Questions arise about balancing cross-border information sharing needs with national confidentiality requirements balancing benefits with the practical work involved respective roles of home/host supervisors loss of supervisory control 5

Reliance Supervisory cooperation raises question of reliance 6

Reliance Approaches to supervision vary widely country to country Two extremes supervisors place virtually no reliance on the work conducted by other supervisors or other potential allies such as external/internal auditors, boards, etc. entire supervisory role turned over to auditors and boards, supplemented by extensive disclosure reqmts to encourage markets to play a supporting role 7

Reliance Most supervisory regimes operate somewhere between these two extremes – a “rely and verify” approach requires appropriate checking to confirm information/judgements supervisors must ask themselves whether/how often to conduct direct supervision where another supervisor has primary responsibility 8

Reliance Information sharing may reduce the direct supervision work but does not eliminate it Historically given more prominence in banking supervision than in insurance supervision Unconsolidated balance sheet of the parent bank cannot be ignored! 9

Guidance & Standards Guidance comes from many groups elements/standards overlap to a large degree Information sharing and cooperation standards issued by: Basel Committee on Banking Supervision eg. Sharing of financial records between jurisdictions in connection with the fight against terrorist financing (April 2002) Essential elements of a statement of cooperation between banking supervisors (May 2001) 10

Guidance & Standards Information sharing and cooperation standards issued by: Basel Committee on Banking Supervision eg. - The supervision of cross-border banking (October 1996) - Minimum Standards for the Supervision of International Banking Groups and their Cross-border Establishments (July 1992) 11

Guidance & Standards Basel Committee on Banking Supervision (cont’d) BCP #1(6) Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place 12

Guidance & Standards BCP #1(6) (cont’d) • system of cooperation/info sharing: - between all domestic agencies responsible for financial sector - with foreign agencies that have supervisory responsibilities for banking operations of mutual interest to domestic supervisor - evidence that arrangements work in practice, where necessary 13

Guidance & Standards BCP #1(6) (cont’d) • the supervisor: -may provide confidential info to another domestic or foreign supervisor -is required to ensure that receiving supervisor will keep info confidential -is required to ensure that confidential info released to another supervisor will be used only for supervisory purposes -is able to deny any demand (other than a court order/mandate from a legislative body) for confidential info 14

Guidance & Standards Basel Committee on Banking Supervision (cont’d) BCP # 25 Cross-border consolidated supervision requires cooperation and information exchange between home supervisors and the various other supervisors involved, primarily host banking supervisors. Banking supervisors must require the local operations of foreign banks to be conducted to the same standards required of domestic institutions. 15

Guidance & Standards BCP # 25: Essential Criteria • for material cross-border operations of its banks, the supervisor identifies all other relevant supervisors and establishes informal or formal arrangements (MOU) for appropriate information sharing, on a confidential basis, on the financial condition and performance of such operations in the home or host country • where MOU exists, their existence should be communicated to the banks 16

Guidance & Standards BCP # 25: Essential Criteria (cont’d) • home supervisor provides info to host supervisors regarding: - specific operations in the host country - the overall framework of supervision in which banking group operates - significant problems in head office or group as a whole - frequency and scope of information sharing varies depending on materiality of bank’s activities in host country 17

Guidance & Standards BCP # 25 and Essential Criteria (cont’d) • local branches/subsidiaries of foreign banks are subject to similar prudential, inspection, and regulatory reporting requirements as domestic banks • for purposes of the licensing process/ongoing supervision, the host supervisor assesses whether the home supervisor practices consolidated global supervision • the host supervisor, before issuing a licence, determines that approval (or no objection) from the home supervisor has been received 18

Guidance & Standards BCP #25 and Essential Criteria (cont’d) • home supervisors are given on-site access to local offices/subsidiaries for safety and soundness purposes • the host supervisor advises home supervisors on a timely basis of any material remedial action it takes regarding the operations of a bank from that country • the host supervisor obtains from home supervisors sufficient info on the banking group to allow it to put into proper perspective the activities conducted within its borders 19

Guidance & Standards Information sharing and cooperation standards issued by (cont’d): Joint Forum on Financial Conglomerates eg. Framework for Supervisory Information Sharing Principles for Supervisory Information Sharing International Association of Insurance Supervisors (IAIS) International Organization of Securities Commissions (IOSCO) 20

Guidance & Standards Ten Key Principles on Information Sharing Issued by G-7 Finance Ministers in May 1998 Published in Financial Stability –Supervision of Global Financial Institutions 21

Guidance & Standards 1. Authorization to share and gather information supervisors should have statutory authority to share – in response to requests or when thought beneficial to do so supervisors should have power to gather info sought by a requestor 22

Guidance & Standards 2. Cross-sector information sharing supervisors from different sectors should be able to share supervisory info both internationally and domestically 23

Guidance & Standards 3. Information about systems and controls supervisors should cooperate in identifying and monitoring the use of management and information systems/controls by internationally active firms 24

Guidance & Standards 4. Information about individuals supervisors should have authority to share objective info of supervisory interest about individuals such as owners, shareholders, directors, managers or employees of supervised firms 25

Guidance & Standards 5. Information sharing between exchanges should be able to share supervisory info with counterparts in other jurisdictions including info about the positions of their members 26

Guidance & Standards 6. Confidentiality provider should be expected to provide info to a requestor that is able to maintain its confidentiality requestor should be free to use such info for supervisory purposes across the range of its duties, subject to minimum confidentiality standards requestor should keep confidential non-public info it receives 27

Guidance & Standards 7. Formal agreements and written requests MOU’s often used and can facilitate the efficient execution of requests. However, requestor should not have to enter into a strict formal agreement to obtain info written requests can be useful but should not be a prerequisite to the sharing of info, particularly in an emergency 28

Guidance & Standards 8. Reciprocity requirements may be considered but should not be a precondition for the exchange of info 9. Cases which further supervisory purposes provider should permit the requestor to pass on info to other supervisory and law enforcement agencies in its jurisdiction in cases which further supervisory purposes 29

Guidance & Standards 10. Removal of laws preventing supervisory information exchange each jurisdiction should take steps to remove or modify those laws and procedures that prevent/impede the exchange of necessary supervisory info 30

Guidance & Standards Basel Committee’s Statement of Mutual Cooperation Essential Elements when a cross-border application is received: • host supervisor should notify the home supervisor as soon as the application is received 31

Guidance & Standards Basel Committee’s Statement of Mutual Cooperation when a cross-border application is received (cont’d) : • home supervisor, upon request, should inform the host supervisor whether the applicant is in substantial compliance with applicable laws and regulations and whether it may be expected, given its administrative structure and internal controls, to manage the cross-border establishment in an orderly manner 32

Guidance & Standards Basel Committee’s Statement of Mutual Cooperation when a cross-border application is received (cont’d) : • home supervisor should also, upon request, assist the host supervisor with verifying or supplementing any information submitted by the applicant 33

Guidance & Standards Basel Committee’s Statement of Mutual Cooperation when a cross-border application is received (cont’d) : • home and host supervisors should inform one another about the nature of their respective regulatory systems and the extent to which they will (each) supervise the cross-border establishment 34

Guidance & Standards Basel Committee’s Statement of Mutual Cooperation when a cross-border application is received (cont’d) : • to the extent permitted by law, the home and host supervisors should share information on the fitness and properness of prospective managers of a crossborder establishment 35

Guidance & Standards Basel Committee’s Statement of Mutual Cooperation re: the ongoing supervision of the crossborder establishments, the home/host supervisors should: • provide relevant info to their counterpart regarding material developments or supervisory concerns in respect of the operations of a cross-border establishment 36

Guidance & Standards Basel Committee’s Statement of Mutual Cooperation re: the ongoing supervision of the crossborder establishments, the home/host supervisors should (cont’d): • respond to requests for info on their respective national regulatory systems and inform each other about major changes, in particular those which have a significant bearing on the activities of cross-border establishments 37

Guidance & Standards Basel Committee’s Statement of Mutual Cooperation re: the ongoing supervision of the crossborder establishments, the home/host supervisors should (cont’d): • inform their counterpart (in advance if possible) of material administrative penalties imposed, or other formal enforcement action taken, against a cross border establishment 38

Guidance & Standards Basel Committee’s Statement of Mutual Cooperation re: the ongoing supervision of the crossborder establishments, the home/host supervisors should (cont’d): • facilitate the transmission of any other relevant information that might be required to assist with the supervisory process 39

Guidance & Standards Basel Committee’s Statement of Mutual Cooperation re: on-site inspections by home supervisor of a cross-border establishment located in a host jurisdiction • host supervisor should allow home supervisor to conduct on-site inspections • prior to deciding whether an on-site inspection is necessary, home supervisor should review any relevant examination or other supervisory reports prepared by host supervisor 40

Guidance & Standards Basel Committee’s Statement of Mutual Cooperation re: on-site inspections by home supervisor of a cross-border establishment located in a host jurisdiction (cont’d) • home supervisor should undertake to notify host supervisor of plans to examine a cross-border establishment or to appoint a third party to conduct an examination on its behalf, and to indicate the purposes and scope of the visit 41

Guidance & Standards Basel Committee’s Statement of Mutual Cooperation re: on-site inspections by home supervisor of a cross-border establishment located in a host jurisdiction (cont’d) • as may be mutually agreed between the parties, examinations may be carried out by the home supervisor alone, or accompanied by the host supervisor • following the examination, an exchange of views should take place between the examination team and host supervisor 42

Guidance & Standards Some Grey Areas Guidance is not specific in some areas info provided by home supervisor to host supervisor on the parent • reluctance especially where the parent is experiencing difficulties • could precipitate action by host supervisor to protect local depositors – result in a loss of confidence which may complicate the efforts of the home supervisor 43

Guidance & Standards Some Grey Areas Guidance is not specific in some areas (cont’d) differences in info sharing practices depending on whether a branch or subsidiary? • in theory the host jurisdiction needs more info on parent in the case of a branch 44

Home-Host Issues/Challenges in Basel II will require a heightened level of supervisory cooperation/coordination because: applied at each level of a banking group need for multiple supervisory approvals rigorous technical requirements will require substantial amounts of info to be available at all levels of the banking organisation 45

Home-Host Issues/Challenges in Basel II will require a heightened level of supervisory cooperation/coordination because (cont’d): substantial flexibility for banks/supervisors in satisfying the minimum capital requirements for Pillar I - not a one-size-fits-all approach the supervisory review process in Pillar 2 introduces another element of flexibility for supervisors beyond what exists in the current capital framework. Pillar 2 also raises expectations for banks/supervisors 46

Home-Host Issues/Challenges in Basel II capital framework will require a heightened level of supervisory cooperation/coordination because (cont’d): bank systems and processes, some of which are highly centralised and others of which are predominately local, must be validated initially and on an ongoing basis. internationally active banks increasingly operate on a business-line basis, using risk management and other techniques that apply across legal entities supervisors will retain their legal responsibilities visà-vis banking institutions in their jurisdictions 47

Home-Host Issues/Challenges in Basel II In absence of greater communication/cooperation, there is a risk that different or inconsistent supervisory processes will be burdensome or redundant for both banks and supervisors Successful implementation of Basel II will depend to a large extent on the ability of home/host supervisors to work together efficiently/effectively 48

Home-Host Issues/Challenges in Basel II No strict guidelines on how to achieve greater supervisory coordination/communication because: home/host arrangements need to reflect their own supervisory needs structure/organisation of the banks’ specific plans for adopting Basel II 49

Home-Host Issues/Challenges in Basel II To address the need for greater home/host cooperation, Basel Committee issued (August 2003) a set of principles: 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 put in place by the Basel Committee Principle 2: the home supervisor is responsible for the oversight of the implementation of Basel II for a banking group on a consolidated basis Principle 3: host supervisors, particularly where banks operate in subsidiary form, have requirements that need to be understood and recognised 50

Home-Host Issues/Challenges in Basel II To address the need for greater home/host cooperation, Basel Committee issued (August 2003) a set of principles (cont’d): Principle 4: will need to be enhanced and pragmatic cooperation among supervisors with legitimate interests. The home country supervisor should lead this coordination effort. 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. 51

Home-Host Issues/Challenges in Basel II To address the need for greater home/host cooperation, Basel Committee issued (August 2003) a set of principles (cont’d): 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. The home supervisor would lead this coordination effort in cooperation with the host 52

Home-Host Issues/Challenges in Basel II May 2004 Basle Committee press release elaborated further on principles: members seeking detailed information about Basel II implementation and roll-out plans from subsidiaries of foreign banks in their jurisdictions would request such information from the home country supervisors before going directly to the banks should be interpreted in practical manner, however, and should not impede host country supervisors from conducting routine supervisory activities home supervisors should play a leading role in approving and validating many elements of the advanced approaches 53

Home-Host Issues/Challenges in Basel II May 2004 Basle Committee press release elaborated further on principles (cont’d): expectation that initial validation work for most advanced IRB approaches for larger corporate exposures will be led by the home supervisor, with appropriate input from host country supervisors and material reliance by host countries on the home regulator detailed guidance issued related to the homehost issues in determining capital requirements for operational risk under the advanced measurement approaches (AMA) 54

Home-Host Issues/Challenges in Basel II February 2007 Consultative Paper on “Home-host supervisory cooperation and allocation mechanisms in an AMA context” The paper sets out principles related to two important topics in the implementation of the Advanced Measurement Approaches for operational risk under Basel II. The first set of principles focuses specifically on supervisory cooperation in the context of banks implementing an AMA. These principles are intended as a supplement to the paper Home -host information sharing for effective Basel II implementation issued by the Committee in June 2006. The second set of principles builds on the 2004 paper Principles for the home-host recognition of AMA operational risk capital and specifically addresses allocation mechanisms developed as part of a hybrid AMA. 55

Home-Host Issues/Challenges in Basel II Home/host and banks all have an interest in supervisory coordination/cooperation financial/human resource constraints overlapping supervisory activities impose costs Home Supervisors responsible for assessing capital adequacy of banking organisations on a consolidated basis have an interest in taking a lead role in coordinating supervisory activities and communicating with head office of bank 56

Home-Host Issues/Challenges in Basel II Home Supervisors (cont’d) primary responsibility for validating bank systems on a consolidated basis and because they may lack detailed knowledge of local conditions in foreign markets • they may need a fairly wide range of info/feedback from host supervisors in order to make well reasoned assessments (especially where foreign subs are material in context of the consolidated banking organization) 57

Home-Host Issues/Challenges in Basel II Host Supervisors (cont’d) responsible for the capital requirements of subsidiaries on a solo basis (less concerned with capitalization of group) because subs may rely to a certain extent on data, systems and resources that originate at parent, host may need info from home to enable host to assess sub’s capital adequacy 58

Home-Host Issues/Challenges in Basel II Home/host must be mindful of minimising the burden (cost) placed on banking organizations in qualifying/validating their processes/systems banks have an interest in being able to use processes and/or data from one part of organization in determining capital in other parts supervisors must be comfortable with reasonableness of these approaches 59

Questions for Supervisors to Ask Themselves Have you the authority to share supervisory information, at your discretion, with other supervisors under appropriate confidentiality safeguards? Can you adequately protect the confidentiality of information obtained in confidence from other supervisors? 60

Questions for Supervisors to Ask Themselves As a home supervisor responsible for consolidated or group-wide supervision, have you arranged to receive appropriate information from supervisors of material branches or subsidiaries in other jurisdictions, and are these arrangements being used effectively? As a home supervisor, are you taking all reasonable steps to inform relevant host supervisors of material supervisory findings relevant to the branch or subsidiary? 61

Questions for Supervisors to Ask Themselves As a host supervisor, are you confident that you have appropriate access to the home supervisor in situations where there may be problems in the branch or subsidiary, or where problems in the parent institution may be spilling over to the branch/subsidiary? As a host supervisor, are you able to cooperate to the satisfaction of the home supervisor as and when they conduct an on-site examination of a branch or subsidiary? 62

Thank - you 63