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R OB ERT D. McTEER, JR.
DALLAS, TE XAS

PR ES ID ENT

75265-5906

AND CH IEF EXEC UTIVE OFFICER

October 15, 1997

Notice 97-95

TO:

The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District
SUBJECT
Principles fo r the Management o f Interest Rate Risk
and Basle Core Principles fo r Effective Banking Supervision
DETAILS

The Basle Committee on Banking Supervision has released Principles fo r the M an­
agement o f Interest Rate Risk. The document is a revised version of a consultative paper issued
in January 1997. It reemphasizes the need for banks to maintain adequate risk management
practices in all their activities. In addition, the document identifies specific principles supervi­
sory authorities will consider in evaluating banks’ management of interest rate risk.
The Committee has also released the Basle Core Principles fo r Effective Banking
Supervision. This document sets out the principles the Committee believes must be in place for a
supervisory system to be effective. The principles are intended to serve as a basic reference for
supervisory and other public authorities worldwide to apply in the supervision of all the banks
within their jurisdiction. Supervisory authorities throughout the world are invited to endorse
them by October 1998.
ATTACHMENT
The Basle Committee’s press statement regarding core principles is attached.
MORE INFORMATION
For more information, please contact Gayle Teague at (214) 922-6151. For copies of
the complete text of the Basle Committee’s documents, contact the Public Affairs Department at

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

(214) 922-5254. The text of both documents is also available on the Bank for International
Settlement’s Web site at http://www.bis.org.

Sincerely yours,

Press Releases
BASLE COMMITTEE ON BANKING SUPERVISION
BANK FOR INTERNATIONAL SETTLEMENTS, CH-4002 BASLE
PRESS STATEMENT
The Basle Committee on Banking Supervision, with the endorsement of the central bank Governors of the Group of Ten
countries, is today releasing the Basle Core Principles for Effective Banking Supervision. This document, which is a
revised version of a consultative paper released in April 1997, establishes a set of twenty-five basic Principles which the
Basle Committee believes must be in place for a supervisory system to be effective.
The Basle Core Principles have been drawn up by the Basle Committee in close collaboration with the supervisory
authorities in fifteen emerging market countries and have benefited from broad consultation with many other supervisory
authorities throughout the world.
The Principles represent the basic elements of an effective supervisory system. They are comprehensive in their
coverage, addressing the preconditions for effective banking supervision, licensing and structure, prudential regulations
and requirements, methods of ongoing banking supervision, information requirements, formal powers of supervisors
and cross-border banking.
The Basle Core Principles are intended to serve as a basic reference for supervisory and other public authorities
worldwide to apply in the supervision of all the banks within their jurisdictions. Supervisory authorities throughout the
world will be invited to endorse the Core Principles, not later than October 1998. Endorsement will include an
undertaking to review current supervisory arrangements against the Principles. The speed with which changes can be
introduced will vary, depending on whether the supervisory authorities already possess the necessary statutory powers.
Where legislative changes are required, national legislators are requested to give urgent consideration to the changes
necessary to ensure that the Principles can be applied in all material respects.
The text of the Principles can be obtained from the BIS Web Site on the Internet at http://www.bis.org with effect from
23rd September, from national supervisory authorities or from the Basle Committee at the Bank for International
Settlements.
22nd September 1997

Notes for editors
1. The Basle Committee on Banking Supervision is a Committee of banking supervisory authorities which was
established by the central bank Governors of the Group of Ten countries in 1975. It consists of senior representatives of
bank supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg,
Netherlands, Sweden, Switzerland, United Kingdom and the United States. It usually meets at the Bank for International
Settlements in Basle, where its permanent Secretariat is located.
2. The Basle Committee has been working to improve banking supervision at the international level for many years, both
directly and through its many contacts with banking supervisors in every part of the world. In the last year and a half, it
has been examining how best to expand its efforts aimed at strengthening prudential supervision in all countries by
building on its relationships with countries outside the G-10 as well as on its earlier work to enhance prudential
supervision in its member countries. In April 1997 the Committee released two documents:
• a draft comprehensive set of Core Principles for effective banking supervision (The Basle Core Principles); and,
• a Compendium (to be updated periodically) of the existing Basle Committee recommendations, guidelines and
standards most of which are cross-referenced in the Core Principles document.

Both documents, with the endorsement of the G-10 central bank Governors, were submitted to the G-7 and G-10
Finance Ministers in preparation for the Denver Summit in the hope that they would provide a useful mechanism for
strengthening financial stability in all countries. They were welcomed by Ministers at the Summit and the Committee was
encouraged to continue its work.
3. The document now being issued is a revised version of the April 1997 document. There are still twenty-five Principles
and only a few contain changes of substance. Other changes to the document are mostly textual in nature.
4. In developing the Principles, the Basle Committee has worked closely with non-G-10 supervisory authorities. The
document has been prepared in a group containing representatives from the Basle Committee and from Chile, China,
the Czech Republic, Hong Kong, Mexico, Russia and Thailand. Nine other countries (Argentina, Brazil, Hungary, India,
Indonesia, Korea, Malaysia, Poland and Singapore) were also closely associated with the work. The drafting of the
Principles benefited moreover from broad consultation with a larger group of individual supervisors, both directly and
through the regional supervisory groups, as well as with the International Monetary Fund and World Bank.
5. The document calls on national agencies to apply the Principles in the supervision of all banking organisations within
their jurisdictions. The Principles are minimum requirements and in many cases may need to be supplemented by
other measures designed to address particular conditions and risks in the financial systems of individual countries.
6. The Basle Core Principles are intended to serve as a basic reference for supervisory and other public authorities in all
countries and internationally. It will be for national supervisory authorities, many of which are actively seeking to
strengthen their current supervisory regime, to use the attached document to review their existing supervisory
arrangements and to initiate a programme designed to address any deficiencies as quickly as is practical within their
legal authority.
7. The Principles have been designed to be verifiable by supervisors, regional supervisory groups, and the market at
large. The Basle Committee will play a role, together with other interested organisations, in monitoring progress made
by individual countries in implementing the Principles. It is suggested that the IMF, the World Bank and other interested
organisations use the Principles in assisting individual countries to strengthen their supervisory arrangements in
connection with their work aimed at promoting overall macroeconomic and financial stability.
8. Supervisory authorities throughout the world are encouraged to endorse the Basle Core Principles. The members of
the Basle Committee and the sixteen other banking supervisory agencies that have participated in their drafting all
agree with the content of the document.
9. The Basle Committee believes that achieving consistency with the Core Principles by every country will be a
significant step in the process of improving financial stability domestically and internationally. The speed with which this
objective will be achieved will vary. In many countries, substantive changes in the legislative framework and in the
powers of supervisors will be necessary because many supervisory authorities do not at present have the statutory
authority to implement all of the Principles. In such cases, the Basle Committee believes it is essential that national
legislators give urgent consideration to the changes necessary to ensure that the Principles can be applied in all
material respects. The need for new legislation will be taken into account by the Basle Committee in monitoring
progress towards implementation.
10. The Basle Committee will continue to pursue its standard-setting activities in key risk areas and in key elements of
banking supervision as it has done in documents such as those reproduced in the Compendium. The Basle Core
Principles will serve as a reference point for future work to be done by the Committee and, where appropriate, in
cooperation with non-G-10 supervisors and their regional groups. The Committee stands ready to encourage work at
the national level to implement the Principles in conjunction with other supervisory bodies and interested parties.
Finally, the Committee is committed to strengthening its interaction with supervisors from non-G-10 countries and
intensifying its considerable investment in technical assistance and training.
11. The twenty-five Core Principles are set out below.

Preconditions for Effective Banking Supervision
1. An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in
the supervision of banking organisations. Each such agency should possess operational independence and adequate
resources. A suitable legal framework for banking supervision is also necessary, including provisions relating to
authorisation of banking organisations and their ongoing supervision; powers to address compliance with laws as well
as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between
supervisors and protecting the confidentiality of such information should be in place.

Licensing and Structure
2. The permissible activities of institutions that are licensed and subject to supervision as banks must be clearly defined,
and the use of the word "bank" in names should be controlled as far as possible.
3. The licensing authority must have the right to set criteria and reject applications for establishments that do not meet
the standards set. The licensing process, at a minimum, should consist of an assessment of the banking organisation's
ownership structure, directors and senior management, its operating plan and internal controls, and its projected
financial condition, including its capital base; where the proposed owner or parent organisation is a foreign bank, the
prior consent of its home country supervisor should be obtained.
4. Banking supervisors must have the authority to review and reject any proposals to transfer significant ownership or
controlling interests in existing banks to other parties.
5. Banking supervisors must have the authority to establish criteria for reviewing major acquisitions or investments by a
bank and ensuring that corporate affiliations or structures do not expose the bank to undue risks or hinder effective
supervision.

Prudential Regulations and Requirements
6. Banking supervisors must set prudent and appropriate minimum capital adequacy requirements for all banks. Such
requirements should reflect the risks that the banks undertake, and must define the components of capital, bearing in
mind their ability to absorb losses. At least for internationally active banks, these requirements must not be less than
those established in the Basle Capital Accord and its amendments.
7. An essential part of any supervisory system is the evaluation of a bank's policies, practices and procedures related to
the granting of loans and making of investments and the ongoing management of the loan and investment portfolios.
8. Banking supervisors must be satisfied that banks establish and adhere to adequate policies, practices and
procedures for evaluating the quality of assets and the adequacy of loan loss provisions and loan loss reserves.
9. Banking supervisors must be satisfied that banks have management information systems that enable management to
identify concentrations within the portfolio and supervisors must set prudential limits to restrict bank exposures to single
borrowers or groups of related borrowers.
10. In order to prevent abuses arising from connected lending, banking supervisors must have in place requirements
that banks lend to related companies and individuals on an arm's-length basis, that such extensions of credit are
effectively monitored, and that other appropriate steps are taken to control or mitigate the risks.
11. Banking supervisors must be satisfied that banks have adequate policies and procedures for identifying, monitoring
and controlling country risk and transfer risk in their international lending and investment activities, and for maintaining
appropriate reserves against such risks.
12. Banking supervisors must be satisfied that banks have in place systems that accurately measure, monitor and
adequately control market risks; supervisors should have powers to impose specific limits and/or a specific capital

charge on market risk exposures, if warranted.
13. Banking supervisors must be satisfied that banks have in place a comprehensive risk management process
(including appropriate board and senior management oversight) to identify, measure, monitor and control all other
material risks and, where appropriate, to hold capital against these risks.
14. Banking supervisors must determine that banks have in place internal controls that are adequate for the nature and
scale of their business. These should include clear arrangements for delegating authority and responsibility; separation
of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities;
reconciliation of these processes; safeguarding its assets; and appropriate independent internal or external audit and
compliance functions to test adherence to these controls as well as applicable laws and regulations.
15. Banking supervisors must determine that banks have adequate policies, practices and procedures in place,
including strict "know-your-customer" rules, that promote high ethical and professional standards in the financial sector
and prevent the bank being used, intentionally or unintentionally, by criminal elements.

Methods of Ongoing Banking Supervision
16. An effective banking supervisory system should consist of some form of both on-site and off-site supervision.
17. Banking supervisors must have regular contact with bank management and thorough understanding of the
institution's operations.
18. Banking supervisors must have a means of collecting, reviewing and analysing prudential reports and statistical
returns from banks on a solo and consolidated basis.
19. Banking supervisors must have a means of independent validation of supervisory information either through on-site
examinations or use of external auditors.
20. An essential element of banking supervision is the ability of the supervisors to supervise the banking group on a
consolidated basis.

information Requirements
21. Banking supervisors must be satisfied that each bank maintains adequate records drawn up in accordance with
consistent accounting policies and practices that enable the supervisor to obtain a true and fair view of the financial
condition of the bank and the profitability of its business, and that the bank publishes on a regular basis financial
statements that fairly reflect its condition.

Formal Powers of Supervisors
22. Banking supervisors must have at their disposal adequate supervisory measures to bring about timely corrective
action when banks fail to meet prudential requirements (such as minimum capital adequacy ratios), when there are
regulatory violations, or where depositors are threatened in any other way. In extreme circumstances, this should
include the ability to revoke the banking licence or recommend its revocation.

Cross-border Banking
23. Banking supervisors must practise global consolidated supervision over their internationally-active banking
organisations, adequately monitoring and applying appropriate prudential norms to all aspects of the business
conducted by these banking organisations worldwide, primarily at their foreign branches, joint ventures and
subsidiaries.
24. A key component of consolidated supervision is establishing contact and information exchange with the various

other supervisors involved, primarily host country supervisory authorities.
25. Banking supervisors must require the local operations of foreign banks to be conducted to the same high standards
as are required of domestic institutions and must have powers to share information needed by the home country
supervisors of those banks for the purpose of carrying out consolidated supervision.
22nd September 1997


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102