Published and draft legislation - European Union

Guidelines for effective banking supervision

Basel Committee on Banking Supervision

The Basel Committee on Banking Supervision has published this report in order to set the direction that regulation and supervision should take with those institutions that offer financial inclusion services.

Guide for regulators and supervisors

The guidelines apply to a number of different types of institution (e-money issuers, financial cooperatives, microfinance institutions, deposit entities, non-banking institutions, etc) and cover a wide range of financial products and services, from traditional microloans to other types of innovative projects designed specifically for the most vulnerable. They represent a benchmark both for jurisdictions that are members of the Basel Committee and for those that are not.

Guidelines for 19 principles

Although the document uses the 29 Banking Supervision principles as revised in 2012, it pays particular attention to 19 of these, having resolved that the remaining 10 require no further redrafting.

These 19 principles can be divided into two main blocks:

  • Faculties, powers and functions (responsibilities, goals and powers; independence, accountability, supervisors’ resources and legal protection; cooperation and collaboration; permissible activities; criteria for awarding licences; supervisory approach; supervisory techniques and tools; supervisory reports; supervisory powers of correction and sanction; and consolidated supervision).
  • Prudential requirements and regulations (corporate governance; risk management process; capital adequacy; credit, liquidity and operational risk; delinquent assets, provisions and reserves; and misuse of financial services.

Corporate governance

Principle 14 establishes that it is the supervisor’s role to verify that institutions have robust corporate governance practices and processes in place that are consistent with the institution’s risk profile and systemic relevance.

The document argues that corporate governance ensures sustainable and responsible financial inclusion, based on a culture that reinforces the values of solvent risk management and equitable treatment of customers.

As such, it requires supervisors to have a sound understanding of these practices and processes and of their impact on institutions’ risk profile. To this end, they must carry out the following, which are applicable to both financial and non-financial companies, in both private and public sectors:

  • Provide guidance to institutions on the supervisor’s expectations of corporate good governance, with the obligation of informing  their Boards of these expectations
  • Set baseline requirements for the structure of Boards and for the criteria for vetting their members
  • Guide institutions in their self-assessments of how well they have complied with corporate governance principles and regulatory requirements, a task which requires a high degree of interaction between the supervisor and the institutions.  
  • Check that Boards of Directors set up and divulge corporate culture and values throughout the institution and that, together with senior management, they understand, manage and mitigate risk effectively.  
  • Ensure that responses to concerns arising in transactions with related parties are suitably transparent.

Traditional microcredit

There are five appendices to the document, that cover issues relating to financial consumer protection, anti-money laundering and the financing of terrorism. Certain terms are explicitly defined: financial cooperation, deposit institution, microfinancing institution, etc), while the distinguishing characteristics of traditional microcredit and its key specific risks are outlined.

Financial inclusion

The purpose of these guidelines is that the actions of regulators and supervisors should take into consideration the systemic importance and risk profile of regulated institutions. To do this, resources must be allocated effectively and specialised knowledge of the nature and level of risk associated with financial inclusion activity must be applied.