Basel II

International supervisory cooperation in the acceptance of advanced Basel II methods

The new revised Framework adopted by the Basel Committee on Banking Supervision (Basel II) in 2004 will, in future, allow banks to use, for the first time, internally developed methods for calculating the regulatory minimum capital requirements for credit and operational risks. Banks need supervisory approval to use one of these advanced approaches (IRB or AMA) to calculate capital requirements. Since international banking groups are subject to both home-country and host-country (in the case of their subsidiaries) supervision, they need approval from the national supervisors of all these countries. A lack of coordination in the approval process would lead to a duplication of work for both the banking group and the banking supervisors. For banking groups, the problem is compounded by the fact that approval requirements can differ between the countries in which they are active, thus creating extra work for the banks involved.

The Accord Implementation Group (AIG), a working group of the Basel Committee on Banking Supervision, has developed a set of principles for enhancing the efficiency of the approval process for international banking groups. These principles, adopted by the Basel Committee in August 2003 as the “High-level principles for the cross-border implementation of the New Accord”, centre on avoiding the duplication of work by means of increased cross-border cooperation among supervisors, close coordination of supervisory activities and an intensive exchange of information.

The Bundesbank, too, has joined forces with BaFin with regard to the issue of cross-border cooperation among supervisory authorities in approving advanced approaches. The position paper below reflects the current thinking of BaFin and the Bundesbank I this respect. It served as a basis for initial talks with the host-country supervisors of internationally active German banking groups that were held as multilateral meetings between March and June 2005.

The AIG’s six “High-level principles” form the starting point for the position paper. On this foundation, the paper has benefited from the experience gained by BaFin and the Bundesbank in conducting a “real case study” – as proposed by the AIG – of cross-border cooperation between supervisory authorities in the case of a German banking group. The paper also includes the findings of another AIG “real case study” involving Germa

n banking supervisors as host-country supervisors as well as from participation in numerous multilateral meetings of foreign supervisory authorities on the topic of cross-border cooperation.