## Results of Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision (_cr0798)

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### Background, scope, and methodology
- Two missions: January 16-31 and March 27-31 led by Mr. Jean‑Luc Couetoux and Mr. Didier Debals; Principle 15 (AML/CFT) assessed separately by a World Bank team led by Mr. Jean Pesme in January 2006.
- Assessment updated the 2002 FSAP evaluation of compliance with the Basel Committee’s 25 Core Principles (Core Principle Methodology in effect in March 2006).
- Materials reviewed included: laws (Law 58-90; Law 2001-65 and subsequent amendments Law 2006-26 of May 15, 2006 and Law 2006-19 of May 2, 2006), compendia of regulations and accounting rules, draft and adopted BCT circulars (circular 2006-19; Circular 2006-06 of July 24, 2006; Circular 2006-07 of July 24, 2006), inspection reports, external auditor documents, and BCT self-assessment prior to January 2006.
- Circular 2006-19 adopted November 28, 2006 (implementation compulsory January 2, 2008; credit institutions having a one year delay to adopt them).

### Organization of banking supervision (findings and resourcing)
- Supervision performed within BCT by Directorate General of Banking Supervision (DGSB).
- DGSB staff: some 50 officers, 15 deployed in the Inspectorate (Inspectorate reports directly to the Director General); noted previous figure of 46 staff at start of 2006.
- Inspection practice: on-site teams regularly include the off-site auditor responsible for the institution; six team leaders with specialized training.
- Monitoring activities: prudential reports and year‑end external auditor documents review; extraction from inspection reports; periodic meetings with managers (two meetings each year for major banks; one meeting for other institutions).
- Support and gaps:
  - DGSB draws on BCT experts (mainly IT) and occasional Foreign Exchange or Credit Directorate staff.
  - No methodology manual exists for off-site supervision; on-site inspection manual not revised since 2001.
  - DGSB requested additional staff (three staff per year between 2006 and 2008) and risk management experts for upcoming regulatory and system changes (internal control, AML/CFT, Basel II).

### Macroeconomic environment and banking structure (findings and implications)
- Bank ownership split roughly: one-third majority government ownership, one-third private Tunisian investors, one-third foreign private banks.
- Recent structural changes:
  - Development bank category eliminated in 2004; former development banks authorized to engage in all commercial bank activities.
  - BFPME (bank for small and medium-scale enterprises) began operations in March 2005.
  - Privatizations: two public banks privatized after tender; Banque Franco-tunisienne (BFT) in process of privatization at mission time.
- Market and infrastructure modernization:
  - Money market instruments modernized, repurchase agreements introduced.
  - New large-value payments system on gross basis close to operations; BCT should examine banks’ controls over these new systems during on-site inspections.
- Nonperforming loans (NPLs) and recovery:
  - NPL ratio declined sharply in 2005 but remains close to 20 percent.
  - NPLs comprised 20.9 percent of outstanding loans at end-2005.
  - Measures adopted: simplified sale procedures for judicial real estate, tax-deductible provisions raised to 85 percent in 2004 and 100 percent in 2005, clarified write-off conditions.
  - Most banks established asset recovery companies and transferred old NPLs; amount recovered on loans transferred: D 1.3 billion (to date modest).

### Legal and regulatory framework — recent reforms and internal controls
- Key laws and provisions:
  - Law 2001-65 of July 10, 2001 on credit institutions (revised by Law 2006-19 of May 2, 2006).
  - Law 2005-96 on strengthening security of financial transactions requires companies raising funds from the public, including credit institutions, to appoint two external auditors to certify financial statements.
  - Law 2006-26 amended Law 58-90; Law 2006-19 amended Law 2001-65.
- Strengthening of credit culture and internal controls:
  - Financial statements certified by external auditor when exposure to single enterprise exceeds D 5 million; recent rating required if exposure reaches D 25 million and company not listed.
  - Law 2006-19 requires establishment of an Executive Credit Committee and a compliance control system; BCT adopted Circular 2006-06 (July 24, 2006) and Circular 2006-19 on internal controls (November 28, 2006).
  - Circular 2006-19 imposes obligations including customer rating assignment and stress tests; requirements aligned with Basel II mechanisms.
- Accounting and provisioning issues:
  - NC 35 to 39 adopted in 2003 to align consolidated accounts with IFRS from 2004.
  - Circular 91-24 on loan classification and provisioning does not envisage estimation of the present value of expected cash flows; inconsistency with IAS 39 given long recovery delays.
- Collateral and registration:
  - Tunisian movable collateral legislation needs modernization; delays in real estate and mortgage registration considered excessive.

### Market discipline, disclosure, and external auditors
- Legal changes (Laws 2006-26 and 2006-19) introduce:
  - appointment of an ombudsman; creation of a banking services monitoring unit in BCT; implementing circulars to follow.
- Credit information bureaus planned or established:
  - risk bureau (enterprise indebtedness); balance sheet bureau (companies’ financial statements); nonperforming loans bureau (data on total NPLs by debtor and classification).
- Current gaps:
  - No credit bureau that reports the score assigned by various lending institutions to a single counterparty.
- External auditors:
  - Must submit several reports annually to BCT; attend periodic BCT meetings.
  - Four largest international audit firms audit half the institutions; currently none audits public banks.
  - Under Law on financial security, all credit institutions required to have two external auditors.

### Resolution framework for problem banks
- No CAMEL-type system in place for identifying banks in difficulty and for corrective measures; establishing such a system is recommended.
- Article 41 of Law 2001-65 stipulates mandatory deposit guarantee scheme membership, but scheme not yet put in place; BCT awaiting recapitalization of recently privatized banks before introducing guarantee scheme.

### Main findings and overall compliance profile
- 2006 assessment: more than half the Principles assessed as “compliant” or “largely compliant” and none as “non-compliant.”
- Progress since 2002:
  - Considerable progress toward full compliance; number of “compliant” principles increased.
  - BCT now compliant with Principles 1–5 and 21 (previously largely compliant in 2001).
- Principles assessed “materially noncompliant” in 2006:
  - Principle 7 (credit policies),
  - Principle 8 (loan evaluation),
  - Principle 20 (consolidated supervision),
  - Principle 22 (remedial measures),
  - Principle 25 (supervision of foreign banks).
- Principle 15 (anti‑money laundering and combating the financing of terrorism) assessed as “materially noncompliant” by World Bank team.
- Specific metrics and issues preserved verbatim:
  - Circular on internal controls adopted on November 26 2006 includes nine articles on credit risks; requirements enter into force on January 2, 2008.
  - NPLs comprised 20.9 percent of outstanding loans at end-2005.
  - Most bank loans continue to be granted on the basis of collateral rather than in-depth financial analysis.
  - Provisioning shortcomings: collateral valuation uncertainties; rules do not account for time frame of recovery despite long legal proceedings.

### Detailed selected core principle results and essential criteria (highlights)
- Principle 1 (Objectives, autonomy, powers and resources):
  - Staffing: “some 50 staff members (46 at the start of 2006), of whom approximately 30 are engaged in off-site inspection ... and 15 work in the Inspectorate”; Inspectorate now has ten fewer staff than in 2001.
  - Governor appointed for a term of six years (Article 9 of Law 58-90); removal “only by decree.”
  - Recommendations: schedule mission to inspect DGSB; produce and publish separate annual report on banking supervision; establish ethical rules for inspectors; specify legal status of on-site inspectors.
- Principles 2–4 (Licensing, permissible activities, ownership): Compliant.
  - Licensing timing: Law 2006-19 specifies license must be issued “within four months of receipt of all the required documents.”
  - Minimum capital requirements (Law 2006-19):
    - banks: “TD 25 million” (from TD 10 million);
    - financial institutions: “TD 10 million” (from TD 3 million);
    - investment banks: “TD 3 million” (unchanged).
  - Ownership thresholds introduced for acquisitions at “one-tenth, one-fifth, one-third, one-half, and two-thirds of the voting rights.”
- Principles 5–6 and 20 (Investment criteria, capital adequacy, consolidation):
  - Equity investment limits: individual equity investment may not exceed 10 percent of capital base; shares in nonfinancial institutions capped at 30 percent (temporary excess allowed for claim recovery).
  - Solvency ratio target: “8 percent.”
  - Regulatory capital: tier 1 and tier 2 defined; tier 2 limited to half of regulatory capital; capital requirement calculated only on credit risk (market and operational risks not included).
  - Consolidated prudential ratios not yet in force; consolidated accounts required starting with year 2003 closing (NC 35–39).
  - Principle 20: “Materially Noncompliant with essential criteria.”
  - Key figures:
    - outstanding claims transferred to asset recovery companies: “almost TD 2 billion (TD 1,891 million according to figures provided by the BCT) between 1999 and 2004.”
    - off-balance-sheet exposure: “DT 174 million out of D 5.2 billion in NPLs at end-2004.”
    - one bank sold claims with selling price “in the order of TD 110 million.”
    - Liquidity ratio requirement: “permanently maintained at or above 100 percent.”
    - Foreign exchange open position limit: “must not exceed 20 percent of regulatory capital.”
- Principles 7–8 (Credit policies, loan evaluation, provisioning):
  - Principle 7: “Materially noncompliant with essential and additional criteria.” Recommendation: verify implementation of Circular 2006-19 via off-site and on-site supervision.
  - Principle 8: “Materially noncompliant with essential criteria.” Recommendation: explicitly state “contagion” rules in regulations; reconsider provisioning to account for discounted recovery flows for long-standing Class 4 claims.
  - Thresholds for documentation and controls preserved verbatim:
    - external auditor report for customer exposure > “10 percent of their capital base”;
    - financial statements certified by an external auditor if exposure > “TD 5 million”;
    - recent rating if exposure > “TD 25 million.”
  - Observance levels:
    - “TD 5 million threshold” observed by approximately “50 percent of the enterprises, and by two-thirds if contested claims are excluded”;
    - “TD 25 million thresholds” observed by approximately “20 percent of the counterparties.”
- Principles 9–10 (Connected lending, large exposures):
  - Connected definitions inconsistent: Circular 91-24 defines managers and shareholders > “10 percent” as connected; Law 2001-65 uses “5 percent.”
  - Circular 91-24 limits total exposure to managers and stockholders with equity holding > “10 percent” to “three times the bank’s net capital”; exposure to a single beneficiary limited to “25 percent of their capital.”
  - Principle 9: Compliant (subject to consolidated ratio caveat). Principle 10: “Largely compliant.”
- Principles 12–14, 13 (Market, other risks, internal control, IT):
  - Circular 2006-19 addresses market risk (Articles 31–34), credit, market, global interest rate, payment, and operational risks (Articles 22–47).
  - Monthly liquidity reporting required; must be ≥ “100 percent.”
  - Circular 2006-19 introduces IT obligations including a business continuity plan; recommendation to increase IT audit frequency.
- Principles 16–19 (Supervision practices):
  - Principle 16: “Compliant with essential criteria and largely compliant with the additional criteria.” Recommendations: deliver full mission reports to bank presidents; compile methodology manual; consider warning/grading system; re-audit DGSB.
  - Principle 18: “Largely compliant with essential criteria.” Need consolidated ratios and analytical framework for inspection prioritization.
  - Principle 19: “Compliant with essential and additional criteria.”
- Principle 15 (Money laundering and financial crime):
  - Law 2003-75 (December 12, 2003) imposes KYC, suspicious transaction reporting to CTAF, and 10-year record retention (Article 75); CTAF Directive 2006/02 (April 20, 2006).
  - Implementation gaps: only “five suspicious transactions declarations” received by CTAF as of assessment; surveillance and BCT control modalities not defined; lack of legal provision requiring credit institution to inform BCT when its financial situation or reputation is compromised.
  - Principle 15: “Materially non compliant with essential and additional criteria.” Recommendations: effective implementation of Law 2003-75 and Directive 2006/02; BCT to issue implementing circular; enlarge BCT sanction powers; require banks to inform BCT of money laundering or fraud events affecting solvency or reputation; strengthen AML/CFT supervisory inspections.
- Principles 21–22 (Accounting standards, remedial measures):
  - Principle 21: “Compliant with essential and additional criteria.” Recommendation: consider present value approach or age-based downgrades for provisioning.
  - Principle 22: “Materially Noncompliant” because of weak practical application of sanctioning regime and lack of effective enforcement.

### Sanctions framework, enforcement practice, and recommendations
- Penalties under Law 2001-65 (listed in source order):
  - 1. Warning
  - 2. Reprimand
  - 3. Fine
  - 4. Suspension of all BCT refinancing
  - 5. Prohibition to perform certain operations and any other restrictions on business activities
  - 6. Withdrawal of licensed intermediary status
  - 7. Revocation of license
- First four penalties within Governor’s remit; penalties 5–7 within competence of the Banking Commission (four members).
- Penalties applicable to representatives include temporary suspension, suspension, and fines up to five times the amount of the offense.
- Fines and sanctions: Article 48 fines for rate/fee violations; Article 49 fines for hiding or knowingly inaccurate information; Ministry of Finance may revoke license on basis of false information (Article 15).
- Empirical note: Since Law 2001-65 entered into force, no officially sanctioned disciplinary measure has been applied to a credit institution or any of its managers; no penalty has been imposed on an external auditor.
- Preventive powers: Article 36 authorizes BCT to issue injunctions (increase capital, prohibit dividends, constitute provisions); no injunction has been issued since law entered into force. Article 37 allows appointment of interim administrator.
- Assessment: sanctions mechanism “Materially Noncompliant with essential and additional criteria” due to lack of timely and effective application.
- Recommendations on sanctions framework:
  - Review penalty system; consider devolving sanction authority to a permanently installed Banking Commission with clearly specified appointment and term rules.
  - Ensure presence of both parties in disciplinary proceedings and state avenues of appeal in law.
  - Clarify interactions when sanctioning authority is split and whether Governor may impose penalties in his remit if Commission declines.

### Cross-cutting and prioritized recommendations
- Rapidly sign information-sharing agreements with CMF and consider arrangements with Ministry of Finance for SICAR and asset recovery companies; seek prudential information exchange agreements with foreign supervisors.
- Expedite introduction of consolidated prudential standards and consolidated capital calculation.
- Verify implementation of Circular 2006-19 across credit institutions via off-site and on-site supervision.
- Strengthen AML/CFT supervisory framework: adopt BCT circular implementing Law 2003-75 and CTAF Directive 2006/02; enlarge BCT sanction powers; require timely bank reporting to BCT of incidents affecting solvency or reputation.
- Increase frequency and scope of IT audits in on-site missions; monitor information system modernization and security.
- Harmonize definitions and ceilings for connected lending; require identification systems and internal procedures to prevent conflicts.
- Formalize on-site reporting: deliver full mission reports to institution presidents; index inspection files; compile methodology manuals; consider bank grading/warning system.
- Equity holdings: deduct equity investments of banks in other financial institutions from separately calculated capital base even before consolidated ratios publication; consider modifying Circular 91-24 Article 3 to lower connected‑lending ceiling currently set at three times capital.

*Source: _cr0798 (excerpt).*

### 1.   Results of Assessment of Compliance with the Basel Core Principles

### 1.   Results of Assessment of Compliance with the Basel Core Principles for Effective Banking Supervision

### Background and scope of the assessment
- Two missions conducted on January 16-31 and March 27-31 by Mr. Jean-Luc Couetoux, Banque de France Inspector, and Mr. Didier Debals, financial sector expert of the World Bank.
- Principle 15 (AML/CFT) was assessed separately by a World Bank team led by Mr. Jean Pesme in January 2006; that mission prepared a separate report and comments in Table 2 for Principle 15.
- The assessment updated the 2002 FSAP evaluation of compliance with the Basel Committee’s 25 Core Principles.
- The BCT cooperated fully and provided documents, explanations, and access to staff, including the Directorate General of Banking Supervision (DGSB).

### Information and methodology used
- Review based on interviews and examination of documents provided by the BCT, including:
  - Laws passed since the previous assessment and proposed amendments to the law on the BCT (Law 58-90) and to the “Banking Law” (Law 2001-65).
  - Compendia of regulations and accounting rules.
  - BCT draft circular on internal controls (circular 2006-19 at the time of the March 2006 mission; adopted November 28, 2006; implementation compulsory January 2, 2008, with credit institutions having a one year delay to adopt them).
  - Standard statements required from supervised institutions, an inspection report, and end-2004 external auditor documents for a credit institution.
- The mission reviewed legislation adopted following the March 2006 mission:
  - Law 58-90 amended by Law 2006-26 of May 15, 2006; and
  - Law 2001-65 amended by Law 2006-19 of May 2, 2006.
- Additional circulars adopted after March 2006:
  - Circular 2006-06 of July 24, 2006 on the establishment of a compliance control system; and
  - Circular 2006-07 of July 24, 2006 on the executive credit committee.
- Prior to January 2006, the BCT had performed a targeted self-assessment focusing on principles previously assessed as “noncompliant.”

### Organization of banking supervision (findings)
- Banking supervision is carried out within the BCT by the Directorate General of Banking Supervision (DGSB).
- DGSB handles both off-site and on-site audits; staff consists of some 50 officers, 15 of whom are deployed in the Inspectorate (which reports directly to the Director General).
- Inspection teams now regularly include the off-site auditor responsible for the institution being inspected.
- Six team leaders responsible for investigations have undergone specialized training for different types of credit institution.
- Monitoring activities include:
  - Examining prudential reports and documents submitted by external auditors at year-end;
  - Extracting information from inspection reports; and
  - Periodic meetings with managers of supervised institutions (two meetings each year for major banks; one meeting for other institutions).
- DGSB draws on BCT experts for specific audits (mainly information technology specialists); occasional assistance from Foreign Exchange Directorate or Credit Directorate staff.
- DGSB requested strengthening of its staff (additional three staff per year between 2006 and 2008) and experts in risk management to address forthcoming regulatory and system changes including internal control, AML/CFT, and Basel II implementation.
- Off-site supervision remains organized by institution type or statute (public banks, private banks, former development banks, off-shore banks, leasing and factoring companies, and investment banks).
- Two directorates handle off-site audits:
  - Directorate of Banks (supervises public and private banks; includes modernization and regulations department responsible for drafting regulations); and
  - Directorate of Financial Institutions (supervises leasing and factoring institutions, merchant banks and the former development banks).
- Directorates prepare licensing files and reports for the Minister of Finance, who decides on licenses; the Inspectorate reports directly to the Director General of the DGSB.
- Inspection coverage over the past three years: major institutions have had at least one on-site inspection; neither the two factoring companies nor the investment banks have been inspected.
- No methodology manual exists for off-site supervision; the on-site inspection manual has not been revised since 2001.

### Macroeconomic environment (findings and implications)
- Tunisia committed to an economic liberalization program affecting the banking sector; modernization is part of a long-term upgrading plan, including information systems modernization.
- Bank ownership distribution: approximately one-third majority government ownership, one-third private Tunisian investors, and one-third foreign private banks.
- Recent privatizations: two public banks privatized after tender; Banque Franco-tunisienne (BFT) in process of privatization at mission time.
- Development bank category eliminated in 2004; former development banks authorized to engage in all commercial bank activities.
- A bank specializing in small and medium-scale enterprises financing (BFPME) began operations in March 2005 to provide cofinancing and co-participation with other banks and financial institutions, including SICAR.
- Steps to enhance operational autonomy: prior authorization for equity investments in other credit institutions eliminated in 2001; Law 2006-19 makes opening of bank branches in Tunisia conditional on BCT specification of terms and conditions rather than a license.
- Money market instruments and liquidity management modernized, including introduction of repurchase agreements.
- Payment systems modernization: a new large-value payments system on a gross basis close to entering into operations; BCT should examine banks’ controls over these new systems during on-site inspections.
- Nonperforming loans (NPLs) remain high:
  - NPL ratio declined sharply in 2005 but remains close to 20 percent.
  - Measures adopted to address NPLs:
    - Simplified procedures for sale of real estate under judicial supervision.
    - Tax-deductible portion of provisions against NPLs raised to 85 percent in 2004 and 100 percent in 2005.
    - Conditions for writing off fully provisioned bad debt clarified, though still rather strict.
  - Most banks established asset recovery companies and transferred old NPLs, largely fully provisioned.
  - Amount recovered on loans transferred: D 1.3 billion (to date modest).

### Public infrastructure: legal and regulatory framework (findings and recent reforms)
- The legal and regulatory framework broadly follows the French model with notable differences (sanctioning/penalties mechanism; classification and provisioning of NPLs); largely consistent with international rules.
- Key laws promulgated or revised since 2001:
  - Law 2001-65 of July 10, 2001 on credit institutions (revised by Law 2006-19 of May 2, 2006).
  - Law 2005-96 on strengthening the security of financial transactions requires companies raising funds from the public, including credit institutions, to appoint two external auditors to certify financial statements.
- BCT strengthened credit culture by requiring:
  - Financial statements certified by an external auditor whenever banking exposure to a single enterprise exceeds D 5 million; and
  - A recent rating if exposure reaches D 25 million and the company is not listed on the stock exchange.
- Internal controls significantly strengthened:
  - Law 2006-19 requires credit institutions to establish an Executive Credit Committee (distinct from the Credit Committee) responsible for examining credit activities and submitting lending policy proposals to the Board.
  - Law 2006-19 requires credit institutions to establish a compliance control system to determine and assess risks of noncompliance with laws, regulations, and sound practices.
  - To implement these provisions, BCT adopted Circular 2006-06 “concerning the implementation of a system of compliance control in credit institutions” on July 24, 2006.
- BCT Circular 2006-19 on internal controls (largely inspired by French regulation 97-02) adopted in November 2006:
  - Imposes numerous obligations (examples include requirement that each customer be assigned a rating and that stress tests be carried out to assess capital adequacy under large-loss shocks).
  - These requirements align with mechanisms of Basel II.
- Circulars under preparation at the March 2006 mission and since adopted:
  - Circular 2006-06 on outsourcing; and
  - Circular 2006-07 on the executive credit committee.
- Accounting and loan provisioning issues:
  - Accounting rules for credit institutions broadly modeled on international standards; NC 35 to 39 close to IFRS adopted in 2003 to establish consolidated accounts from 2004 financial statements.
  - BCT Circular 91-24 on loan classification and provisioning does not envisage estimation of the present value of annual expected cash flows (paid by borrower or recovered under restructuring).
  - Given long delays in recovering overdue loans and low amounts recovered under judicial procedures in Tunisia, absence of a present value framework is inconsistent with IAS 39.
- Collateral and registration issues:
  - Tunisian legislation regarding movable collateral needs modernization to align with international standards.
  - Delays in real estate and mortgage registration procedures are considered excessive by banks; reforms needed.

*Assessment prepared as part of the review and update of compliance with the Basel Committee’s 25 Core Principles for Effective Banking Supervision.*

### 37.      As regards relations with customers, Laws 2006-26 and 2006-19 modifying

### _cr0798 - 37.      As regards relations with customers, Laws 2006-26 and 2006-19 modifying

### Market Discipline
- Laws 2006-26 and 2006-19 (modifying Laws 58-90 and 2001-65) introduce provisions to enhance the quality of banking services, including:
  - the appointment of an ombudsman;
  - the creation of a banking services monitoring unit in the BCT.
- Revisions in the laws will be accompanied by implementing circulars.
- Information bureaus established or planned to improve credit risk information available to credit institutions and the BCT:
  - a risk bureau to monitor the indebtedness of enterprises;
  - a balance sheet bureau to make companies’ financial statements available to banks;
  - a nonperforming loans bureau (scheduled to come on stream shortly) to provide data on total NPLs by debtor and the classification attributed according to the prudential regulations.
- Current gaps in information infrastructure:
  - there is no credit bureau that would report the score assigned by the various lending institutions to a single counterparty.
- Role of external auditors:
  - external auditors must submit several reports annually to the BCT detailing adjustments to financial statements, internal controls and management, the loan portfolio, and ratios at December 31;
  - external auditors attend periodic meetings organized by the BCT with supervised banks;
  - the four largest international audit firms audit half the institutions, but currently none of them audits public banks.
- Reporting and auditing of financing information:
  - most credit institutions publish their annual financial statements;
  - the quality of information on risk exposure, internal control mechanism, nonperforming loans and their recovery could be improved and varies widely across banks;
  - on the basis of the recent law on financial security, all credit institutions are required to have two external auditors.
- BCT reporting:
  - the BCT devotes several pages in its annual report to banking supervision;
  - consideration is being given to producing an annual report specifically dedicated to banking supervision that should include profitability, solvency, risks, organization, inspections and controls carried out by the BCT, and a description of sanctions adopted with explanations.

### Resolution Framework for Problem Banks
- The BCT does not currently have a (CAMEL-type) system for identifying banks in difficulty and for providing a basis for corrective measures; establishing such a system is recommended.
- Article 41 of Law 2001-65 stipulates that all banks must belong to a deposit guarantee scheme, but:
  - such a mechanism has not yet been put in place;
  - the BCT is waiting until the recapitalization of the banks recently privatized has been completed before introducing a guarantee scheme.

### Main Findings
- Table 1 (referred to in the source) compares core principle assessments for essential criteria in 2006 versus 2002.
- In 2006 more than half the principles were assessed as “compliant” or “largely compliant” and none as “non-compliant.”
- Progress between 2002 and 2006:
  - Tunisia has made considerable progress toward full compliance with the Basel Committee principles;
  - the number of principles marked “compliant” has increased;
  - the BCT is now compliant with Principles 1-4, 3, 5, and 21, which were marked “largely compliant” in 2001.
  - The 2006 assessment reflects promulgation of Law 2001-65 and the entry into force of accounting standards applicable to consolidated accounts.
- Principles assessed as “materially noncompliant” in 2006:
  - Principles 7 and 8 (credit and provisioning policy);
  - Principle 20 (consolidated supervision);
  - Principle 22 (remedial measures);
  - Principle 25 (supervision of foreign banks).
- Principle 15 (anti-money laundering and combating the financing of terrorism) was assessed as “materially non-compliant” by the World Bank team that examined this subject.
- Specific issues and metrics:
  - Circular on internal controls adopted on November 26 2006 includes nine articles on credit risks; requirements enter into force on January 2, 2008.
  - NPLs comprised 20.9 percent of outstanding loans at end-2005.
  - Most bank loans continue to be granted on the basis of collateral rather than in-depth financial analysis of counterparty risk and cash-flow generation.
  - Provisioning shortcomings:
    - collateral valuation uncertainties undermine provisioning adequacy;
    - rules governing provisioning do not take into account the time frame for recovering sums owed by debtors despite generally long legal proceedings.
- Anti-money laundering:
  - some progress has been registered, but much remains to be done to bring the system into conformity with Basel Committee criteria.
- Consolidated supervision:
  - while the BCT carries out consolidated analysis starting with accounts for 2004, effective consolidated supervision still needs implementation;
  - it is necessary to introduce consolidated ratios and to establish supervision of banking groups in conformity with the circular on internal controls, which requires banking groups to establish by January 2, 2008 a system of evaluation and surveillance of risks assumed by the parent company and all financial subsidiaries (article 5).
- Remedial measures:
  - the “materially noncompliant” assessment is maintained owing to lack of effective enforcement of the penalties system provided in the law.
- Supervision of foreign banks:
  - lack of agreements on information sharing with other supervisors explains why Principle 25 is assessed as “materially noncompliant.”

### Detailed Assessment — Selected Core Principle Results (Essential Criteria)
- Summary status changes noted between 2001 and 2006 (essential-criteria assessments as presented in Table 1):
  - 1. Objectives, autonomy, powers and resources
    - 1.1 Objectives: Compliant (2001) → Compliant (2006)
    - 1.2 Independence: Compliant → Compliant
    - 1.3 Legal framework: Compliant → Compliant
    - 1.4 Enforcement powers: Largely Compliant → Compliant
    - 1.5 Legal protection: Compliant → Compliant
    - 1.6 Information sharing: Materially Noncompliant → Largely Compliant
  - 2. Permissible activities: Compliant → Compliant
  - 3. Licensing criteria: Largely Compliant → Compliant
  - 4. Ownership: Largely Compliant → Compliant
  - 5. Investment criteria: Largely Compliant → Compliant
  - 6. Capital adequacy: Largely Compliant → Largely Compliant
  - 7. Credit policies: Materially Noncompliant* → Materially Noncompliant
  - 8. Loan evaluation: Materially Noncompliant → Materially Noncompliant
  - 9. Large exposure limits: Compliant → Compliant
  - 10. Connected lending: Largely Compliant → Largely Compliant
  - 11. Country risk: Not Applicable → Not Applicable
  - 12. Market risks: Largely Compliant → Largely Compliant
  - 13. Other risks: Largely Compliant → Largely Compliant
  - 14. Internal control and audit: Largely Compliant → Largely Compliant
  - 15. Money laundering: Noncompliant → Materially Noncompliant
  - 16. On-site and off-site supervision: Compliant → Compliant
  - 17. Bank management: Compliant → Compliant
  - 18. Off-site supervision: Largely Compliant → Largely Compliant
  - 19. Validation of information: Compliant → Compliant
  - 20. Consolidated supervision: Noncompliant → Materially Noncompliant
  - 21. Accounting standards: Largely compliant → Compliant
  - 22. Remedial measures: Materially Noncompliant → Materially Noncompliant
  - 23. Global consolidated supervision: Not Applicable → Not applicable
  - 24. Host country supervision: Materially Noncompliant → Not applicable

*The assessment is based on the Core Principle Methodology of the Basel Committee on Banking Supervision in effect in March 2006; the 25 Basel Principles were revised in October 2006. The rating scale distinguishes five degrees of compliance: compliant, largely compliant, materially noncompliant, noncompliant, and not applicable.

*Source: _cr0798 (excerpt).*

### 25. Sup/foreign establishments Materially Noncompliant          Materially          Noncompliant

### _cr0798 - 25. Sup/foreign establishments Materially Noncompliant          Materially          Noncompliant

### Overview
- Detailed assessment of Tunisia’s compliance with the Basel Core Principles for Effective Banking Supervision (October 1999 version) as reflected in the FSAP update.
- Key overall assessments in the excerpt: several Principles rated “Compliant”, “Largely Compliant”, “Largely noncompliant”, and specific Principles rated “Materially noncompliant” (e.g., Principle 7, Principle 8, Principle 15, Principle 20 noted as materially noncompliant in parts).

### Principle 1 — Objectives, Autonomy, Powers, and Resources
Findings
- Law 2006-26 amended Article 33: “the BCT supervises credit institutions.” Article 32 of Law 2001-65 states the BCT “conducts off-site and on-site inspections of credit institutions.”
- Banking supervision inside BCT is conducted by the General Directorate of Banking Supervision (DGSB).
- The Bank’s internal inspections department can inspect the DGSB; last inspection reportedly in 2001-2002.
- DGSB staffing: “some 50 staff members (46 at the start of 2006), of whom approximately 30 are engaged in off-site inspection ... and 15 work in the Inspectorate responsible for on-site inspections; this Inspectorate now has ten fewer staff members than it did in 2001.”
- Governor appointed for a term of six years (Article 9 of Law 58-90); term renewable; removal “only by decree.” Law 2006-26 did not amend these provisions.
- No BCT code of conduct in place; BCT regulation n. 445 protects staff against threats and attacks.

Recommendations
- “It might be useful to schedule a mission to inspect the DGSB.”
- “The BCT should produce and publish a separate annual report on banking supervision and the state of the banking system, in addition to its own annual report.”
- Establish ethical rules for DGSB personnel specifying:
  - terms for staff acquiring securities issued by credit institutions;
  - restrictions regarding invitations and acceptance of gifts;
  - terms on leaving BCT to take a post in a credit institution.
- Specify by internal BCT memorandum the legal status (rights and obligations) of inspectors exercising on-site inspection duties.

Assessment notes
- Compliant with essential and additional criteria for Principle 1(1).
- Compliant with essential criteria but “Noncompliant with the two additional criteria” for Principle 1(2).
- Largely Compliant with essential criteria for Principle 1(6); recommendation to sign information-sharing agreements with CMF and other domestic/foreign supervisors.

### Licensing, Permissible Activities, and Ownership (Principles 2–4)
Findings
- Permissible banking activities (Article 2 of Law 2001-65): taking deposits; granting credit (leasing and factoring treated as credit in Article 4); intermediation on the exchange market; provision and management of payment instruments.
- Article 14 prohibits unlicensed practice and use of “bank”, “banker”, “credit institution”, or “financial institution” in names or advertising.
- Licensing: Ministry of Finance issues licenses based on BCT report; Law 2006-19 specifies license must be issued “within four months of receipt of all the required documents.”
- Minimum capital requirements revised by Law 2006-19:
  - banks: from TD 10 million to TD 25 million;
  - financial institutions: from TD 3 million to TD 10 million;
  - investment banks: minimum capital remains TD 3 million.
- Ownership thresholds (new Article 10): authorization required for acquisitions at thresholds: “one-tenth, one-fifth, one-third, one-half, and two-thirds of the voting rights.”
- Concepts introduced: “reference shareholder” (majority/control) and “principal shareholder” (5 percent or more of capital). Governor may require financial support from reference and principal shareholders.

Assessment
- Principles 2–4: Compliant with essential and additional criteria (Principle 3 and Principle 4 assessments compliant).

### Investment Criteria, Capital Adequacy, and Consolidation (Principles 5–6, 20)
Findings
- Equity investment limits (Articles 21–22):
  - individual equity investment may not exceed 10 percent of the credit institution’s capital base;
  - shares in nonfinancial institutions capped at 30 percent (temporary excess allowed if for recovery of claims).
- No cumulative limit for nonfinancial investments; recommendation to set standard ceiling (suggested in recommendations) consistent with Basel 2 (individual 15 percent and overall 60 percent guidance referenced).
- Capital adequacy:
  - Risk cover ratio (solvency ratio) should be equal to 8 percent.
  - Regulatory capital defined by BCT Circular 91-24 (tier 1 and tier 2; tier 2 limited to half of regulatory capital).
  - Capital requirement calculated only on credit risk; market and operational risks not included.
  - Banks must report risk cover ratio to BCT each quarter.
- Consolidation:
  - Consolidated prudential ratios not yet in force; consolidated accounts required starting with year 2003 closing under National Accounting Board standards (NC 35–39).
  - Assessment: “Essential Criterion 4 and Additional Criterion 5 are not observed” because capital base not calculated on a consolidated basis.
  - Principle 20 assessment: “Materially Noncompliant with essential criteria.”

Key statistics and figures
- Capital minimums: “TD 25 million” (banks), “TD 10 million” (financial institutions), “TD 3 million” (investment banks).
- Solvency ratio target: “8 percent.”
- Reported NPLs and asset transfer data (see Principle 6 and Principle 8):
  - outstanding claims transferred to asset recovery companies: “almost TD 2 billion (TD 1,891 million according to figures provided by the BCT) between 1999 and 2004.”
  - off-balance-sheet exposure accounted for “DT 174 million out of D 5.2 billion in NPLs at end-2004.”
  - one bank sold claims with selling price “in the order of TD 110 million.”
- Liquidity ratio requirement: “permanently maintained at or above 100 percent” (Principle 13).
- Foreign exchange open position limit: “must not exceed 20 percent of regulatory capital” (Principle 13).
- Exposure concentration rules (Principle 9):
  - exposures ≥ “5 percent of regulatory capital” must not exceed “5 times the regulatory capital” in total;
  - exposures ≥ “15 percent of regulatory capital” must not exceed “twice the regulatory capital” in total;
  - exposure to a single beneficiary limited to “25 percent of their capital” (and other ceilings including a practice limit “three times the bank’s net capital” referenced for certain connected parties).

Recommendations (selected)
- Expedite introduction of consolidated prudential standards for risk diversification and solvency ratios.
- Amend Article 5 of BCT Circular 91-24 to require deduction from individual capital bases of equity holdings in other credit institutions until consolidated calculation is implemented.
- Prudential treatment of asset transfer operations should be discussed in detail with BCT in advance; consider IASB SIC-12 on deconsolidation.
- Consider deducting from capital base nonfinancial equity participations exceeding regulatory ceilings (Basel 2 guidance).

### Credit Policies, Loan Evaluation, and Provisioning (Principles 7–8)
Findings
- Prior to BCT Circular 2006-19, there was no specific regulatory provision on credit risk management; Circular 2006-19 (internal controls) establishes rules on credit risk management (Articles 22–30 and other articles).
- Law 2006-19 introduces Article 34 ter requiring an Executive Credit Committee; Circular 2006-07 (executive credit committee) and Circular 2006-06 (compliance controls) issued 24 July 2006.
- Existing thresholds for required documentation:
  - external auditor report for customer exposure > “10 percent of their capital base”;
  - financial statements certified by an external auditor if total banking exposure to a counterparty exceeds “TD 5 million”;
  - recent rating if exposure exceeds “TD 25 million.”
- Implementation gaps: internal rating systems and credit risk surveillance uneven; evidence of compliance with thresholds:
  - “TD 5 million threshold” observed by approximately “50 percent of the enterprises, and by two-thirds if contested claims are excluded”;
  - “TD 25 million thresholds” observed by approximately “20 percent of the counterparties.”

Assessment
- Principle 7: “Materially noncompliant with essential and additional criteria.” Recommendation: verify through off-site and on-site supervision that provisions of Circular 2006-19 are effectively implemented.

Principle 8 findings and assessment
- Circular 91-24 sets classification and provisioning rules; Circular 2006-19 requires quarterly loan portfolio review (Article 28).
- Application of “contagion” (cross-classification) principle applied by BCT in off-site and on-site inspections, and Article 2 of Circular 91-24 defines “single beneficiary.”
- Several banks were under-provisioned in 2004; BCT adjusted capital bases for shortfalls; one bank’s solvency ratio fell well below “8 percent” and was taken over.
- Assessment: “Materially noncompliant with essential criteria.” Recommendations include explicitly mentioning “contagion” rules in regulations and reconsidering provisioning to account for discounted recovery flows for long-standing Class 4 claims.

### Connected Lending and Large Exposures (Principles 9–10)
Findings
- Connected parties defined in Article 23 (Law 2001-65) and in circulars with some inconsistencies (e.g., Circular 91-24 defines managers and shareholders > “10 percent” as connected; Law 2001-65 uses “5 percent”).
- Reporting: credit institutions must submit annually a regulatory statement on connected lending; external auditors must prepare a special report for shareholder meetings on connected loans.
- Ceilings and controls: Circular 91-24 limits total exposure to managers and stockholders with equity holding > “10 percent” to “three times the bank’s net capital,” while overall exposure to a single beneficiary limited to “25 percent of their capital.”
- Several essential criteria lacking (e.g., prohibition of more favorable terms for connected loans, internal procedures excluding beneficiaries from decision-making, ceilings/deduction from capital base, system for identifying connected loans).

Assessment
- Principle 9: Compliant with essential and additional criteria (subject to consolidated ratio caveat).
- Principle 10: “Largely compliant with essential and additional criteria.” Recommendations: harmonize definitions, specify that connected-party loans not be on more favorable terms, require identification in information systems, lower high ceilings (three times capital), require collateralization or deduction from capital base.

### Market, Other Risks, Internal Control, Audit, and IT (Principles 12–14, 13)
Findings
- Market risks currently limited; BCT Circular 2006-19 includes Articles 31–34 covering market risk; simulation/ crisis scenario obligations included.
- Other risks: Circular 2006-19 explicitly addresses credit, market, global interest rate, payment, and operational risks (Articles 22–47). Liquidity ratio reporting monthly, must be ≥ “100 percent.”
- Internal control: Law 2001-65 Article 34 and Law 2006-19 provisions require internal controls, Executive Credit Committee, compliance control body. Circular 2006-19 requires appointment of an officer responsible for internal audits and two annual reports to BCT (on risks and on internal audit environment).
- IT: BCT inspectors note improvements; Circular 2006-19 introduces IT obligations including a business continuity plan.

Assessment and recommendations
- Principles largely compliant or largely compliant in these areas; increase frequency of IT audits; strengthen on-site IT reviews; monitor market risk developments; encourage deeper risk disclosure in annual reports.

### Supervision Practices — On-site, Off-site, Validation, and Management Contact (Principles 16–19)
Findings
- BCT conducts both off-site (“document control”) and on-site inspections; on-site teams include off-site staff for synergy.
- On-site teams: six team leaders, inspectorate staff, access to BCT specialists (IT, exchange, credit).
- On-site outputs: mission report and a “notification” letter signed by the Governor delivered to the President of the institution; the full report currently not always sent to institution president.
- Regular biannual meetings with banks; review exposures, NPLs, and corrective measures. Mid-year and pre-annual meeting agendas specified.
- Off-site supervision: extensive prudential data collection; limited cross-cutting analytical reports; no consolidated ratio yet; no systematic methodology/manual for inspection selection and prioritization.

Assessment
- Principle 16: “Compliant with essential criteria and largely compliant with the additional criteria.” Recommendations: deliver full mission reports to bank presidents; structure inspection files; compile methodology manual; consider warning/grading system; re-audit DGSB.
- Principle 18: “Largely compliant with essential criteria.” Need consolidated ratios and an analytical framework to prioritize inspections.
- Principle 19: “Compliant with essential and additional criteria.” Note: BCT cannot legally oppose appointment of an external auditor in strict legal terms, but Article 46 allows removal of an external auditor.

### Money Laundering and Financial Crime (Principle 15)
Findings
- Law 2003-75 (December 12, 2003) imposes KYC, suspicious transaction reporting to CTAF, and 10-year record retention (Article 75); CTAF Directive 2006/02 (April 20, 2006) further specifies requirements.
- CTAF Directive requires appointment of a correspondent (minimum rank of director) to declare suspicious transactions; BCT circular to implement directive envisaged.
- Implementation gaps: as of assessment, only “five suspicious transactions declarations” received by CTAF; surveillance mechanisms and BCT control modalities not defined; no specific legal provision requiring a credit institution to inform BCT when its financial situation or reputation is compromised.
- Sanctions: BCT can impose penalties but may lack power to impose pecuniary sanctions for AML/CFT violations tied to unquantified infractions.

Assessment and recommendations
- Principle 15: “Materially non compliant with essential and additional criteria.”
- Urgent priorities: effective implementation of Law 2003-75 and Directive 2006/02; BCT to issue circular implementing these provisions; expand BCT’s powers to impose financial sanctions; require banks to inform BCT of money laundering or fraud events affecting solvency or reputation; strengthen BCT supervisory inspections in AML/CFT.

### Accounting Standards and Remedial Measures (Principles 21–22)
Findings
- National Accounting Board (CNC) standards (NCT) largely inspired by international norms; specific bank standards exist (e.g., NC 22).
- BCT Circular 93-08 sets periodic accounting statement rules. External auditor certification required; two auditors required when public fundraising applies.
- Provisioning: Tunisian standards do not explicitly require estimating present value of recoverable cash flows (IAS/IFRS approach); recommendation to incorporate time-factor or simple rules accounting for recovery duration.
- Remedial powers: Law 2001-65 Articles 36–37 provide BCT powers to issue injunctions (e.g., increase capital, prohibit dividend distribution, constitute provisions) and to appoint interim administrator when solvency ratio is below the minimum by “25 or 50 percent” and institution fails to present a restructuring plan within “two months.”
- Article 42 lists seven penalties available to Governor per increasing seriousness (text truncated in excerpt).

Assessment
- Principle 21: “Compliant with essential and additional criteria.” Recommendation: consider present value approach or age-based downgrades for provisioning.
- Principle 22: Law provides remedial measures; practical application and satisfaction of sanctioning regime flagged as unsatisfactory in parts (see Principle 1(4) remark).

### Cross-cutting Recommendations (selected and prioritized)
- Rapidly sign information-sharing agreements with the CMF and consider arrangements with the Ministry of Finance for SICAR and asset recovery companies; consider prudential information exchange agreements with foreign supervisors.
- Expedite implementation of consolidated prudential standards and consolidated capital calculation.
- Verify through off-site and on-site supervision effective implementation of Circular 2006-19 (internal controls) across credit institutions.
- Strengthen AML/CFT supervisory framework: adopt BCT circular implementing Law 2003-75 and CTAF Directive 2006/02; enlarge BCT sanction powers; require timely bank reporting to BCT of incidents affecting solvency or reputation.
- Increase frequency and scope of IT audits within on-site missions; monitor information system modernization deadlines and security obligations.
- Harmonize definitions and ceilings relating to connected lending across law and circulars; require identification systems and internal procedures preventing conflicts in lending decisions.
- Formalize on-site reporting practices: deliver full mission reports to institution presidents; index inspection files; compile methodology manuals; and consider a bank grading/warning system.

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0798.pdf*

### 1. Warning

### 1. Warning

### Penalties framework and institutional roles
- Penalties available under Law 2001-65 (listed in source order):
  - 1. Warning
  - 2. Reprimand
  - 3. Fine
  - 4. Suspension of all BCT refinancing
  - 5. Prohibition to perform certain operations and any other restrictions on business activities
  - 6. Withdrawal of licensed intermediary status
  - 7. Revocation of license
- The first four penalties are within the remit of the Governor of the BCT; penalties 5–7 are within the competence of the Banking Commission.
- The Banking Commission comprises four members:
  - A magistrate serving at least as President of a chamber of a Court of Appeals, who chairs the Commission;
  - A representative of the Ministry of Finance, with at least Director General rank;
  - A representative of the BCT with at least Director General rank;
  - The Director General of the Tunisian Association of Banks and Financial Institutions.

### Penalties applicable to credit institution representatives
- Penalties for board/oversight board members, directors, managers, and legal representatives are subject to decision by the Banking Commission.
- Article 45 of Law 2001-65 establishes the penalties:
  - Temporary suspension of one or more representatives of the credit institution, with or without the appointment of an interim administrator;
  - Suspension of one or more representatives of the credit institution, with or without the appointment of an interim administrator;
  - A fine of up to five times the amount of the offense.

### Fines and sanctions on credit institutions and auditors
- Article 48 of Law 2001-65: fine applies for any of these violations:
  - setting lending or deposit rates above the limits established by the BCT;
  - charging fees not contemplated in BCT circulars;
  - collection of fees at rates higher than those reported to the BCT.
- Article 49 of Law 2001-65: hiding information or reporting knowingly inaccurate information is punishable by a fine.
- Article 15 of Law 2001-65: Ministry of Finance may decide, on the basis of a BCT report, to revoke a credit institution’s license if it provided false information to obtain it.
- Delay in disclosing documents requested by the BCT may give rise to a fine for each day of delay; an institution may be liable to a one-off or daily fine without prejudice to other penalties.
- Penalties on external auditors (Law 2001-65):
  - BCT may prohibit an external auditor from practicing either for a period of up to three years, or permanently.
  - Appeals procedure is mentioned only in the case of a permanent prohibition, in which case the Banking Commission rules on the appeal.
- Empirical note: Since Law 2001-65 entered into force, no officially sanctioned disciplinary measure has been applied to a credit institution or any of its managers; no penalty has been imposed on an external auditor (one case where Governor wrote an external auditor a letter after shortcomings were detected).

### Preventive measures and supervisory powers
- Article 36 of Law 2001-65 authorizes the BCT to serve a formal notice on credit institutions that fail to observe rules of good conduct and, in particular, to issue an injunction to:
  - increase their capital,
  - prohibit the distribution of any dividend,
  - constitute provisions.
- No injunction has been issued since the Law entered into force.
- Article 37 of Law 2001-65 allows the Governor of the BCT to appoint an interim administrator for a credit institution.
- The Banking Commission has never been installed because it has never had to pronounce on adoption of any of the three penalties within its competence.
- Only one of its four members is expressly appointed by law (Director General of the Tunisian Association of Banks and Financial Institutions); BCT indicates the other three could be appointed rapidly—within a week—though law does not specify appointment procedures.

### Assessment of compliance
- Overall assessment for the sanctions mechanism: "Materially Noncompliant with essential and additional criteria."
- Key assessment findings:
  - Law 2001-65 provides for penalties under Essential Criteria 1, 2, and 4.
  - Penalties have never been imposed despite some institutions possibly breaching regulations.
  - Essential Criterion 3 and Additional Criterion 1, which require sanctions to be imposed without delay, are not observed.
  - Conclusion: sanctions mechanism is not effectively applied; the 2002 assessment has been maintained.

### Recommendations on sanctions framework
- Review the system of penalties applicable to credit institutions:
  - It is difficult to determine a priori and systematically the level of penalty to be imposed; de facto, the Governor initiates convening the Banking Commission only when he deems that one of the three most severe penalties is called for.
  - Option: devolve all authority for imposing penalties to the Banking Commission to separate supervisory and punitive functions.
  - If so, the Banking Commission should be installed on a permanent basis and the law should specify how members are appointed and duration of their term.
- Ensure presence of both parties in disciplinary proceedings:
  - The manner of applying this principle is specified for cases where the Banking Commission imposes a penalty; it would be logical to extend these provisions to cases where the Governor exercises disciplinary authority.
- Mention avenues of appeal in Law 2001-65, even if they mirror ordinary law.
- Clarify interactions when sanctioning authority is split:
  - Specify whether the Banking Commission may impose a penalty of less severity than those for which it is competent.
  - Specify whether the Governor of the BCT may impose one of the penalties in his remit should the Banking Commission decide not to punish an institution.

### Related supervisory context and follow-up actions (selected)
- The BCT noted measures adopted since the mission:
  - Circular on internal controls adopted on November 28, 2006 as circular 2006-19, includes provisions on credit risk.
  - Law 2006-26 amending Law 58-90 (not yet adopted at time of mission) will authorize the central bank to enter into information sharing agreements with other domestic and foreign financial supervisors, permitting compliance with CP 25 once operational.
- The BCT disagreed with recommendations to:
  - Transform the Banking Commission into a permanent body, noting it can be convened rapidly when needed.
  - Devolve all sanctioning powers to the Commission; BCT considers the current split appropriate.

*Source: _cr0798 - 1. Warning*

### 70.      As for equity holdings in financial institutions, it would be advisable—even before

### _cr0798 - 70.      As for equity holdings in financial institutions, it would be advisable—even before

### Equity holdings and capital base
- Recommendation: Deduct equity investments of banks in other financial institutions from the separately calculated capital base of each institution, in order to avoid double counting the capital base.
- Timing: Advice given "even before publication of regulations on the establishment of consolidated ratios."

### BCT inspections and connected lending
- Observation: The BCT circular 2006-19 on internal controls prescribes that the credit institutions identify connected lending in their information system, and specifies particular norms for extending such credit.
- Recommendations:
  - It would be advisable that the BCT incorporates these provisions in its inspections.
  - It would be advisable to make use of a revision of the Circular 91-24 of the BCT to modify its Article 3, so as to lower the ceiling applicable to this type of lending, currently set at tree times capital, which appears high.

### Sanctions mechanism and enforcement
- Finding: Full implementation of the sanctions mechanism is essential to the credibility of the supervisory authority.
- Current status: Until now, the BCT has not applied formal sanctions, nor injunctions, toward any credit institutions which has been in breach of the regulations.
- Nature of breaches: Mostly related to excess credit concentration and equity participation in non financial companies.
- Recommendations:
  - With the modernization of the banking system, the entry into effect of the circular on internal controls, and the adoption of other envisaged regulations, identified breaches, including those pertaining to the organization of the internal control system, should be monitored rigorously by the BCT.
  - Any violations of the regulations should be promptly corrected, or should be the object of a waiver in duly justified cases.
  - In the case of persistent violations, sanctions should be adopted.
  - On organization: confer sanctioning powers exclusively on the Banking Commission, while the Governor of the BCT should have the power to issue injunctions.

### Information exchange and consolidated supervision
- Domestic agreements recommended:
  - Establish information exchange agreements with the Financial Markets Board (CMF) for the mutual fund institutions (SICAV, SICAF and FC).
  - Establish agreements with the Ministry of Finance for insurance companies, the SICAR, and the asset recovery companies, which under present conditions constitute an extension of banking activities.
- International cooperation:
  - Agreements with foreign supervisors should be established, especially with those agencies supervising banking groups that hold shares in recently privatized Tunisian banks.
  - The need for cooperation among supervisory authorities will increase following implementation of the Basel II agreement.

### Independence of the Governor of the BCT
- Recommendation: The grounds on which the Governor may be removed from office should be specified in the Law and subject to publication, to achieve compliance with the additional criteria of Principle 1-2.

### Table 3: Tunisia — Summary Compliance of the Basel Committee Principles (Essential and Additional Criteria)
- The source includes "Table 3. Tunisia: Summary Compliance of the Basel Committee Principles (Essential and Additional Criteria)" with a compliance legend:
  - C = Compliant; LC = Largely Compliant; MNC = Materially Noncompliant; NC = Noncompliant; NA = Not Applicable.
- Note: Shading indicates that there are no additional criteria for that principle. The vertical strikethrough indicates that compliance with Principle 15 was not assessed.

*Source: _cr0798 - 70. As for equity holdings in financial institutions, it would be advisable—even before*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2007/_cr0798.pdf_