## _cr15230

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---

### INTRODUCTION
- Focus: current status of banking supervision and regulation in Samoa based on selected Basel Core Principles (BCP).
- Scope: domestic commercial banks; international (offshore) banking industry noted but small (less than 10 percent of domestic banking assets) and recommendations for SIFA remain valid.
- Organization: overview of financial system and vulnerabilities; review of regulatory and supervisory frameworks; assessment of 2007 BCP recommendations and progress; main findings and recommendations.

### FINANCIAL SYSTEM PROFILE
- Total financial system assets correspond to about 120 percent of GDP with bank assets accounting for almost 60 percent of system assets or 70 percent of GDP.
- Four banks in sector; two Australian groups hold almost ⅔ of domestic banking sector assets.
  - ANZ holds 45 percent of total banking assets.
  - Westpac holds 21 percent of total banking assets.
  - Samoa Commercial Bank market share: 18 percent.
  - National Bank of Samoa market share: 16 percent.
- Claims on the central government: 1.3 percent of assets.
- Claims on the public sector, including SOEs and PFIs: less than 6 percent at June 2014.
- Liquidity and dollarization:
  - On average, banks hold around 20 percent of deposits in reserves at the CBS.
  - Loan-to-deposit ratio is around 100 percent, but higher for foreign banks.
  - Foreign currency loans account for about 4 percent of total assets.
  - All foreign currency deposits account for about 8 percent of total deposits.
- Non-banks and PFIs:
  - Main non-bank institutions: Samoa National Provident Fund (SNPF), Development Bank of Samoa (DBS), Samoa Housing Corporation (SHC), Unit Trust of Samoa (UTOS).
  - Funding sources: members’ contributions/premium (SNPF/SLCA), loans from the CBS and international financial institutions (DBS, SHC), and investments (UTOS). No retail deposits.
  - Total financial system (percent of GDP) reported as 120.1 in 2013/14.
  - Nominal GDP (in millions of Tala): 1,900 for 2013/14.
- Microfinance and credit unions:
  - One MFI (Samoa Pacific Business Development, SPBD) with SAT 10 million in assets, SAT 6 million in loans and SAT 780,000 in deposits across 18,000 clients.
  - 13 credit unions licensed by MCIL; total assets of credit unions estimated about SAT 20 million.
  - Supervision of the MFI and credit unions by MCIL is virtually non-existent; financial information not collected systematically or shared with the CBS.
- International banking sector:
  - Seven international banks licensed in Samoa.
  - Total international banking assets declined from US$112 million in 2005 to US$ 54.4 million mid-2014 (about one tenth of the domestic banking sector).
  - Two licensees restricted to serving members of their own groups; five affiliates of investment advisers deal with advisers’ clients at arm’s length.
  - No linkages between domestic and international financial sectors.

### VULNERABILITIES
- Loan portfolio trends:
  - Bank credit stagnant for several years; recent jump due to a few larger projects.
  - Portfolios more concentrated to the top ten borrowers; concentration limits of 25 percent of capital constrain new bankable projects, especially for locally-owned banks with smaller capital bases.
- Asset quality:
  - System NPLs are 8.3 percent of total loans.
  - All banks above 4 percent NPLs, and NPLs are growing.
  - System exhibits high NPL coverage instead of write-offs; some banks carry NPLs accumulated over time and not written off.
  - Asset classification, NPL write-offs, and provisioning policies require further examination, particularly at locally-owned banks.
- Capitalization:
  - Reported capitalization strong; system CAR around 30 percent, most capital high quality Tier 1.
  - Uncertainties remain about whether problem loans are fully accounted and provisioned for.
- Liquidity monitoring:
  - Despite large liquid reserves with the CBS, liquidity positions should be closely monitored and maturity gaps identified.

### FINANCIAL REGULATION AND SUPERVISION
- Mandate and coverage:
  - CBS is principal domestic financial sector supervisor; mandate derived from the CBA, 1984 (Section 4(f) and (g)) and the Financial Institutions Act, 1996 (Section 3).
  - CBS responsible for supervision and regulation of domestic commercial banks and, following legislative amendments, domestic nonbank financial services including insurance companies, PFIs, Money Transfer Operators, and foreign exchange dealers.
  - Supervision and regulation of credit unions intended to be added to CBS responsibilities in the future.
  - Over time, the CBS should supervise all lending, deposit taking, and other financial intermediary institutions (including offshore banks).
- Resource adequacy:
  - CBS current resources are not commensurate to the mandate.
  - FSD staffing: currently has a staff of six persons after adding two in early 2014; further additions envisaged in the Department’s Plan for the Year 2014–2015.
- Supervision approach and gaps:
  - FSD aims to conduct Risk-Based Supervision, but gaps in implementation remain.
  - Prudential guidance limited to nine “Prudential Statements” issued between 1995 and 1999 and lacks detailed prescriptive international-standard guidance.
  - Enforcement powers should be strengthened.
- Supervisory processes and data:
  - Supervision primarily off-site; banks file weekly, monthly and quarterly returns in “hard copy” and PDF format.
  - Portions of data are re-cast on spreadsheets for analysis; data quality is uneven.
  - CBS does not routinely obtain external auditors’ “Internal Control Memorandum”/”Management Letter.”
- On-site inspection program:
  - A 2007 plan for targeted on-site inspections on a two-year cycle was not fully developed or delivered.
  - On-site inspections conducted in 2010 at the two locally-owned banks with strict focus on AML/CFT.
  - Mid-2013: on-site inspections at the four domestic banks focused on credit and liquidity and AML/CFT.
  - FSG plans to conduct on-site inspections of all four domestic banks by June 2015.
  - Staffing constraints limit on-site inspection coverage.
- Offsetting factors for large foreign-owned banks (ANZ and Westpac):
  - Annual on-site internal audit by parent organizations; extensive control reporting to regional headquarters (Fiji).
  - Both ANZ and Westpac: identical high credit ratings: Moody’s Short Term P-1 (Stable); Standard & Poor’s Short term A-1+ (Stable).
  - Listed on the Australian Securities Exchange (ASX) and comply with ASX Corporate Governance Principles and Recommendations.
  - Must comply with APRA governance requirements under Prudential Standards CPS 510 (Governance).
  - CBS is an active member of the APRA-sponsored College of Supervisors for ANZ.

### THE 2007 BCP ASSESSMENT AND SUBSEQUENT DEVELOPMENTS
- 2007 assessment summary:
  - Domestic banking sector: seventeen BCPs “Compliant” or “Largely Compliant”; four BCPs “Not Applicable”; remaining four BCPs “Materially Non-Compliant.”
  - International banking sector: twelve BCPs “Compliant” or “Largely Compliant”; four BCPs “Not Applicable”; of remaining nine BCPs: two “Materially Non-Compliant” and seven “Non-Compliant.”
- Major weaknesses identified in 2007:
  - Domestic banks: management of various risks, credit policies, connected lending, large exposures, and corporate governance.
  - International banks: need for on-site inspections, minimum risk-based capital requirements, guidance on risk management and corporate governance.
- Disruptions to reform efforts after 2007:
  - Progress disrupted by exogenous shocks (e.g., 2009 tsunami; tropical cyclone Evan in 2012) and diversion of supervisory resources (e.g., development of supervisory regime for PFIs).
  - AML-CFT progress: Samoa moved to a “normal reporting” regime by the Asia Pacific Group on Money Laundering (APGML) in 2014 from “enhanced reporting.”
- Outstanding 2007 recommendations remain largely unimplemented, notably for international banking sector (SIFA).

### MAIN FINDINGS AND RECOMMENDATIONS
- Key structural weaknesses requiring action:
  - Prudential data reporting, including quality of data, needs upgrade; implement new electronic data returns to automate transposition of data for analysis.
  - Planned program of targeted on-site inspections on a two-year cycle was not developed/delivered; on-site inspections should be a priority with near-term focus on locally-owned banks.
  - Full implementation of Risk-Based Supervision required; apparent gaps exist.
  - Supervisory guidance limited to nine “Prudential Statements”; need more detailed prescriptive guidance and strengthened enforcement powers.
  - FIA requires amendments, including:
    - (i) specific powers for the CBS to grant “waivers” on the large exposure limit only where robust analysis indicates appropriateness;
    - (ii) CBS authority to effect change in a bank’s Board and senior management;
    - (iii) provisions regulating “significant shareholder” and related parties;
    - (iv) role of the Court in certain administrative remedial measures, which may obstruct application of such measures.
- Table 1. Key Recommendations (selected items preserved verbatim with timing):
  - Domestic Banking (selected ST and MT actions):
    - CBS to hire additional staff for financial oversight according to Four Year Plan (¶15) — ST
    - CBS to improve the quality and coverage of data (¶16) — ST
    - CBS to conduct in-depth assessment of balance sheets, including an asset quality review, of potentially vulnerable banks (¶34) — ST
    - CBS to implement risk based supervision in full and conduct regular on-site inspections (¶32, 39) — ST
    - CBS to require banks to report all single exposures which exceed 10 per cent of regulatory capital (¶37) — ST
    - CBS to require half-yearly certification by a bank’s external auditor of the accuracy of prudential returns submitted to CSB (¶38) — ST
    - CBS to require immediate delivery from each bank of a copy of the external auditor’s “Internal Control Memorandum”/ “Management Letter” provided to management at the conclusion of the bank’s annual audit (¶38) — ST
    - CBS to activate regularly the provisions of MOUs with “home” regulators (¶40) — ST
    - CBS to upgrade supervisory guidance to banks, especially in regard to risk management and NPL write-offs (¶41, 11) — MT
    - CBS to source and install a current, standard package for the filing of prudential returns electronically and with analytical functionality (¶36) — MT
    - CBS to seek amendments to the FIA and CBA to support more efficient bank oversight through a set of prompt corrective actions and bank resolution tools (¶30) — MT
  - International Banking (selected ST and MT actions):
    - Enhance operational independence of SIFA to supervise international banks and remove potential for conflict between SIFA’s promotional and supervisory roles (¶27) — ST
    - Over time the CBS should assume supervision and regulation of all financial intermediaries (¶14) — MT
    - SIFA to publish data on the international banking sector (¶34) — ST
    - SIFA to introduce individual capital requirements based on risk profile and to provide guidance (¶27) — ST
    - SIFA to introduce supervisory guidance to international banks (¶40) — ST
    - SIFA to introduce on-site inspections with an emphasis on asset quality and classification (¶34) — ST
  - Timing legend: Short-term (ST), Medium-term (MT)
- Implementation priorities emphasized:
  - Near-term upgrades to prudential reporting and data systems.
  - Immediate focus on on-site inspections and asset quality reviews for potentially vulnerable banks.
  - Strengthen supervisory guidance, enforcement powers, and legal framework amendments to the FIA and CBA.
  - Over medium-term, unify supervision of all financial intermediaries under CBS and provide SIFA operational independence or transition its functions.

### ON-SITE INSPECTIONS, ASSET QUALITY REVIEWS AND RISK-BASED SUPERVISION (CPs 6–13; 14)
- On-site inspections:
  - CBS should engage in an annual program of on-site inspections guided by risk-based supervision.
  - On-site inspections should target locally-owned banks based on their higher relative riskiness.
  - On-site inspections should verify supervisory reports and obtain more information on classified assets, connected lending, and country exposures.
  - To date, only one cycle of prudential inspections has been completed for domestic banks.
  - CBS should conduct an in-depth assessment of balance sheets, including an asset quality review of potentially vulnerable banks, possibly through appointing an experienced external assessor.
  - For international banks supervised by SIFA, no prudential inspections have been performed and published data is insufficient.
- Supervisory returns and missing items:
  - Weekly: condensed balance sheet and foreign exchange position.
  - Monthly: detailed balance sheet with schedules and computation of the bank’s capital adequacy ratios.
  - Quarterly: income statement; summary of past due and non-performing loans; schedule of 10 largest borrowers; schedule of credit portfolio and deposits by residual maturity.
  - Notably absent: a bank’s liquidity profile showing “gap” positions.
- Reporting improvements:
  - Banks should be required to report all single exposures over 10 percent of capital.
  - Banks should be required to submit an external auditors’ certificate verifying accuracy of returns to the CBS (procedure contemplated by the FIA but not implemented).
  - CBS should require each bank to deliver the external auditor’s “Management Letter”/”Internal Control Memorandum” provided to management.
- RBS implementation gaps:
  - Institutional Profile and Supervisory Plan for each bank not maintained.
  - On-site supervision is sporadic and follow-up on inspection findings inadequate.
  - Mid-2013 inspections revealed inaccuracy in prudential returns regarding asset quality, provisions for loss and suspension of interest accrual.
  - Adequate resources should be engaged for RBS implementation, including experienced inspection staff from other jurisdictions to act as mentors.
- Information processing and electronic filing:
  - Returns filed in “hard copy” and PDF and data are recast on spreadsheets; CBS should investigate obtaining a standard package for electronic filing.
  - The most recent workshop on RBS was held at CBS in October 2014.

### HOME/HOST COOPERATION
- The CBS should regularly activate the provisions of the 5 June 2014 Multilateral Memorandum of Understanding with the APRA regarding ANZ.
- APRA typically organizes conference calls with relevant host supervisors every three to six months and will provide host supervisors with its assessment of the parent, if requested.
- APRA invites host supervisors to accompany APRA on inspections of Australian banks operating in the host jurisdiction; CBS would benefit from accepting such invitations.

### CORPORATE GOVERNANCE, RISK MANAGEMENT, INTERNAL CONTROL AND SELECTED CP RECOMMENDATIONS (CPs 14–26; selected CPs 6–14 for international banks)
- Domestic banks should be provided with more detailed guidance on corporate governance and risk management; existing guidelines date from 1995–1999 and should be revised to cover omitted areas.
- Banks should be required to have Board-approved comprehensive risk management policies to identify, evaluate, monitor and control material non-credit risks, including:
  - interest rate risk,
  - market risk,
  - liquidity risk,
  - country risk,
  - operational risk.
- CBS should assess adequacy of these policies during ongoing supervision.
- Selected 2007 Detailed Assessment recommendations (excerpt):
  - CP 7 (Domestic): develop a PS setting minimum standards for banks’ own credit policies; verify by on-site inspection adherence to policies; include internal limits for exposures to single counter-parties, groups of closely related borrowers, economic sectors and geographical areas; procedures for approving exposures to connected persons.
  - CP 10 Connected Lending: CBS should have discretion to make judgments on existence of connections; validate compliance via periodic collection of information and on-site inspection; require banks’ information systems to identify, monitor and administer such exposures.
  - CP 11 Country Risk: amend PS 4 and PS 7 to address country and transfer risk and periodically collect information on exposures.
  - CP 13 Other Risks: issue guidance on operational risk and interest rate risk management.
  - International banking sector CPs 6–14 (excerpt): Minister/Inspector to issue regulatory codes on capital adequacy, credit policies, loan review/classification/provisioning, reporting of exposures exceeding 10 percent of capital, prohibition on single exposures exceeding 25 percent without permission, governance safeguards on connected lending, and on-site examination programs covering risk management, internal control and audit systems.

*Source: IMF staff assessment text in _cr15230 (chapter/section).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### _cr15230 - EXECUTIVE SUMMARY ___________________________________________________________________________ 4

### INTRODUCTION
- Focus: current status of banking supervision and regulation in Samoa based on selected Basel Core Principles (BCP).
- Scope: domestic commercial banks; international (offshore) banking industry noted but small (less than 10 percent of domestic banking assets) and recommendations for SIFA remain valid.
- Organization: overview of financial system and vulnerabilities; review of regulatory and supervisory frameworks; assessment of 2007 BCP recommendations and progress; main findings and recommendations.

### FINANCIAL SYSTEM PROFILE
- Total financial system assets correspond to about 120 percent of GDP with bank assets accounting for almost 60 percent of system assets or 70 percent of GDP.
- Structure and concentration:
  - Four banks in sector; two Australian groups hold almost ⅔ of domestic banking sector assets.
  - ANZ holds 45 percent of total banking assets; Westpac holds 21 percent of total banking assets.
  - Two locally-owned banks, Samoa Commercial Bank and National Bank of Samoa, have market shares of 18 percent and 16 percent, respectively.
  - Claims on the central government are very small: 1.3 percent of assets.
  - Claims on the public sector, including SOEs and PFIs, were less than 6 percent at June 2014.
- Liquidity and dollarization:
  - On average, banks hold around 20 percent of deposits in reserves at the CBS.
  - Loan-to-deposit ratio is around 100 percent, but higher for foreign banks.
  - Foreign currency loans account for about 4 percent of total assets; all foreign currency deposits account for about 8 percent of total deposits.
- Non-banks and PFIs:
  - Main non-bank institutions: Samoa National Provident Fund (SNPF), Development Bank of Samoa (DBS), Samoa Housing Corporation (SHC), Unit Trust of Samoa (UTOS).
  - Funding sources: members’ contributions/premium (SNPF/SLCA), loans from the CBS and international financial institutions (DBS, SHC), and investments (UTOS). No retail deposits.
  - Total financial system (percent of GDP) reported as 120.1 in 2013/14; Nominal GDP (in millions of Tala) 1,900 for 2013/14.
- Microfinance and credit unions:
  - One MFI (Samoa Pacific Business Development, SPBD) with SAT 10 million in assets, SAT 6 million in loans and SAT 780,000 in deposits across 18,000 clients.
  - 13 credit unions licensed by MCIL; total assets of credit unions estimated about SAT 20 million.
  - Supervision of the MFI and credit unions by MCIL is virtually non-existent; financial information not collected systematically or shared with the CBS.
- International banking sector:
  - Seven international banks licensed in Samoa; total assets declined from US$112 million in 2005 to US$ 54.4 million mid-2014 (about one tenth of the domestic banking sector).
  - Two licensees restricted to serving members of their own groups; five affiliates of investment advisers deal with advisers’ clients at arm’s length.
  - No linkages between domestic and international financial sectors.

### VULNERABILITIES
- Loan portfolio trends:
  - Bank credit stagnant for several years; recent jump due to a few larger projects.
  - Portfolios more concentrated to the top ten borrowers; concentration limits of 25 percent of capital constrain new bankable projects, especially for locally-owned banks with smaller capital bases.
- Asset quality:
  - System NPLs are 8.3 percent of total loans; all banks above 4 percent, and NPLs are growing.
  - System exhibits high NPL coverage instead of write-offs; some banks carry NPLs accumulated over time and not written off.
  - Asset classification, NPL write-offs, and provisioning policies require further examination, particularly at locally-owned banks.
- Capitalization:
  - Reported capitalization strong; system CAR around 30 percent, most capital high quality Tier 1.
  - Uncertainties remain about whether problem loans are fully accounted and provisioned for.
- Liquidity monitoring:
  - Despite large liquid reserves with the CBS, liquidity positions should be closely monitored and maturity gaps identified.

### FINANCIAL REGULATION AND SUPERVISION
- Mandate and coverage:
  - CBS is principal domestic financial sector supervisor; mandate derived from the CBA, 1984 (Section 4(f) and (g)) and the Financial Institutions Act, 1996 (Section 3).
  - CBS responsible for supervision and regulation of domestic commercial banks and, following legislative amendments, domestic nonbank financial services including insurance companies, PFIs, Money Transfer Operators, and foreign exchange dealers.
  - Supervision and regulation of credit unions intended to be added to CBS responsibilities in the future.
  - Over time, the CBS should supervise all lending, deposit taking, and other financial intermediary institutions (including offshore banks).
- Resource adequacy:
  - CBS current resources are not commensurate to the mandate.
- Supervision approach and gaps:
  - CBS’s Financial Supervision Department aims to conduct Risk-Based Supervision, but gaps in implementation remain.
  - Prudential guidance limited to nine “Prudential Statements” which lack detailed prescriptive internationally-standard guidance.
  - Enforcement powers should be strengthened.

### THE 2007 ASSESSMENT AND SUBSEQUENT DEVELOPMENTS
- Little progress towards implementing 2007 BCP assessment recommendations.
- Disruptions: initiatives by CBS were disrupted by natural disasters and reallocation of limited supervisory resources.
- AML-CFT progress: Samoa upgraded to a “normal reporting” regime by the Asia Pacific Group on Money Laundering (“APGML”) in 2014 from “enhanced reporting.”
- International banking (SIFA): recommendations regarding the international banking sector remain to be implemented.
- Institutional reform view: Over time, supervision and regulation of all financial intermediaries, including offshore banks, should be unified under the CBS.

### MAIN FINDINGS AND RECOMMENDATIONS
- Summary of key structural weaknesses in banking supervision and regulation:
  - Prudential data reporting, including quality of data, needs upgrade; implement new electronic data returns to automate transposition of data for analysis.
  - Planned program of targeted on-site inspections on a two-year cycle was not developed/delivered; on-site inspections should be a priority with near-term focus on locally-owned banks.
  - Full implementation of Risk-Based Supervision required; apparent gaps exist.
  - Supervisory guidance limited to nine “Prudential Statements”; need more detailed prescriptive guidance and strengthened enforcement powers.
  - FIA requires amendments, including:
    - (i) specific powers for the CBS to grant “waivers” on the large exposure limit only where robust analysis indicates appropriateness;
    - (ii) CBS authority to effect change in a bank’s Board and senior management;
    - (iii) provisions regulating “significant shareholder” and related parties;
    - (iv) role of the Court in certain administrative remedial measures, which may obstruct application of such measures.
- Table 1. Key Recommendations (selected items preserved verbatim with timing)
  - Domestic Banking
    - CBS to hire additional staff for financial oversight according to Four Year Plan (¶15) — ST
    - CBS to improve the quality and coverage of data (¶16) — ST
    - CBS to conduct in-depth assessment of balance sheets, including an asset quality review, of potentially vulnerable banks (¶34) — ST
    - CBS to implement risk based supervision in full and conduct regular on-site inspections (¶32, 39) — ST
    - CBS to require banks to report all single exposures which exceed 10 per cent of regulatory capital (¶37) — ST
    - CBS to require half-yearly certification by a bank’s external auditor of the accuracy of prudential returns submitted to CSB (¶38) — ST
    - CBS to require immediate delivery from each bank of a copy of the external auditor’s “Internal Control Memorandum”/ “Management Letter” provided to management at the conclusion of the bank’s annual audit (¶38) — ST
    - CBS to activate regularly the provisions of MOUs with “home” regulators (¶40) — ST
    - CBS to upgrade supervisory guidance to banks, especially in regard to risk management and NPL write-offs (¶41, 11) — MT
    - CBS to source and install a current, standard package for the filing of prudential returns electronically and with analytical functionality (¶36) — MT
    - CBS to seek amendments to the FIA and CBA to support more efficient bank oversight through a set of prompt corrective actions and bank resolution tools (¶30) — MT
  - International Banking
    - Enhance operational independence of SIFA to supervise international banks and remove potential for conflict between SIFA’s promotional and supervisory roles (¶27) — ST
    - Over time the CBS should assume supervision and regulation of all financial intermediaries (¶14) — MT
    - SIFA to publish data on the international banking sector (¶34) — ST
    - SIFA to introduce individual capital requirements based on risk profile and to provide guidance (¶27) — ST
    - SIFA to introduce supervisory guidance to international banks (¶40) — ST
    - SIFA to introduce on-site inspections with an emphasis on asset quality and classification (¶34) — ST
  - Timing legend: Short-term (ST), Medium-term (MT)
- Implementation priorities emphasized:
  - Near-term upgrades to prudential reporting and data systems.
  - Immediate focus on on-site inspections and asset quality reviews for potentially vulnerable banks.
  - Strengthen supervisory guidance, enforcement powers, and legal framework amendments to the FIA and CBA.
  - Over medium-term, unify supervision of all financial intermediaries under CBS and provide SIFA operational independence or transition its functions.

*SAMOA INTERNATIONAL MONETARY FUND*

### 14.      The SIFA is responsible for the supervision and regulation of international financial

### _cr15230 - 14.      The SIFA is responsible for the supervision and regulation of international financial

### Institutional responsibilities and organization
- SIFA
  - Established in 2005 under its own Act.
  - Responsible for supervision and regulation of international financial services and the seven international banks, subject to the International Banking Act, 2005.
  - Supervision and regulation of offshore banks should eventually be moved to the CBS.
- Central Bank of Samoa (CBS)
  - Program of supervision and regulation delivered through the Financial Supervision Department (FSD) of the Financial Soundness Group (FSG).
  - FSG established in context of the CBS’ Strategic Plan (2014–2018).
  - FSG is headed by an Assistant Governor and includes:
    - Supervision and regulation unit;
    - Samoa’s Financial Intelligence Unit (FIU) responsible for AML and CFT issues;
    - Financial System Development Unit responsible for financial inclusion initiatives and development of a national payment and settlement system.
  - FSD staffing:
    - Currently has a staff of six persons after adding two in early 2014.
    - Further additions envisaged in the Department’s Plan for the Year 2014–2015 to deal with expansion of supervisory responsibilities.
  - Supervisory model:
    - Two senior supervisors use a portfolio approach, allocated institutions across categories (commercial banks, insurance companies, PFIs).

### Supervision of domestic banks (processes, gaps, and recent activity)
- Supervisory processes and data
  - Supervision primarily off-site; staff maintain frequent contact with bank counterparts.
  - Senior executive meetings occur “as viewed necessary” rather than on a scheduled format.
  - Banks file weekly, monthly and quarterly returns in “hard copy” and PDF format, originally designed for monetary survey purposes.
  - Portions of data are re-cast on spreadsheets for analysis of banks’ performance and adherence to FIA and CBS “Prudential Statements.”
  - Data quality is uneven.
  - CBS does not routinely obtain external auditors’ “Internal Control Memorandum”/”Management Letter.”
- Prudential guidance
  - Guidance confined to nine “Prudential Statements” issued between 1995 and 1999 and lacks the detailed, prescriptive quality expected by current international supervisory standards.
  - FSD’s Plan for the Year 2014–2015 objective: “Updated Prudential Standards in line with international requirements and global developments.”
- On-site inspection program and implementation
  - A 2007 plan for targeted on-site inspections on a two-year cycle was not fully developed or delivered.
  - On-site inspections:
    - Conducted in 2010 at the two locally-owned banks with strict focus on AML/CFT.
    - Mid-2013: on-site inspections at the four domestic banks focused on credit and liquidity (based on the CBS’ 2000 On-Site Manual) and AML/CFT.
    - FSG plans to conduct on-site inspections of all four domestic banks by June 2015.
  - Staffing constraints noted as a limiting factor for on-site inspection coverage.
- Offsetting factors for large foreign-owned banks (ANZ and Westpac)
  - Annual on-site internal audit by parent organizations; extensive control reporting to regional headquarters (Fiji).
  - Both ANZ and Westpac:
    - Hold identical high credit ratings: Moody’s Short Term P-1 (Stable); Standard & Poor’s Short term A-1+ (Stable).
    - Are listed on the Australian Securities Exchange (ASX) and comply with ASX Corporate Governance Principles and Recommendations.
    - Must comply with APRA governance requirements under Prudential Standards CPS 510 (Governance).
  - CBS is an active member of the APRA-sponsored College of Supervisors for ANZ.
- Risk-Based Supervision (RBS)
  - CBS aims for RBS, but gaps remain in implementation, notably in effective and timely follow-up to close out issues from inspection cycles.
  - Review of mid-2013 on-site inspections revealed instances where follow-up was not achieved.
- Legal and statutory limitations
  - Key deficiencies in the Financial Institutions Act (FIA) affecting supervision:
    - The statute sets out a large exposure limit which CBS has from time to time “waived” without legal capacity to do so.
    - CBS does not have authority to effect change in a bank’s Board and senior management.
    - The statute lacks a definition of “significant shareholder,” the capacity to deem parties related, and the capacity to require deduction of related parties’ exposures from capital when assessing capital adequacy.
    - The statute contemplates involvement of the Court in certain administrative remedial measures, which could obstruct application of such measures.

### Supervision and regulation of international banks (SIFA performance)
- Current practice
  - Supervision and regulation of the seven international banks is minimal.
  - No Prudential Guidance from SIFA exists.
  - Supervision is limited to SIFA’s receipt and filing of a quarterly report and review of audited accounts prior to annual license renewal.
- Concerns identified (from 2007 assessment and still outstanding)
  - Lack of individual capital requirements based on risk profile.
  - Lack of guidance on banks’ risk management.
  - Need to expand on-site inspections emphasizing asset quality and classification.
  - Potential infringement on SIFA operational independence given MoF powers to grant licenses and take supervisory measures.
  - Potential conflict between SIFA’s promotional and supervisory roles.
  - Minimal published data on the international banking sector.

### The 2007 BCP assessment and subsequent developments
- 2007 assessment summary (stand-alone BCP assessment conducted in 2007)
  - Assessment basis: Twenty-Five BCPs (September 1997) and evaluation vs. 2006 BCPs.
  - Domestic banking sector:
    - Seventeen BCPs assessed as “Compliant” or “Largely Compliant.”
    - Four BCPs assessed as “Not Applicable.”
    - Remaining four BCPs assessed as “Materially Non-Compliant.”
  - International banking sector:
    - Twelve BCPs assessed as “Compliant” or “Largely Compliant.”
    - Four BCPs assessed as “Not Applicable.”
    - Of remaining nine BCPs: two “Materially Non-Compliant” and seven “Non-Compliant.”
- Major weaknesses identified in 2007
  - Domestic banks: weaknesses in management of various risks, credit policies, connected lending, large exposures, and corporate governance.
  - International banks: need for on-site inspections, minimum risk-based capital requirements, guidance on risk management and corporate governance.
- Disruptions to reform efforts after 2007
  - Progress disrupted by exogenous shocks (e.g., 2009 tsunami; tropical cyclone Evan in 2012) and diversion of supervisory resources (e.g., development of supervisory regime for PFIs).
  - Progress achieved on AML/CFT matters; Samoa moved to a “normal reporting” regime by the Asia Pacific Group on Money Laundering (APGML) in 2014, reduced from “enhanced reporting.”
- Outstanding 2007 recommendations for domestic banks (examples)
  - CBS should issue more detailed guidance on expected standards for banks’ credit policies and use these to evaluate effectiveness of banks’ systems and controls for credit risk.
  - Collect information on connected lending and use off-site surveillance and on-site inspections to monitor compliance; seek legal power to rule on existence of connected lending.
  - Require Board-approved comprehensive risk management policies for all material non-credit risks including interest rate, market, country and operational risks; assess adequacy during ongoing supervision.
  - Require banks to report all single exposures which exceed 10 percent of capital for monitoring of concentration risk.
- Outstanding 2007 recommendations for international banks (examples)
  - Implement individual capital requirements based on risk profile.
  - Issue guidance on banks’ risk management.
  - Expand on-site inspections with emphasis on asset quality and classification.
  - Address potential governance and independence concerns relating to SIFA and MoF powers; address minimal publication of sector data.

### Main findings and focused recommendations (assessment approach and priorities)
- Assessment approach
  - Compliance assessed according to the September 2012 BCP methodology.
  - Review included authorities’ self-assessment, relevant laws and regulations, and interviews with CBS FSD management and staff, SIFA officials, domestic banks, and private audit firms.
  - Emphasis on supervisor powers, resourcing levels, and need for greater supervisory guidance on risk management.
  - The 2012 methodology adds 39 new assessment criteria (34 “Essential” and 5 “Additional”) and re-categorizes 34 “Additional” criteria from 2006 as “Essential.”
- Selected Core Principle recommendations (high level)
  - Responsibilities, objectives and powers (CP 1)
    - Amend the FIA to:
      - (a) provide CBS legal capacity to waive large exposure limits in appropriate circumstances based on robust analysis;
      - (b) provide CBS power to remove bank Board members and senior executives when warranted;
      - (c) provide a clear definition of a “significant ownership” position and capacity for CBS to deem parties related and require deductions of related parties’ exposures from capital; and
      - (d) provide CBS power to use certain administrative remedial measures by removing prior involvement of the Court.
    - Use the FIA power for issuance of regulations “necessary or expedient for giving full effect to this Act” to set out detailed, prescriptive requirements now covered or omitted by the nine Prudential Statements.
    - Update Prudential Statements (PSs) to include new or improved supervisory requirements on:
      - Policies for controlling credit risk, connected lending, operational risk, interest rate risk, corporate governance and liquidity; and, although not currently material, market and country risks.
  - Independence, accountability, resourcing and legal protection for supervisors (CP 2)
    - Conduct a careful assessment of CBS staffing given increased responsibilities and centralization of supervision.
    - Evaluate sufficiency and technical skills of staffing for bank supervision and seek additional resources if necessary.
    - For the fiscal year ending June, 2015, prioritize on-site inspections of the two locally-owned banks given limited FSD staff.
  - Supervisory approach; Supervisory techniques and tools; Supervisory reporting; Corrective and sanctioning powers (CPs 8–11)
    - Strengthen implementation of Risk-Based Supervision, including timely follow-up on inspection findings.
    - Improve off-site reporting quality and obtain external auditors’ internal control communications as routine supervisory input.
    - Develop and deploy more detailed, prescriptive prudential guidance via regulations and updated Prudential Statements.

*Source: IMF staff assessment text in _cr15230 (chapter/section).*

### 34.      The CBS should engage in an annual program of on-site inspections guided by risk-

### _cr15230 - 34.      The CBS should engage in an annual program of on-site inspections guided by risk-

### On-site inspections; asset quality reviews; scope and target
- The CBS should engage in an annual program of on-site inspections guided by risk-based supervision.
- On-site inspections should target locally-owned banks based on their higher relative riskiness.
- On-site inspections should be used to verify supervisory reports and obtain more information on:
  - classified assets,
  - connected lending, and
  - country exposures.
- To date, only one cycle of prudential inspections has been completed for domestic banks.
- The CBS should conduct an in-depth assessment of balance sheets, including an asset quality review of potentially vulnerable banks, possibly through appointing an experienced external assessor.
- For international banks supervised by SIFA, no prudential inspections have been performed and published data is insufficient.
- The single cycle of prudential inspections on domestic banks completed in 2013 highlighted significant issues with supervisory reporting, especially regarding classified assets and connected lending.

### Current supervisory processes; deficiencies identified
- Historically, the CBS’ bank supervisory processes have been almost exclusively off-site and focused on review of prudential returns and published financial statements.
- The CBS’ current suite of returns includes components filed:
  - weekly: condensed balance sheet and foreign exchange position;
  - monthly: detailed balance sheet with schedules and computation of the bank’s capital adequacy ratios;
  - quarterly: income statement; summary of past due and non-performing loans; schedule of 10 largest borrowers; schedule of credit portfolio and deposits by residual maturity.
- Notably absent is a bank’s liquidity profile showing “gap” positions; this omission should be rectified.
- Review of the on-site inspections conducted in mid-2013 revealed instances where effective—and timely—follow-up to close out issues raised in the supervisory cycle was not achieved.
- It is clear that on-site supervision should play a greater role in the fulfillment of the CBS mandate as bank supervisor; adequate resources should be engaged, including experienced inspection staff from other jurisdictions to act as mentors.

### Information processing and electronic filing
- Information processing from prudential returns needs to be modernized for supervisors to have access to adequate data.
- Returns are filed in “hard copy” and PDF format and data are subsequently recast by the CBS’ staff on spreadsheets for analysis.
- This is a time-consuming process and the CBS should investigate obtaining a standard package for the electronic filing of returns.
- The most recent workshop on RBS was held at CBS in October 2014.12

### Reporting requirements and concentration monitoring
- Banks should be required to report all single exposures over 10 percent of capital.
  - This would include many exposures that fall below the current 25 percent ceiling under the FIA and not captured by the present quarterly return of each bank’s 10 largest borrowers.
  - The present reporting does not provide sufficient information for full and effective monitoring of concentration risk.
- Banks should be required to submit an external auditors’ certificate verifying accuracy of returns to the CBS.
  - This procedure is expressly contemplated by the FIA, but has not been implemented to date.
  - Given past performance of some banks, and any further delay in implementing an on-site inspection program, serious consideration should be given to using this power.
- The CBS should require each bank to deliver a copy of the “Management Letter”/”Internal Control Memorandum” provided to management by the external auditor at the conclusion of the annual audit.

### Risk-Based Supervision (RBS) implementation
- The CBS should address deficiencies in the implementation of Risk-Based Supervision (RBS).
- While CBS supervision staff have drawn benefit from participation in RBS workshops, gaps in full implementation are apparent.
- An Institutional Profile and a Supervisory Plan for each bank is not maintained and, as previously noted, on-site supervision is sporadic.
- Full implementation of RBS requires effective—and timely—follow-up to close out issues raised in the supervisory cycle.
- On-site inspections in mid-2013 revealed inaccuracy in prudential returns, particularly as regards asset quality, provisions for loss and suspension of interest accrual.
- Adequate resources should be engaged for RBS implementation, including experienced inspection staff from other jurisdictions to act as mentors.
- Home/host relationships; (CP13)

### Home/host cooperation (ANZ/APRA memorandum)
- The CBS should regularly activate the provisions of the 5 June 2014 Multilateral Memorandum of Understanding with the APRA regarding ANZ.
- APRA typically organizes conference calls with all relevant host supervisors of Australian banks every three to six months and will provide host supervisors of subsidiaries incorporated in overseas jurisdictions with its assessment of the parent, if requested. Such requests should be made by the CBS.
- APRA’s practice is to invite a representative from the host supervisor to accompany APRA when undertaking an inspection of Australian banks operating in the host supervisor’s jurisdiction; the CBS would draw benefit from accepting the standard invitation if APRA arranges to inspect ANZ's Samoan subsidiary.

### Corporate governance, risk management, internal control and audit (CPs 14-26)
- Banks should be provided with more detailed guidance on corporate governance and risk management; existing guidelines date from 1995–1999 and should be revised to cover omitted areas.
- The CBS should issue more detailed guidance to domestic banks on standards to be observed in individual credit policies; the CBS would then use them to evaluate effectiveness of banks’ systems and controls for managing credit risk.
- Banks should be required to have comprehensive risk management policies, approved at Board level, to identify, evaluate, monitor and control material non-credit risks, including:
  - interest rate risk,
  - market risk,
  - liquidity risk,
  - country risk, and
  - operational risk.
- The CBS should assess the adequacy of these policies and procedures during on-going supervision.
- For international banks, SIFA should develop guidance on all of these standards.
- The CBS and SIFA could benefit from a coordinated review of Prudential Standards already in use by banking supervisors in other countries, underpinned by an appropriate Memorandum of Understanding to guard against inconsistent standards.

### Selected 2007 Detailed Assessment recommendations (excerpted)
- CP 7 Credit Policies (Domestic Banking Sector):
  - CBS should develop a PS setting minimum standards for banks’ own credit policies and verify by on-site inspection that banks adhere to their own approved policies.
  - Banks’ credit policies should contain internal limits for exposures to single counter-parties, groups of closely related borrowers, economic sectors and geographical areas; procedures for approving exposures to persons connected with the bank and internal limits for such exposures.
- CP 10 Connected Lending:
  - CBS should have discretion to make judgments on existence of connections in special circumstances.
  - CBS has not validated compliance with the law or PS 6 via periodic collection of information on connected lending or via on-site inspection.
  - CBS does not require information systems in banks to independently identify, monitor, and administer such exposures.
- CP 11 Country Risk:
  - CBS should consider amending PS 4 and PS 7 to address country and transfer risk and periodically collect information on specific country and transfer risk exposures.
- CP 13 Other Risks:
  - CBS should issue guidance on requirements and expectations for management and control of operational risk and interest rate risk.

- CP 6–14 (International Banking Sector excerpt):
  - CP 6: Minister to issue a regulatory code (s.6 IBA) on capital adequacy.
  - CP 7: Minister and Inspector should develop a regulatory code setting standards for international banks’ credit policies.
  - CP 8: Regulatory code requiring internal systems for loan review, classification and provisioning.
  - CP 9: Regulatory code requiring reporting of all individual exposures exceeding 10 percent of capital and prohibition on single exposures exceeding 25 percent of capital without prior permission from the Inspector.
  - CP 10: Inspector should address lack of prohibitions and governance safeguards regarding connected lending and require information systems to identify, monitor and administer such exposures.
  - CP 11–13: Inspector should issue guidance and verify implementation through periodic collection and analysis of pertinent information and on-site inspections for country, market and other risks.
  - CP 14: Inspector should provide guidance on risk management/internal controls and corporate governance; fully implement on-site examination program covering risk management, internal control, and audit systems.

*Source: _cr15230 - 34. The CBS should engage in an annual program of on-site inspections guided by risk- (PDF).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15230.pdf_