## _sifisup ## Source details **Canonical URL:** [_sifisup](https://www.imf.org/-/media/websites/imf/imported-publications/external/np/mcm/financialstability/papers/_sifisup.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-publications/external/np/mcm/financialstability/papers/_sifisup.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-publications/external/np/mcm/financialstability/papers/_sifisup.pdf.json) --- ### Mandates - Purpose: Supervisory intensity must be commensurate with the potential destabilization risk that SIFIs pose domestically and internationally; recommendations aim to make supervision of financial institutions more intense, effective and reliable. - Key recommendations: - All jurisdictions should self-assess against all sections of Principle 1 in the current Basel Core Principles (BCPs). Deficiencies and intended corrective action should be reported in a letter to the FSB chair (and shared with FSB members) by the end of June 2011. Implementation could be subject to future peer reviews. - Insurance supervisors should self-assess against equivalent IAIS Core Principles (“ICPs”) within 6 months of their date of issue (expected to be October 2011). Deficiencies and corrective action plans should be outlined in a letter to the FSB chair and shared with FSB peers. - Consider expanding BCP 1 (and possibly BCPs 19, 20 or 23) to: - express a need for early intervention as an element of the supervisor’s mandate; and - expand on what is meant by “clear” when describing an authority’s responsibilities and objectives. Action suggested by the end of December 2011. - IAIS should consider enhancing the relevant ICP relating to mandates by incorporating appropriate references currently in the ICP 2 explanatory note. - Findings: - Mandates that explicitly support active early intervention facilitate a culture where supervisors have the will to act early. - Early intervention often lacks tangible risk indicators, complicating persuasion of firms and boards. - Mandates may contain conflicting elements (e.g., promoting local market attractiveness, consumer protection, AML) that can distract from prudential supervision; organisational separation of accountability/resources is recommended. - BCPs should expand on mandate clarity and caution that additional urgent responsibilities should not unduly draw focus away from primary safety and soundness objectives. ### Independence - Key recommendations: - Consider expanding BCP 1(2) to provide more guidance on features and structures that support operational independence and to expand criteria for assessment. - Guidance to cover: circumstances for referral of key decisions to government; prohibition on supervisory agencies managing enterprises they supervise; prohibition on boards of supervisory agencies having directors who represent the industry. - Guidance on funding models to preserve budgetary autonomy and allow agencies to establish their own budgets and line elements, with full transparency. - Guidance on accountability structures that backstop operational independence and budgetary autonomy. - Findings: - IMF-World Bank FSAP assessments reveal a high incidence of failure; more than a third of countries do not comply with operational independence requirements. - Assessors face challenges concluding independence because industry or political influences are often subtle and minimal guidance exists on good practices and assessment. - Supervisory independence is critical, especially when mandates include politically unpopular countercyclical powers. - SIFIs often exert greater influence on supervisory outcomes, making independence more challenging. - True independence in oversight and supervision of financial institutions is a prerequisite for financial stability. ### Resources - Key recommendations: - Consider expanding BCP Principle 1 related to core resources (Principle 1(1), additional Criteria 1) to expressly note that resource allocation must consider systemic risks posed by banks and to reflect that for SIFIs there is a minimum acceptable level of annual work that should not be breached. - Supervisors should regularly (at least annually; on a rolling basis) assess existing skills and projected requirements short- to medium-term and implement measures to bridge gaps (flexible hiring, secondments to industry or other supervisory agencies). - Findings and observations: - Funding sources vary: many supervisory agencies are within central banks; others rely on industry fees, government budgets, or combinations. - An industry-fee model is viewed as preferable to government budgets because it may guarantee more stable funding over the cycle and shield agencies from fiscal vacillations; in some countries fee caps create independence issues. - Several supervisory agencies faced sharp budget cuts during times of high expectations and need for skilled resources. - Comparison of supervisory resources applied to a SIFI ranges from a low of 14 people to a high of over 100; many cases fall roughly in the range of 40 to 50 supervisors per SIFI. - The “will to act” is generally agreed to be a better precondition for effectiveness than sheer team size. - Trade-offs between hiring private-sector specialists (insider perspective, costly) and internally developed supervisors (stronger questioning attitude) are observed. - Agencies should maintain prudent reserve capacity; overly tight and inflexible resource planning creates risks. - New areas require specialized resources globally (e.g., continuous monitoring of pillar 1 and pillar 2 models); globally coordinated training programs resourced jointly could help. ### Supervisory Powers - Recommendation: Consider expanding the list of required supervisory powers in BCP 23 EC 4, 5 and 6 (corrective and remedial powers of supervisors) to include a fuller inventory of tools needed since the crisis. - Tools cited as needed: increased liquidity requirements, large exposure limits, imposing dividend cuts, requiring additional capital, and ensuring a full comprehensive supervisory view of a firm. - Actions and timelines: - Action suggested by the end of December 2011. - All jurisdictions should self-assess against the tools noted above; deficiencies and intended corrective action should be reported in the same letter to the FSB chair by the end of June 2011. - Findings: - Failures in BCP 23 are relatively frequent in FSAP assessments. - There should be zero tolerance for authorities operating without an adequate suite of powers. ### Improved Techniques — focus areas and recommendations - Focus on Outcomes: - Recommendation: Supervisory authorities should determine whether risk assessment frameworks focus enough on risk outcomes and align risk assessments against stress test outcomes (e.g., verify that business lines rated as low risk show outcomes that support this in stress tests). - Finding: Pre-crisis supervisors often emphasized processes and characteristics over outcomes, leading to over-estimation of risk management effectiveness. - Horizontal Reviews: - Recommendation: Consider expanding BCP 19 and BCP 20 to discuss horizontal reviews and good practices; FSB should develop means to share broad, thematic results of domestic horizontal reviews within the FSB Peer Review Council. - Guidance for effective horizontal reviews: - Use experts to perform reviews. - Carefully select peer groups. - Ensure detailed understanding of products and risks. - Execute and communicate results timely; prefer parallel execution. - Seek global perspectives for SIFIs, including peer authorities or third parties. - Establish communication regimes for boards, CEOs, and where appropriate peer firms. - Use simple horizontal outlier analysis on readily available reports as a practical tool. - Assessment of Boards: - Recommendation: Consider developing expanded BCBS guidance on assessing board effectiveness with tools such as pre-appointment interviews, mandatory director training, periodic one-on-one director interviews, supervisor observation of board meetings, and regular supervisor–board communications including in camera sessions with non-executives at least once a year. - Finding: A well-functioning board is critical; effectiveness often becomes apparent only after stress, so proactive supervisory tools are needed. - Financial Statement Analysis: - Recommendation: Consider expanding BCP 19 and BCP 20 to enhance supervisory use of financial analysis, especially at business line level, to detect trends, actual risk appetite, excess yields, and strategy shifts. - Finding: Few supervisors set aside time for detailed financial statement analysis when planning work. - Business Models and Product Analysis: - Recommendation: Consider expanding BCP 19 and BCP 20 to cover business model assessment and product-oriented risk analysis, and require firms to monitor post-approval alterations to new products with re-application of approval where needed. - Finding: Crisis experience shows supervisors and firms often did not understand product-embedded risks; supervisors must decompose innovations and perform transaction testing in areas showing abnormal growth or yields. - Quantitative Models outside Pillar 1: - Recommendation: Given lack of BCBS standards for approving quantitative models outside pillar 1 and their pervasiveness, consider addressing these models more fully in international guidance. - Findings: Model usage is pervasive at SIFIs; supervisors may under-appreciate extent and often emphasize initial approvals over continuous monitoring. - Stress tests: - Recommendation: The FSB encourages the BCBS to conduct a peer review against the May 2009 Basel Committee paper titled “Principles for sound stress testing practices and supervision”. - Findings: - Use of stress testing has increased; partnered approaches between supervisors and firms (including reverse stress testing and common scenario development) would strengthen risk identification. - Firms must integrate data systems; years of underinvestment have created critical gaps. - Expectations for controls in SIFIs will be higher; firms should invest now to meet future standards. - Data aggregation and supervisory data needs: - Recommendation: Supervisors should study data needs and processing capabilities for SIFI supervision and address deficiencies in i) type of data collected, ii) ability to process data in a timely and fulsome way, or iii) ability to collect ad-hoc data in a timely manner. - Findings: - Collection, monitoring and analysis of data is critical; significant variation exists in quantity and type of data collected. - Purposes for data include identifying risk areas for future exams, stress testing, replicating bank stress tests, provision adequacy analysis, monitoring rating migrations, back-testing supervisory risk assessments, and performing peer comparisons of pillar 1 risk quantification. - Data has not typically been used to analyze interconnectedness, though movement in that direction exists. - Granularity is critical; highly processed feeds can create blind spots. Direct access to a SIFI's MIS is advantageous in some jurisdictions. - Supervisors report push-back and road blocks when requesting more data, including requirements for cost-benefit analyses that cause delays. - State-of-the-art controls and risk management: - Recommendation: National supervisors should set a “higher bar” for internal controls at SIFIs, including risk appetite, data aggregation, and managing complexity. - Findings: - Supervisors must push SIFIs to higher control standards; legacy information system enhancements are costly and often downsized, contributing to aggregation problems. - Assessing effectiveness of risk management is challenged by absence of tangible loss; global supervisory work is needed. ### Continuous and Comprehensive Supervision - New product approval and post-approval controls: - Finding: Business lines sometimes materially alter product designs post-approval, changing key features and risk profiles. - Recommendation: Firms should introduce more rigidity in risk control processes for considering changes to new products after initial approval. - Group-wide and consolidated supervision: - Recommendation: All national authorities should prepare a detailed self-assessment against BCP 24 (all ten essential criteria and three additional criteria), develop action plans to fill gaps and produce a letter to the FSB Chairman covering shortcomings, plans and timelines by June 2011. For insurance supervisors, a similar process should occur after IAIS revised ICPs are issued. - Recommendation: Consider elevating additional criteria 1,2 and 3 in BCP 24 (consolidated supervision, host country supervision quality assessment, supervision of foreign locations) to essential criteria for SIFIs. - Findings: - Group-wide supervision covers the financial group including non-regulated entities; consolidated supervision covers the consolidated top entity. - “Blind spots” and impediments arise when supervisors lack legal rights to review group entities or when multiple authorities fragment supervision. - At least one major crisis failure traced to group-wide supervision failures; these are frequent FSAP findings. - Artificial barriers to full supervision must be removed. - Continuous communication, supervisory organization, and escalation: - Recommendation: Authorities should codify a comprehensive communication regime for frequent senior-level communication between supervisors and firms, and maintain less formal regimes for specialist areas (credit, market, operations risk). - Recommendation: Organizational structures should allow SIFI supervisory team leads direct access to the most senior personnel in the supervisory authority. - Findings: - Contact was often event-driven and at lower levels; thematic material discussions did not always reach senior managers. - A “don’t escalate bad news” culture impeded timely awareness of material issues. - Continuous communication at senior levels is necessary to spot developing trends. - Industry feedback programs have improved communication and supervisory processes in some jurisdictions. - Supervisory colleges and home/host information sharing: - Recommendation: Standard setters should continue work on supervisory colleges and home/host information sharing. By end 2012, BCBS Standards Implementation Group and the IAIS should study the effectiveness of improvements to supervisory colleges, potentially including feedback from home supervisors, host supervisors, and supervised firms’ participants. - Findings: - Cross-border relationships did not work as well as possible during the crisis; supervisory colleges remain an evolving tool. - Colleges can lead to stronger bi-lateral and multi-lateral relationships and more joint reviews; concerns exist about size and effectiveness for very large international firms. ### Macro-prudential surveillance and multi-disciplinary approach - Key recommendations: - Supervisory authorities must have a well developed macro-prudential surveillance approach to identify trends that might negatively impact firms’ risk profiles. - The approach should be endorsed by all government stakeholders, provide consultation/coordination, identify market and industry information sources, articulate a regular communication regime, and incorporate multidisciplinary expertise (credit, market, operations risk). - The approach must regularly inform senior management within the supervisory authority and should generate senior-level communication between firms and the supervisor where appropriate. - Consider elevating additional criteria 1 in BCP 19 (that supervisory approach be forward-looking) to essential criteria for SIFIs. - Failures observed: - Some authorities lacked forward-looking surveillance functions or failed to integrate multidisciplinary views and risk interconnections leading up to the crisis. - Insufficient engagement with non-banks and active market players limited supervisors’ views of developing trends. - Multi-disciplinary evaluation: - Supervisors should fully capture measurement of risk, interconnections among risks, and correlations in dynamic market conditions. - Cross-jurisdictional surveillance: - Surveillance systems should account for regulatory changes abroad and assess relevance to domestic conditions. - The joint FSB and IMF work ‘The Financial Crisis and Information Gaps’ advances efforts in this area. ### Use of Third Parties, auditors, and assessment practices - Third parties: - Recommendation: Consider altering BCP 20 to avoid implying complete outsourcing of onsite work to third parties is an acceptable substitute for supervisors’ own work. - Recommendation: Use of third parties should be supported by supervisory assessment of whether outputs can be relied upon; consider biases influencing third parties. - Practical guidance: Reliance on third parties requires supervisory scepticism, clear expectations, and proportional supervisory work to validate third-party outputs. - Observed deficiency: External auditors rarely proactively contacted supervisors with matters of material significance during the crisis. - Accounting and disclosure: - Recommendation: Consider elevating additional criteria 2 in BCP 22 (duty of external auditors to report matters of material significance to supervisors) to essential criteria for all firms. - Recommendation: Heads of national authorities should prepare a letter to heads of SIFI external auditors reminding them of BCP 22 expectations and maintain regular contact with regulators of auditing firms. - Assessment against core principles: - Recommendation: For countries with global SIFIs, assessment of additional criteria during FSAPs should be mandatory; failure to comply should be considered in final country assessments. - Recommendation: The FSB should prepare a status report for members before year-end 2011 on whether further steps are needed to implement or complement these recommendations. - Recommendation: Between FSAP reviews (approximately 2-3 years after a review), supervisory authorities should prepare formal self-assessments against standard setters’ core principles, which may be peer reviewed globally; the head of the supervisory authority should send a letter to the FSB Chairman outlining results and planned measures and make that letter available to FSB peers. ### Appendix A — distilled actions by thematic area (selected timelines and actions) - Mandates: - Self-assess against BCP Principle 1; report by the end of June 2011. - Insurance supervisors to self-assess against ICPs within 6 months of issue (expected October 2011). - Consider expanding BCP 1 and related BCPs to incorporate early intervention and clearer mandate definitions; action suggested by the end of December 2011. - Independence: - Expand BCP 1(2) guidance on operational independence, budgetary autonomy, access to skilled staff and accountability structures. - Resources: - Expand Principle 1 on resource allocation to address systemic risk and minimum acceptable annual SIFI work; supervisors to assess skills at least annually. - Supervisory Powers: - Expand required powers in BCP 23 (EC 4, 5, 6); self-assess and report deficiencies by end of June 2011; action suggested by end of December 2011. - Improved Techniques: - Focus on outcomes, horizontal reviews, board assessment, financial statement analysis, business model/product analysis, models outside pillar 1, stress tests (BCBS peer review of May 2009 paper), data aggregation, and raising control expectations for SIFIs. - Group-wide and Consolidated Supervision: - Self-assess against BCP 24 (all ten essential criteria and three additional criteria), develop action plans, and produce a letter to the FSB Chairman by June 2011; consider elevating additional criteria 1,2 and 3 to essential criteria. - Continuous and Comprehensive Supervision: - Codify comprehensive communication regimes, ensure SIFI supervisory leads have direct access to senior authority personnel, and maintain specialist informal regimes. - Supervisory Colleges and Home/Host: - Continue standard setter work; BCBS Standards Implementation Group and the IAIS to study effectiveness of supervisory college improvements by end 2012. - Macro-prudential surveillance: - Develop forward-looking, multidisciplinary surveillance approaches endorsed by government stakeholders and integrated with senior-level supervisory communication. - Third parties and auditors: - Limit wholesale outsourcing of supervisory work; assess third-party outputs for biases; consider elevating auditor reporting duties in BCP 22. *Prepared by the FSB in consultation with the IMF, 2 November 2010.* ### 1. Mandates ........................................................................................................... ### _sifisup - 1. Mandates ### I. Introduction and purpose - After the financial crisis, the FSB and the G20 Leaders prioritized more intense and effective supervision of systemically important financial institutions (SIFIs). - Supervisory intensity must be commensurate with the potential destabilization risk that SIFIs pose domestically and internationally. - The report sets out recommendations to make supervision of financial institutions more intense, effective and reliable, drawn from an internationally co-ordinated assessment of lessons from the crisis. ### Policy changes and supervisory role - Basel III and other policy changes are key to reducing probability and impact of SIFI failure, but policy changes alone are not sufficient. - Determining capital sufficiency is both quantitative and judgmental; one-size-fits-all minimum capital requirements are insufficient given unique institution risk profiles. - Supervisors must maintain a balance between institutions’ risk-taking and appropriate capital; stronger supervision of SIFIs in good times as well as bad is necessary to support policy changes. - Supervisory failure to achieve appropriate risk assessment/capital requirement balance contributed to loss of confidence among counterparties, funds providers and investors. - Excessive capital requirements could drive risk to less regulated entities. ### Making the recommendations enduring - Standard setters (including the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors) should review these supervisory recommendations and consider implementation to ensure national authorities subject large systemically important firms to effective and sufficiently intense supervision. - Standard setters should consider applicability to lesser systemic institutions that could become systemic. - Some recommendations refer to the Basel Core Principles (“BCPs”); other standard setters should assess how their core principles address the issues noted. - Supervisory authorities must adopt a “through the cycle” mentality and resist leniency during economic serenity. - The FSB (via peer review processes) and the IMF-World Bank (through FSAP work) will play important roles in preventing reversion in supervisory intensity and effectiveness. ### II. Findings — summary (10 points) - The report summarizes findings in 10 points; Annex “A” contains a summary of recommendations. - The content provided here details findings and recommendations on Mandates, Independence, and Resources. ### 1. Mandates — findings and recommendations - Recommendation: All jurisdictions should self-assess against all sections of Principle 1 in the current Basel Core Principles (BCPs). Deficiencies identified and intended corrective action should be reported in a letter to the FSB chair (and shared with FSB members) by the end of June 2011. Implementation could be subject to future peer reviews. - Recommendation: Insurance supervisors should self-assess against equivalent IAIS Core Principles (“ICPs”) within 6 months of their date of issue (expected to be October 2011). Deficiencies and corrective action plans should be outlined in a letter to the FSB chair and shared with FSB peers. - Recommendation: Consideration should be given to expanding on BCP 1 related to independence and mandates, and possibly BCPs 19, 20 or 23, to: - express a need for early intervention to be an element of the supervisor’s mandate; and - expand on what is meant by “clear” when describing an authority’s responsibilities and objectives. Action suggested by the end of December 2011. - Recommendation: The IAIS should consider enhancing the relevant ICP that relates to mandates by incorporating appropriate references on mandates that are currently in the ICP 2 explanatory note. - Findings/analysis: - Mandates geared toward active early intervention facilitate a culture where supervisors have the will to act early. - Early intervention often lacks tangible risk indicators, making it difficult to convince firms and boards that measures are necessary. - Mandates may contain multiple elements (e.g., promoting local market attractiveness, consumer protection, AML) that can conflict with core prudential supervision; where such elements exist, organisational structures should separate accountability and resources to mitigate distraction from core supervision. - BCPs should expand on mandate clarity and suggest that additional urgent responsibilities should not unduly draw focus away from primary safety and soundness objectives. ### 2. Independence — findings and recommendations - Recommendation: Consideration should be given to expanding on BCP 1(2) to provide more guidance on features and structures that support operational independence and expand criteria for assessment. - Example criteria to consider: circumstances under which key decisions on individual companies may be referred to government; supervisory agencies should not manage or run enterprises they supervise; boards of supervisory agencies should not have directors who represent the industry. - Guidance on funding models that preserve budgetary autonomy and allow agencies to establish their own budgets and line elements, with full transparency, should be provided. - Guidance should include desirable features of accountability structures that backstop operational independence and budgetary autonomy. - Findings/analysis: - IMF-World Bank FSAP assessments reveal a high incidence of failure in this area; more than a third of countries do not comply with operational independence requirements. - Assessors face challenges concluding whether supervisory agencies are independent because industry or political influences are often subtle and minimal guidance exists on good practices and assessment. - Supervisory independence is critical, especially when mandates broaden to include countercyclical powers (e.g., more conservative underwriting standards, raising capital requirements) that may be politically unpopular. - SIFIs often have greater influence on supervisory outcomes, rendering independence more challenging. - True independence in oversight and supervision of financial institutions is a prerequisite for financial stability. ### 3. Resources — findings and recommendations - Recommendation: Consideration should be given to expanding on BCP Principle 1 related to core resources. Specifically Principle 1(1), additional Criteria 1 on resource allocation, should expressly note that resource allocation must consider systemic risks posed by banks and should reflect that for SIFIs, there is a minimum acceptable level of annual work that should not be breached. - Recommendation: As part of annual resource planning, supervisors should regularly (at least annually; on a rolling basis) take stock of existing skills and projected requirements over the short to medium term and review and implement measures to bridge gaps in numbers and/or skill-sets. Measures could include more flexible hiring policies, schemes for secondment of staff to industry, or other supervisory national/international agencies to provide access to specialist skills on a temporary basis and opportunities for supervisory staff to better understand industry practices. - Findings/analysis: - Funding sources vary: many supervisory agencies are within central banks (access to more stable funding), while others rely on industry fees, government budgets, or combinations. - A model based on industry fees is seen as preferable to government budgets because it may guarantee more stable funding over the cycle, allow supervisory services to be priced and adjusted, and shield agencies from fiscal vacillations. In some countries, fees that can be levied are decided or capped by ministry or parliamentary formulae, creating independence issues. - Several supervisory agencies have seen budgets cut sharply as part of broad civil service cost reduction initiatives, at a time of high expectations and need for skilled resources. - Comparison of supervisory resources applied to a SIFI varies widely: - Per SIFI, resource allocation ranges from a low of 14 people, to a high of over 100. - Many cases fall roughly in the range of 40 to 50 supervisors per SIFI. - The “will to act” is generally agreed to be a better precondition for effectiveness than sheer team size. - Hiring specialist skills from the market provides insider perspectives; internally developed supervisors may offer stronger questioning attitudes. Views are polarized and anecdotal. - Hiring private sector expertise is costly and some agencies may lack budgetary flexibility to acquire needed expertise. - Agencies should maintain prudent reserve capacity because resource planning that is too tight and inflexible creates risks. - New areas require specialized resources globally, such as continuous monitoring of models used by SIFIs (both pillar 1 and pillar 2 models); globally co-ordinated training programs resourced jointly could help meet these needs. *Prepared by the FSB in consultation with the IMF, 2 November 2010.* ### 4. Supervisory Powers ### 4. Supervisory Powers ### Recommendation: expand required supervisory powers - Consideration should be given to expanding the list of required supervisory powers in BCP 23 EC 4, 5 and 6 which cover corrective and remedial powers of supervisors. - Since the crisis, the need for tools such as increased liquidity requirements, large exposure limits, imposing dividend cuts, requiring additional capital etc. have come to the forefront. - Given that a full suite of powers is critical to a supervisor executing their role, the inventory of required tools should be updated. - For action suggested by the end of December 2011. - All jurisdictions should self-assess against the tools noted above. - Deficiencies identified and the intended corrective action should be reported in the same letter to the FSB chair referenced in Section 1 of this report covering mandates, by the end of June 2011. - The FSB discussions revealed that not all supervisors have the range of powers (i.e. full set of tools) needed to impel change. These include an inability to: - require more capital or liquidity, - cut dividends, - have a full comprehensive supervisory view of a firm. - Failures in BCP 23 covering corrective and remedial powers of supervisors are relatively frequent in FSAP assessments. - There should be zero tolerance in the global supervisory community for authorities who are operating without an adequate suite of powers. ### 5. Improved Techniques — overview - Since the crisis, supervisors are reassessing supervisory approaches and making changes based on lessons from these events. - The FSB group identified several areas where improvements to existing supervisory techniques are being made or should be made in different jurisdictions. - Work in all of these areas is important so supervisors globally can benefit from a unified work effort and broader spectrum of experiences for national supervisory framework redesign. ### Key areas for consideration — Focus on Outcomes - Recommendation: Supervisory authorities should determine whether their frameworks for risk assessment focus enough on the risk outcomes that result from the processes which are being evaluated. - This includes looking at trends in the quality of outcomes and checking and aligning risk assessments against stress test outcomes (i.e. do business lines rated as low risk show outcomes that support this assessment in stress tests?). - Post-crisis concern: some supervisors focused risk assessments more on processes and characteristics than outcomes (governance, risk management processes, credit approvals, board oversight, capital adequacy) without enough analysis confirming outputs produced risk profiles and exposures consistent with supervisory expectations. - Example: prior to the crisis many SIFI's risk management processes had been assessed acceptable, yet they presided over falling underwriting standards, poor risk/reward decisions and increasing complexity. - Supervisors need to analyze whether processes are likely to produce outcomes within banks' risk appetite and whether that risk appetite is acceptable for a regulated institution. ### Key areas for consideration — Horizontal Reviews - Recommendation: Consideration should be given to expanding BCP 19 and BCP 20 on supervisory approach and supervisory techniques respectively, with greater discussion of horizontal reviews and good practice around their use. - Recommendation: The FSB should develop a means for the broad, thematic (i.e. not sensitive firm specific) results of domestic horizontal reviews involving one or more SIFIs to be shared within the FSB Peer Review Council so peer supervisors can consider comparisons and supervisory issues receiving attention in other countries. - Definition: A horizontal review is performed across many institutions around a common subject to reveal the range of practice among firms. - Two output angles: - relative firm-by-firm ranking to determine lagging firms and areas needing attention, and - group angle to determine whether industry practice as a whole is strong enough to address embedded risks. - Both supervisors and industry participants find horizontal reviews valuable: supervisors can use peer comparisons to prompt firm action; boards and senior management find understanding industry practice helpful to assess control quality. - Observations to make horizontal reviews more effective: (1) The highest quality output comes from ensuring that people with expert knowledge are used to perform the review. (2) The choice of the peer group can have an impact on the quality of the review outcome. Supervisors should carefully consider which firms are chosen and why. (3) To assess broad current practice within industry against ideal practice requires a detailed understanding of the products under consideration and the risks associated with those products. (4) Timeliness of execution and communication back to firms is key. When possible these reviews should be performed in parallel or near parallel fashion. The sequential execution of reviews over a long period of time dampens the results. (5) When reviewing a SIFI or a group of SIFIs within a single jurisdiction, authorities should seek a global perspective, including peer authority or third party firms with a broader perspective. (6) Authorities should have an established communication regime for horizontal reviews addressing the need for assessments to go to the firms’ board, the CEO and where appropriate some higher level aggregated information provided to peer firms so they can gain from thematic lessons learned. (7) The thematic results of horizontal reviews performed within a national jurisdiction can be beneficial to the global supervisory community, especially as it relates to SIFIs. Forums for communication of thematic information (not firm specific) should be considered by the FSB. (8) Horizontal reviews need not always be grand undertakings. Simple horizontal outlier analysis on readily available firm reports can provide helpful supervisory insight. Some supervisors are not as aware as they should be of what information is submitted to the national authority by firms. Simple analysis of these reports, including trends and peer comparisons, can help spot potential risk areas and better target future work. ### Key areas for consideration — Assessment of Boards - Recommendation: Consideration should be given to developing expanded BCBS guidance to supervisors on how to assess a board with the goal of better tools and techniques to determine board effectiveness. - A well functioning board is critical. The BCBS document “Principles for enhancing corporate governance” provides important guidance on board structure and responsibilities. - The true effectiveness of a board is often only apparent after a major stress event; supervisors need proactive tools to ensure corrective action before severe losses materialize. - In absence of tangible evidence of effectiveness, supervisors may default to evaluating board characteristics and processes rather than robust evaluations of effectiveness. - Approaches discussed by the FSB to improve board effectiveness: (1) subjecting prospective directors to comprehensive interviews by the supervisory authority before joining the board; (2) requiring mandatory training sessions for directors relating to the duties, roles and responsibilities of a SIFI board member; (3) periodically interviewing each director individually to assess how informed and proactive they and their peers have been; (4) having supervisors attend and observe SIFI board meetings (one country example); (5) ensuring regular communication with boards to discuss the most recent supervisory findings including recurring meetings with the full board as well as in camera discussions with non-executive members at least once a year (many are starting this practice while others are considering it). - Other observations: some countries are establishing rules on director independence, maximum terms, and separation of chair and CEO. - Supervisors are using board interactions to assess whether institutions are “too complex to manage” and whether directors understand complexities and can assure understanding of firm risk-taking and management. - More focus is needed on the board’s role in setting risk appetite and monitoring whether business lines operate within that appetite. ### Key areas for consideration — Financial Statement Analysis - Recommendation: Consideration should be given to expanding BCP 19 and BCP 20 to include greater discussion of the use of financial analysis and enhancement of supervisory practices around type and depth of financial analysis to inform supervisory risk assessments. - Over time supervisors emphasized frameworks evaluating control environment possibly at the expense of financial statement analysis. - Financial statement analysis, especially at business line level, provides deeper understanding of developing trends: - business line income statement analysis can reveal areas of growth and indicate actual risk appetite versus stated risk appetite, - can show where excess yields imply excess risk-taking, - can indicate changes in firm strategy, - expected versus actual comparisons can give clues about a bank’s ability to achieve strategic goals. - Few supervisors set aside time for detailed financial statement analysis when planning work. ### Key areas for consideration — Business Models and Product Analysis - Recommendation: Consideration should be given to expanding BCP 19 and BCP 20 on supervisory approach and techniques to cover business model assessment and product oriented risk analysis, guiding supervisors to better understand risks embedded in banks’ business models and product design. - BCPs should reflect the need for supervisors to ensure firms have processes to monitor post-approval alterations to new products which may alter risk profiles; in such cases the firm’s new product approval process should be re-applied. - The crisis revealed many banks and supervisors did not understand risks embedded in products. This partly reflects oversight functions and national supervisors not keeping pace with business line innovations. - SIFIs constantly innovate; supervisors must decompose innovations into component parts and deeply analyze them to understand true risks. - This can be done at product introduction (new product approval) or via ongoing transaction testing where transactions in targeted businesses (i.e. businesses showing abnormal growth or yields) are randomly selected and decomposed by the supervisor. - Such analysis arms supervisors with better tools to challenge business-line risk taking and risk reporting into oversight structures. *Source: _sifisup - 4. Supervisory Powers* ### Section 7 of this report titled “Continuous and Comprehensive Supervision” will be greatly ### Continuous and Comprehensive Supervision ### New product approval and post-approval controls - Finding: In some firms, business lines made material alterations to a product’s design post-approval — sometimes to exploit the original approval, other times through a series of small changes that cumulatively produced a product with quite different key features and risk profile versus what was initially understood by oversight functions. - Recommendation: In some cases there should be more rigidity within a firm’s risk control processes for considering changes to new products subsequent to their initial approval. ### Quantitative models outside Pillar 1 - Recommendation: There are no BCBS standards for approving quantitative models outside of pillar 1. Given the pervasiveness of their use, consideration should be given to addressing quantitative models more fully in international guidance. - Findings: - The FSB noted that the usage of computational models at SIFIs is pervasive and often a distinguishing feature of a SIFI. - Supervisors may not be fully aware of the extent of model usage in SIFIs. - Models commonly reviewed by supervisors include models used in the calculation of pillar 1 capital charges, models used for valuations in capital markets businesses, and models used in the approval of credits. - Models have many benefits but also many risks and limitations; quantitative models may be “over-relied-upon” in many SIFIs. - Supervisory focus has sometimes emphasized initial model approvals at the expense of continuous monitoring after approval. - Effective challenge of model reliance requires high functioning risk and control systems and processes within firms. ### Stress tests - Recommendation: The FSB encourages the BCBS to conduct a peer review against the May 2009 Basel Committee paper titled “Principles for sound stress testing practices and supervision”. - Findings and recommendations: - Use of stress testing has increased; many firms and supervisors have made progress in enhancing stress testing tools and developing system-wide stress test programs. - A partnered approach between supervisors and firms to stress testing (including system-wide reverse stress testing and common scenario development) would strengthen identification of future risks. - Supervisors should consider two assessment items for firms: - (i) Firms must put greater effort into integrating data systems given their critical role in risk monitoring and oversight reporting; years of underinvestment have culminated in a critical need for improvement in many large institutions. - (ii) Expectations for controls in SIFIs will be higher in the future; firms should make adjustments and investments now to meet future higher standards. - Supervisors should communicate that much of the effort in these areas falls on firms to meet higher expectations that supervisors and the public have for SIFIs. ### Data aggregation and supervisory data needs - Recommendation: Supervisors should study their data needs and data processing capabilities in the context of the higher requirements for SIFI supervision. Where there are deficiencies in any or all of i) the type of data collected, ii) the authority’s ability to process the data in a timely and fulsome way, or iii) their ability to collect ad-hoc data in a timely manner, these should be addressed as soon as possible. - Findings: - Collection, monitoring and analysis of data is a very important component of SIFI supervision. - Significant variation exists in the quantity and type of data collected and utilized by supervisors. - Purposes for which data is used include: - (1) identifying risk areas for future examinations; - (2) doing stress tests to determine whether capital is adequate; - (3) replicating the bank’s own stress tests to challenge outcomes; - (4) analyzing the adequacy of provision levels; - (5) monitoring portfolio risk rating migrations; - (6) back testing the supervisory risk assessment; - (7) performing peer comparisons of pillar 1 risk quantification. - Note: Data has not typically been used to analyze interconnectedness but there is movement in that direction. - Wide variation exists in internal IT systems used by authorities to query and analyze supervisory data. - Supervisors report push-back and road blocks when asking for more data, including requirements for cost-benefit analyses, which can cause harmful delays. - Granularity of data is critical: highly processed feeds carry the same blind-spots as the institution; more granular feeds allow supervisors to perform detailed analysis and rapid responses to emerging issues. - Direct access to a SIFI's MIS is available in some jurisdictions and is advantageous because it provides real time, accurate information; regulatory returns can be delayed and error-prone. - Supervisors are concerned that post crisis the ability to request new data will become much more difficult. - Supervisors also recognized that requiring a great deal of data can be problematic if it is not used. - Peer analysis is common, but peer groupings are challenging; size is often used as a proxy for peers but may give false comfort. - Firm peer analysis on a global basis will be enhanced by the work underway as a result of the joint FSB and IMF Report to the G-20 Finance Ministers and Central Bank Governors on October 29, 2009 titled ‘The Financial Crisis and Information Gaps’, which contained 20 recommendations for strengthening data collection and information provision. ### State-of-the-art controls and risk management - Recommendation: National supervisors should consider how their supervisory frameworks set internal control expectations for SIFIs, and they should be confident that the assessment criteria for the control environment at SIFIs set a “higher bar” for these firms to achieve in the areas of internal controls given the potential systemic impact that they pose. - Findings and guidance: - Higher control expectations should include risk appetite, data aggregations, and complexity. - Historically, supervisors were often satisfied if a SIFI’s control environment was described as satisfactory; since the crisis, SIFIs must be pushed to strive for a much higher level of control. - Supervisors should consider more stringent SIFI assessment criteria regarding setting and monitoring of risk appetite, aggregating data to feed risk control and oversight functions, and making complex firms more able to be overseen by boards and supervised by authorities. - One major area of expected resistance is requests for SIFIs to enhance legacy information systems to aggregate risk exposures within very short time windows; such enhancements are costly and have been downsized or cancelled in the past, contributing to the existing data aggregation problems. - How higher expectations are achieved depends on the structure of the supervisory framework within each authority. - Assessing effectiveness of risk management is challenged by the absence of tangible loss; supervisors globally struggle with this assessment and more international work is needed. ### Group-wide and consolidated supervision (context and related recommendations) - Recommendation: All national authorities should prepare a detailed self-assessment against BCP 24 (all ten essential criteria and three additional criteria), develop action plans to fill any identified gaps and produce a letter to the FSB Chairman (to be shared with FSB peers) covering the shortcomings, plans to correct and timelines for completion by June 2011. As it relates to insurance supervisors, once the IAIS has issued their revised ICPs that will apply for supervision of insurers at the legal entity and group level, a similar process should take place (see time lines in Section 1 of this report titled Mandates). - Recommendation: Consideration should be given to elevating additional criteria 1,2 and 3 in BCP 24 covering consolidated supervision, to essential criteria given the importance of these issues for SIFIs. These criteria address group-wide supervision, assessing the quality of host country supervision, and the supervision of foreign locations. - Findings: - Group-wide supervision concerns supervision of a financial group including group structure, constituent entities (including non-regulated entities) and interrelationships. - Consolidated supervision focuses on the total of individual entities consolidated at the top financial or holding company and applying prudential oversight across the consolidated entity. - “Blind spots” can arise when supervisors lack legal rights or ability to review group entities including non-regulated entities, or when entities within a regulated firm are outside the consolidated supervisor’s access or influence. - Competing mandates and approaches among multiple supervisory authorities can fragment supervisory efforts. - At least one of the largest failures in the crisis can be traced to failures in group-wide supervision; such failures are a frequent finding in FSAP assessments. - Standard setters in all industries must keep group-wide supervision a top priority. - Authorities need to assess impediments to full consolidated supervision, including impairments to information gathering in the entire entity and material affiliates, and impairments created when multiple supervisory authorities oversee a firm. - Artificial barriers to full supervision must be removed to avoid primary supervisors being unable to properly discharge their duties. ### Continuous communication, supervisory organization, and escalation - Recommendation: All supervisory authorities should develop and codify a comprehensive communication regime which calls for frequent communication between senior levels of supervisory authorities and firms to ensure that information flows between industry and regulators on a continuous basis. In addition, a less formal but equally important regime must be developed and maintained between the authority and the firm in areas of specialized expertise including credit, market and operations risk. - Recommendation: The organizational structure of supervisory authorities should reflect the importance of SIFI institutions, allowing SIFI supervisory team leads direct access to the most senior personnel in the supervisory authority. - Findings: - Contact between supervisors and firms — especially at senior levels — was often event-driven and occurred only after problems appeared; ongoing relationships were often handled at lower levels. - Thematic, material discussions did not always take place; information to senior managers was sometimes fragmented or incomplete, exacerbated by a “don’t escalate bad news” culture at junior levels in firms or supervisors. - In some cases most discussion between firms and supervisors focused on immaterial issues while material thematic discussions did not occur. - Continuous communication at all levels, particularly senior levels, is necessary for supervisors to spot developing trends in markets, industry, and supervised firms — in both good and bad times. - Industry feedback programs have been successful in some jurisdictions to identify communication and supervisory process problems and improve relationships with firms. ### Supervisory colleges and home/host information sharing - Recommendation: The work of the standard setters should continue in the area of Supervisory Colleges and Home/Host information sharing. In addition, the FSB recommends that by end 2012, the BCBS Standards Implementation Group and the IAIS individually engage in efforts to study the effectiveness of the improvements made to supervisory colleges, which may include feedback from home supervisors, host supervisors, and members of the supervised firm who participated. - Findings: - Cross-border relationships did not work as well as they could have during the crisis; the FSB’s work on cross-border crisis management plans will help address shortcomings. - Supervisory colleges are an important but relatively new tool and continue to improve as jurisdictions become more comfortable with the process. - Colleges should lead to stronger bi-lateral and multi-lateral relationships and more joint reviews by home/host supervisors. - Concern exists that for very large and broadly based international firms, core colleges could be too large to be effective and there may be too many colleges when considering core, regional, and crisis management meetings. *Source: Section 7, “Continuous and Comprehensive Supervision” (excerpt) from the supplied IMF FSB report content.* ### 9. Macro-prudential surveillance, Multi-disciplinary approach (forward looking) ### _sifisup - 9. Macro-prudential surveillance, Multi-disciplinary approach (forward looking) ### Forward-looking macro-prudential surveillance — key recommendations and objectives - Recommendation: Supervisory authorities must have a well developed macro-prudential surveillance approach which is designed to identify trends and developments that might negatively impact the risk profile of its firms. - Recommendation: The approach should be endorsed by all government stakeholders, provide for consultation and coordination with those stakeholders, identify the key sources of market and industry information, articulate a regular communication regime with those sources and take into account the expertise of all of its various disciplines (credit, market, operations risk) when assessing that information. - Recommendation: This approach must regularly inform the senior management team within the supervisory authority and where appropriate should generate senior level communication between firms and the supervisor. - Recommendation: Consideration should be given to BCP 19 on supervisory approach; in particular whether additional criteria 1 outlining that the supervisory approach should be forward-looking, should be elevated to essential criteria and possibly expanded given the importance of this issue for SIFIs. ### Failures observed leading up to the crisis — surveillance shortcomings - Leading up to the crisis, the forward looking surveillance functions at some supervisory authorities were either non-existent or failed to work. - Key reasons included: - a lack of such a function or the failure to bring together multidiscipline views and understand the correlations between risks (credit risk, market risk, operational risk, economic trend analysis, supervisory findings). - insufficient frequent discussions with active players in the market including non-banks, limiting the fuller view of developing trends and underlying causes. - Supervisors need awareness of both firm-level trends and macro-prudential trends within the banking industry and the broader environment. - To achieve this, supervisors need links to central banks’ analyses and stress tests, and processes to interact with market players to obtain broader pictures of trends which may not be obvious. ### Multi-disciplinary evaluation and risk interconnections - Supervisors should evaluate information from a multi-disciplinary angle, taking into account opinions of experts in economic, credit, capital markets, operational risk, etc. - It is critical these assessments fully capture: - the measurement of risk, - the interconnections among risks, - the correlations in dynamic market conditions. ### Cross-jurisdictional surveillance and information sharing - Surveillance systems should account for changes being made in other national jurisdictions (for example, changes to lending regulations elsewhere). - Supervisors in other countries should take note of those changes, the reasons behind them, and assess whether similar conditions exist in their own jurisdiction that might present a need for change. - The joint FSB and IMF work titled ‘The Financial Crisis and Information Gaps’ is identified as advancing global efforts in this area. ### Use of Third Parties (Section 10) — recommendations and cautions - Recommendation: Consideration should be given to altering BCP 20 related to supervisory techniques to avoid implying that complete outsourcing of onsite work to third parties is an acceptable substitute for work performed by a supervisor’s own resources. - Recommendation: Use of third parties for specially commissioned examinations should be supported by a supervisory assessment of whether the output can be relied upon to the degree intended; assessments should take into consideration the biases that influence third parties. - Recommendation: Consideration should be given to BCP 22 on accounting and disclosure; in particular whether additional criteria 2 outlining the duty of external auditors to report matters of material significance to supervisors, should be elevated to an essential criteria for all firms. - Recommendation: The heads of national authorities should prepare a letter to the heads of SIFI external auditors reminding them of the expectations outlined in BCP 22. National authorities should have regular contact with the regulators of auditing firms to exchange experiences and concerns. - Practical guidance: - Any reliance on or use of the work of third parties must be viewed with some scepticism, yet the use of third parties cannot and should not be avoided. - Supervisors must manage risks from third-party loyalties to industry and have clear communication of expectations before engagement. - The amount of work to get comfort with the third party should reflect the degree to which a supervisor relies on that work in making supervisory judgments. - Observed deficiency: During the crisis, there appeared to be very few, if any, instances where external auditors proactively contacted supervisors to report matters of material significance even though some may have been present. ### Assessment Against Core Supervisory Principles — systemic and procedural recommendations - Observation: FSB group discussions revealed supervisory failures in some cases to conform to Core Principles for Effective Supervision; in other cases, essential criteria were met but additional criteria for SIFIs remained critical. - Recommendation: For countries with global SIFIs, the assessment of additional criteria during FSAPs should be mandatory as it relates to the supervision of those SIFIs, and failure to comply with those additional criteria should be considered in the final assessment of the subject country. - Recommendation: The FSB should continue to discuss the special needs and challenges of SIFI supervision. This group should before year-end 2011 prepare a status report for members on whether further steps should be taken to implement or complement the recommendations set out in “Intensity and Effectiveness of SIFI Supervision”. - Recommendation: Between FSAP reviews (approximately 2-3 years after a review), supervisory authorities should prepare a formal self-assessment against the standard setters’ core principles, which may in turn be peer reviewed on a global basis. - The head of the supervisory authority should prepare a letter to the FSB Chairman outlining the results of these self-assessments and the measures planned to correct any gaps. - That letter should be made available to their FSB peers. ### Appendix A — distilled actions by thematic area - 1. Mandates - Recommendation: All jurisdictions should self-assess against all sections of Principle 1 in the current Basel Core Principles (BCPs). - Deficiencies and intended corrective action should be reported in a letter to the FSB chair by the end of June 2011. - Insurance supervisors should self-assess against IAIS Core Principles (ICPs) within 6 months of their date of issue (expected to be October 2011); deficiencies and corrective actions to be outlined in a letter to the FSB chair. - Recommendation: Consider expanding BCP 1 related to independence and mandates, and possibly BCPs 19, 20 or 23, to express: i) a need for early intervention as element of supervisor’s mandate; and ii) expand on what is meant by “clear” when describing authority responsibilities and objectives. Action suggested by the end of December 2011. - Recommendation: IAIS should consider enhancing the relevant ICP relating to mandates by incorporating appropriate references currently in the ICP 2 explanatory note. - 2. Independence - Recommendation: Consideration to expand BCP 1(2) to provide more guidance on key features and structures supporting operational independence and to expand criteria for assessment. - Possible criteria: under what circumstances key decisions on individual companies be referred to government; supervisory agencies should not manage/run enterprises they supervise; boards of supervisory agencies should not have directors who represent the industry. - Guidance to flesh out appropriate budgets promoting budgetary autonomy, access to skilled staff, technology and outside resources, and accompanying accountability structures. - 3. Resources - Recommendation: Consider expanding BCPs, in particular Principle 1 related to core resources. Principle 1(1) additional Criteria 1 on resource allocation should expressly note that resource allocation must consider systemic risks posed by banks and should reflect that for SIFIs there is a minimum acceptable level of annual work that should not be breached. - Recommendation: Supervisors should regularly (at least annually; on a rolling basis) take stock of existing skills and projected requirements short- to medium-term, and implement measures to bridge gaps (flexible hiring, secondments to industry or national/international supervisory agencies). - 4. Supervisory Powers - Recommendation: Consider expanding the list of required supervisory powers in BCP 23 EC 4, 5 and 6 (corrective and remedial powers). Tools cited as needed since the crisis: increased liquidity requirements, large exposure limits, imposing dividend cuts, requiring additional capital. - Action suggested by the end of December 2011. - Recommendation: All jurisdictions should self-assess against the tools noted above and report deficiencies and corrective actions in the same letter to the FSB chair by the end of June 2011. - 5. Improved Techniques - Focus on Outcomes - Recommendation: Supervisory authorities should determine whether frameworks for risk assessment focus enough on risk outcomes and should “true up” risk assessments against stress test outcomes (e.g., do business lines rated low risk show outcomes that support this in stress tests?). - Horizontal Reviews - Recommendation: Consider expanding BCP 19 and BCP 20 to discuss use of horizontal reviews and good practice around their use. - Recommendation: The FSB should develop a means for broad, thematic (not sensitive firm-specific) results of domestic horizontal reviews involving one or more SIFIs to be shared within the FSB Peer Review Council. - Assessment of Boards - Recommendation: Consider developing expanded BCBS guidance to supervisors on how to assess a board to better determine board effectiveness. - Financial Statement Analysis - Recommendation: Consider expanding BCP 19 and BCP 20 to discuss financial analysis and enhance supervisory practices around type and depth of financial analysis to inform risk assessments. - Business Models and Product Analysis - Recommendation: Consider expanding BCP 19 and BCP 20 to cover business model assessment and product-oriented risk analysis, guide supervisors to understand risk in business models and product design, and require firms to monitor post-approval alterations to products with re-application of the new product approval process where needed. - Quantitative Models outside Pillar 1 - Recommendation: Given no BCBS standards for approving quantitative models outside of pillar 1 and their pervasiveness, consider addressing quantitative models more fully in international guidance. - Stress tests - Recommendation: The FSB encourages the BCBS to conduct a peer review against the May 2009 Basel Committee paper titled “Principles for sound stress testing practices and supervision”. - Data Aggregation - Recommendation: Supervisors should study data needs and data processing capabilities for SIFI supervision and address deficiencies in i) type of data collected, ii) ability to process data in a timely and fulsome way, or iii) ability to collect ad-hoc data timely. - State of the Art Controls including risk management - Recommendation: National supervisors should consider how frameworks set control expectations for SIFIs and ensure assessment criteria reflect a “higher bar” for internal controls at SIFIs given their potential systemic impact. - 6. Group-wide and Consolidated Supervision - Recommendation: All national authorities should prepare a detailed self-assessment against BCP 24 (all ten essential criteria and three additional criteria), develop action plans to fill gaps and produce a letter to the FSB Chairman covering shortcomings, plans and timelines by June 2011. - Recommendation: Consider elevating additional criteria 1,2 and 3 in BCP 24 (covering consolidated supervision, host country supervision quality assessment, and supervision of foreign locations) to essential criteria given importance for SIFIs. - 7. Continuous and Comprehensive Supervision - Recommendation: All supervisory authorities should develop and codify a comprehensive communication regime calling for frequent communication between senior levels of supervisory authorities and firms to ensure continuous information flows between industry and regulators. - Recommendation: Develop and maintain a less formal regime between the authority and the firm in areas of specialized expertise including credit, market and operations risk. - Internal requirements: Supervisor’s internal communication regime should express need for escalation of issues vertically and horizontally, and aggregation of interactions into thematic conclusions for senior consideration. - Recommendation: Organizational structure of supervisory authorities should reflect importance of SIFI institutions, allowing SIFI supervisory team leads direct access to the most senior personnel in the supervisory authority. *Source: _sifisup - 9. Macro-prudential surveillance, Multi-disciplinary approach (forward looking).* ### 8. Supervisory Colleges, Home/Host ### 8. Supervisory Colleges, Home/Host ### Supervisory Colleges and Home/Host information sharing - Recommendation: The work of the standard setters should continue in the area of Supervisory Colleges and Home/Host information sharing. - Recommendation: In addition to this, the FSB recommends that by end 2012, the BCBS Standards Implementation Group and the IAIS individually engage in efforts to study the effectiveness of the improvements made to supervisory colleges which may include feedback from the home supervisors who conduct the sessions, as well as host supervisors and members of the supervised firm who participated. ### Macro-prudential surveillance, Multi-disciplinary approach (forward looking) - Recommendation: Supervisory authorities must have a well developed macro-prudential surveillance approach which is designed to identify trends and developments that might negatively impact the risk profile of its firms. - Key features this approach should include: - It should be endorsed by all government stakeholders, provide for consultation and coordination with those stakeholders. - Identify the key sources of market and industry information, articulate a regular communication regime with those sources. - Take into account the expertise of all of its various disciplines (credit, market, operations risk) when assessing that information. - This approach must regularly inform the senior management team within the supervisory authority and where appropriate should generate senior level communication between firms and the supervisor. - Recommendation: Consideration should be given to BCP 19 on supervisory approach; in particular whether additional criteria 1 outlining that the supervisory approach should be forward-looking, should be elevated to essential criteria and possibly expanded given the importance of this issue for SIFIs. ### Use of Third Parties - Recommendation: Consideration should be given to altering BCP 20 related to supervisory techniques. Specifically, the principle might be read to imply that the complete outsourcing of onsite work to third parties is an acceptable substitute for work performed by a supervisors own resources. In the case of SIFIs, this presumption would be met by a great deal of discomfort in supervisory circles. - Recommendation: Use of third parties for specially commissioned examinations should be supported by a supervisory assessment of whether the output can be relied upon to the degree intended. These assessments should take into consideration the biases that influence third parties. - Recommendation: Consideration should be given to BCP 22 on accounting and disclosure; in particular whether additional criteria 2 outlining the duty of external auditors to report matters of material significance to supervisors, should be elevated to an essential criteria for all firms. - Recommendation: The heads of national authorities should prepare a letter to the heads of SIFI external auditors reminding them of the expectations outlined in BCP 22. In addition, national authorities should have regular contact with the regulators of auditing firms to exchange experiences and concerns. ### Concluding Recommendations - Recommendation: For countries with global SIFIs, the assessment of additional criteria during FSAPs should be mandatory as it relates to the supervision of those SIFIs. Furthermore, failure to comply with those additional criteria should be considered in the final assessment of the subject country. - Recommendation: The FSB should continue to discuss the special needs and challenges of SIFI supervision. This group should before year-end 2011 prepare a status report for members on whether further steps should be taken to implement or complement the recommendations set out in “Intensity and Effectiveness of SIFI Supervision”. - Recommendation: Between FSAP reviews (approximately 2-3 years after a review), supervisory authorities should prepare a formal self assessment against the standard setters’ core principles, which may in turn be peer reviewed on a global basis. - The head of the supervisory authority should prepare a letter to the FSB Chairman outlining the results of these self assessments and the measures planned to correct any gaps. - In the spirit of transparency, that letter should be made available to their FSB peers. ### Appendix B — Senior line supervisors that contributed to producing this report - Chair Julie Dickson — Superintendent, Office of the Superintendent of Financial Institutions, Canada - Australia: Heidi Richards — General Manager, Diversified Institutions Division, Australian Prudential Regulatory Authority - Brazil: Luiz Maranhão de Mello — Head of Division, Department of Supervision of Banks and Banking Conglomerates, Central Bank of Brazil - Canada: Karen Badgerow-Croteau — Senior Director, Deposit Taking Group, Office of the Superintendent of Financial Institutions (OSFI) - China: Hui Ding — Deputy Director, Banking Supervision Department I, China Banking Regulatory Commission - Germany: Frauke Menke — Executive Director of Banking Supervision, Bundesanstalt für Finanzdienstleistungsaufsicht (Bafin) - Germany: Sven Deckers — Director (Head of Section) Major and Foreign Banks, Bundesanstalt für Finanzdienstleistungsaufsicht (Bafin) - Italy: Luigi Federico Signorini — Head of the Banking Groups Supervision Department, Bank of Italy - Japan: Toshiyuki Miyoshi — Director, Supervisory Planning Office, Financial Services Agency - Japan: Akito Konagaya — Deputy Director, Supervisory Planning Office, Financial Services Agency - Korea: Hunsuk Rhee — Deputy Director General, International Cooperation, Financial Services Commission (FSC) - Korea: Kyeongmo Koo — Deputy Director/Bank Department, Financial Supervisory Services (FSS) - Korea: Suh Jae Hong — Deputy Director, International Finance Division, Financial Services Commision (FSC) - Singapore: Teo Swee Lian — Deputy Managing Director, Financial Supervision, Monetary Authority of Singapore - Spain: Alberto Calles — Head of Division, Supervision General Directory, Bank of Spain - Switzerland: Daniel Zuberbühler — Vice Chairman of the Board, Swiss Financial Market Supervisory Authority (FINMA) - UK: Clive Adamson — Director Major Retail Groups, Financial Services Authority - UK: Mandy Spink — Head of UK Banking Groups Department, Financial Services Authority - USA: Philip Aquilino — Assistant Director, Banking Supervision and Regulation Division, Board of Governors of the Federal Reserve System - USA: Mike Brosnan — Deputy Comptroller, Office of the Comptroller of the Currency - Basel Committee on Banking Supervision (BCBS): José Maria Roldán — (Director General of Banking Regulation, Bank of Spain) - Basel Committee on Banking Supervision (BCBS): Ben Gully — (Managing Director, Conglomerate Division OSFI Canada) - Basel Committee on Banking Supervision (BCBS): Julian Adams — Standards Implementation Group, BCBS (Director, Financial Services Authority UK) - International Monetary Fund (IMF): Aditya Narain — Advisor, Monetary and Capital Markets Department - International Association of Insurance Supervisors (IAIS): Yoshihiro Kawai — Secretary General - Financial Stability Board Secretariat: Kent Andrews — Advisor Supervisory Policy and Practices *Source: _sifisup - 8. Supervisory Colleges, Home/Host* --- _Source: https://www.imf.org/-/media/websites/imf/imported-publications/external/np/mcm/financialstability/papers/_sifisup.pdf_