The Australian Prudential Regulation Authority (APRA) today released its self-assessment of the prudential supervision of Australian banks against the Basel Committees Core Principles for Effective Banking Supervision.

Background

In 1997, the Basel Committee on Banking Supervision (BCBS) released the Core Principles for Effective Banking Supervision. These Principles provide an internationally accepted benchmark against which the quality of banking supervision systems can be assessed. The Principles have been developed and refined by the BCBS (which comprises the central banks and bank supervisory agencies of the G10 countries) in co-operation with supervisors from non-G10 countries. APRA is represented on the working group that developed the Principles.

APRAs assessment is intended to provide a critical self-assessment of the Australian system of banking supervision. APRA believes that, particularly at this stage of its development, it is desirable to subject its supervisory practices to scrutiny against internationally accepted benchmarks. Full compliance with the Basel Principles is in no way mandatory, but where areas of deficiency or difference are detected, these can be examined and, where necessary, changes to the supervisory framework can be made.

The Core Principles

There are two elements to the Core Principles. The first is macroeconomic/macroprudential in character and requires a broad assessment of the so-called Preconditions for Effective Banking Supervision. In the absence of these fundamental preconditions - sound and sustainable macroeconomic policies, a well-developed public infrastructure, effective market discipline, and mechanisms for protecting systemic stability - no system of banking supervision is likely to achieve its objective of institutional safety.

The second element is the 25 Core Principles. These represent the agreed set of high-level Principles against which systems of prudential supervision can be measured and assessed. The Core Principles Methodology provides 227 detailed criteria to aid the assessment; these criteria were finalised by the BCBS at the end of 1999.

The Self-Assessment for Australia

Our assessment is that Australia meets all of the Preconditions.

Measured against the 25 Core Principles, Australias supervisory system scores a high level of compliance.

There are only two areas where banking supervision practices in Australia could be said to fall short:

• the absence of a formal fit and proper test for bank directors and management. However, the need for such a test has been recognised by APRA as part of its review of conglomerate supervision, and it plans to introduce a more formal approach in the near future; and
• the lack of supervisory oversight given to the small number of foreign banks operating as merchant banks in Australia. This situation arises from historical circumstances, originating in the era when foreign bank entry was less open than it is today, and foreign banks wishing to conduct largely wholesale business in the Australian market were permitted to do so without a banking authority.

Overall, the self-assessment demonstrates that Australias system of banking supervision is strong.

APRAs CEO Graeme Thompson said, While the assessment shows that there are areas where improvements can be made, in many cases the issues involved are relatively minor. The overall picture is of a system of supervision that is well placed to protect the safety of our strong and dynamic banking system, without unduly interfering with competition, innovation and efficiency gains. We believe that Australias system of banking supervision stands up well against international standards.

APRAs self-assessment can be found on the APRA website ( http://www.apra.gov.au/policy/).

For further information contact:

Mr Brian Gray
Executive General Manager
(02) 9210 3160

Mr Wayne Byres
General Manager, Risk Analysis & Research
(02) 9210