Essential elements of a statement of cooperation between banking supervisors

Introduction

In the course of recent discussions under the auspices of the Financial Stability Institute at the Bank for International Settlements, a number of countries have suggested that there is a need for a statement setting out the essential elements of a Memorandum of Understanding (MOU) or similar document that can be used as a reference for establishing bilateral relationships between banking supervisory authorities in different countries (and, where appropriate, between banking supervisors and other financial regulators).

The attached document presents the essential elements of a statement of mutual cooperation between supervisors. It is intended to provide a framework for an agreement between supervisors, leaving sufficient discretion and flexibility to supervisors to add additional details and responsibilities, if they so wish and upon mutual agreement, when entering into bilateral relationships. The Basel Committee encourages convergence towards this common modality and standard, particularly for countries that are seeking to develop an institutional framework for supervisory cooperation or are in the process of doing so.

The document has been prepared by the Working Group on Cross-border Banking, a working group of the Basel Committee which includes selected members of the Offshore Group of Banking Supervisors. It has also benefitted from comments made by a number of other bank supervisors on an earlier draft circulated in December 2000. In its development, the Working Group started from the proposition established in many Basel Committee documents, going back to the 1975 Basel Concordat, that supervisory authorities need to have a good working relationship with their counterparts in other countries with which they have a cross-border relationship. While communication does not necessarily need to be frequent, there must be a basis of mutual trust and a willingness to share information when the circumstances justify it. There are different ways in which the relationship between the two sets of supervisors can gain expression. Some prefer something akin to a legal document which is drafted by lawyers to provide protection to both parties, while others prefer a simpler and more flexible understanding that can be set out in an informal exchange of letters. The manner in which the understanding is framed will be a matter for the two countries concerned. The essential elements of a statement of mutual cooperation, as attached, can be included in either approach, but experience has shown that supervisors should take care that any statement does not become too prescriptive or they may find themselves constrained in their ability to communicate.

National laws, for example laws designed to protect the legitimate interest of bank customers, may limit the transmission of information between supervisory authorities. Any statement of mutual cooperation along the lines of the attached document cannot override such laws. In agreeing to a statement, each supervisor should inform the other of the existence of any legislative or administrative restrictions on information exchange, and if both sides so wish, these caveats could be detailed in the statement.

It is important that there are no impediments to the flow of information from a cross-border establishment to its parent institution necessary for risk management on a global basis, and for compiling consolidated reports to the home supervisor. Any significant impediments will mean that the parent institution will not be able to conduct effective oversight of its own operations abroad, and should not be operating in that foreign jurisdiction.

The working group also discussed mutual assistance in criminal matters. This is an important area that supervisors must consider. However as it involves obligations arising from non-supervisory legislation, falls within the responsibility of law enforcement agencies, and is often the subject of existing separate bilateral mutual legal assistance treaties or agreements, it is not thought appropriate that this matter should be covered in the attached document.

It is recognised that in certain circumstances, there will be significant costs associated with the provision of assistance, e.g. when a home supervisor requests a host supervisor to carry out specific investigatory and/or enforcement action. Parties to a statement of mutual cooperation may therefore wish to refer in the statement to the circumstances when cost-sharing arrangements might be applicable.