The Basle Committee Issues a Framework for Internal Control Systems in Banking Organisations
22 September 1998
As part of its ongoing efforts to encourage sound risk management practices in banks, the Basle Committee on Banking Supervision today issued a framework for internal control systems in banks. The paper sets out thirteen principles covering the essential elements of a sound internal control system. These include: management oversight and the control culture, risk recognition and assessment, control activities and segregation of duties, information and communication, monitoring activities and correcting deficiencies, and evaluation of internal control systems by supervisory authorities. The principles are intended to be of general application and the Basle Committee recommends that supervisory authorities use them in assessing their own supervisory procedures for monitoring how banks structure their internal control systems.
Mr. William J. McDonough, Chairman of the Basle Committee and President of the Federal Reserve Bank of New York, stated that "the Basle Committee has been focusing on ways of strengthening internal controls at banks in recognition of the fact that internal control deficiencies continue to be a source of major problems and significant losses for banks globally. This framework is intended to assist both banks and bank supervisors in strengthening internal control procedures."
The guidance was prepared by the Basle Committee's Risk Management Sub-group, which is co-chaired by Mr. Roger Cole, Associate Director at the Board of Governors of the Federal Reserve System and Ms. Christine Cumming, Senior Vice President at the Federal Reserve Bank of New York. The paper was previously issued for consultation in January 1998 and now incorporates comments received from bank supervisors and the banking industry.
Mr. Cole, while acknowledging that the exact approach chosen by individual supervisors will depend upon an array of factors including their on-site and off-site supervisory techniques, stated that "these principles cover the critical components of an internal control system and should be used by banking supervisors to assess the adequacy and effectiveness of internal control systems at individual banking organisations." Mr. Cole stated that an analysis of past problems at several major banking organisations indicated that they could have been avoided had the banks maintained effective internal control systems. Mr. Cole emphasised that "in developing these principles, the Committee has drawn on the lessons learned from problem bank situations in individual member countries."
The publication of this paper forms part of the Basle Committee's work to promote effective banking supervision and safe and sound banking systems. These recommendations complement the Basle Core Principles, which outline the minimum requirements for a supervisory system in any country to be effective and were issued by the Basle Committee in September 1997.
Mr. McDonough further stated that "this paper is the culmination of lessons learned from sometimes painful experiences with weak internal control systems at individual banks. I am certain that the principles contained in this paper will assist banks and supervisors around the world in improving internal control standards and minimising problems related to weak controls."
22nd September 1998
Notes for editors
The Basle Committee on Banking Supervision
The Basle Committee on Banking Supervision is a Committee of banking supervisory authorities which was established by the central bank Governors of the Group of Ten countries in 1975. It consists of senior representatives of bank supervisory authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States. Its current chairman is Mr. William J. McDonough, President of the Federal Reserve Bank of New York. The Committee usually meets at the Bank for International Settlements (BIS) in Basle, where its permanent Secretariat is located.
The Risk Management Sub-group
The Risk Management Sub-group was established by the Basle Committee on Banking Supervision in 1996, with the mission to develop guidance for supervisors and encourage sound industry practices across a broad range of risk management and internal control topics.. The Sub-group carries out this task by identifying issues and developing guidance. Where appropriate, the work of the group is framed as sound practices for the industry as well as supervisors. The Sub-group consists of supervisory experts on risk management and internal controls from the member institutions of the Basle Committee. The Sub-group is co-chaired by Mr. Roger Cole, Associate Director at the Board of Governors of the Federal Reserve System and Ms. Christine Cumming, Senior Vice President at the Federal Reserve Bank of New York.
A system of effective internal controls is a critical component of bank management and a foundation for the safe and sound operation of banking organisations. It is explained in the paper that internal control is a process effected by the board of directors, senior management and all levels of personnel. It is not solely a procedure or policy that is performed at a certain point in time, but rather it is continually operating at all levels within the bank. The board of directors and senior management are responsible for establishing the appropriate culture to facilitate an effective internal control process and for monitoring its effectiveness on an ongoing basis; however, each individual within the organisation must participate in the process.
Internal control recommendations
This guidance presents a framework that the Basle Committee encourages supervisors to use in evaluating the internal controls over all on- and off-balance sheet activities of banks and consolidated banking organisations. It is based on thirteen principles covering the essential elements of a sound internal control system, which include: management oversight and the control culture, risk recognition and assessment, control activities and segregation of duties, information and communication, monitoring activities and correcting deficiencies, and evaluation of internal control systems by supervisory authorities.
To whom is the report useful?
The report should be useful to banks as an indication of what banking supervisors will expect from their internal control systems. Banking supervisors can use the principles to assess the adequacy and effectiveness of internal control systems at individual banking organisations. Other international groups discussing internal control issues may also find the report useful.
Where can I obtain the full report?
The text of the report, "Framework for Internal Control Systems in Banking Organisations", can be obtained from the BIS Web site on the Internet at http://www.bis.org as from noon (BST) on 22nd September. It is also available from the Basle Committee's Secretariat at the BIS and from member bank supervisory authorities and central banks.