The Basel Committee of the Bank for International Settlements recently issued “Guidelines for identifying and dealing with weak banks,” which discusses the supervisory tools that should be available to banking supervisors to help them identify and deal with weakness at banking organizations, including the ultimate weapon of closure and resolution.1 This column will compare the general supervisory tools U.S. bank regulators have to identify and address weakness at U.S. banking offices of non-U.S. banks (branches and agencies) to the guidelines.2

The Guidelines

The guidelines are aimed at providing practical advice in dealing with “weak banks” and replace a 2002 publication on the same topic. The guidelines define a “weak bank” as “one whose liquidity or solvency is impaired or will soon be impaired unless there is a major improvement in its financial resources, risk profile, business model, risk management systems and controls, and/or quality of governance and management in a timely manner.” The guidelines emphasize early identification and intervention to prevent escalation of problems that could ultimately result in the closure and liquidation of the bank.

What are the signs of a weak bank, aside from a deteriorating financial condition? They include poor governance or management, inadequate capital and liquidity, a non-viable business model or strategy, weak asset quality and poor systems and controls. Bank supervisors must implement a risk-based supervisory approach that includes on-site bank examinations coupled with off-site reviews, regular financial reporting by banks and ongoing assessments of a bank's business models, corporate governance, risk management, information systems, stress testing and resolution plans. Additionally, supervisors should be interacting on a regular basis with senior bank management and board members, external auditors, and international supervisors. Any supervisory rating system on the safety and soundness of the banks under their supervision should result in a report highlighting a comprehensive forward-looking picture of the bank, and its principal strengths, weaknesses and risks.