Three Basle Committee Papers on Sound Risk Management
October 7, 1998
Circular No. 11097

To All State Member Banks, Bank Holding Companies, and Branches and
Agencies of Foreign Banks, in the Second Federal Reserve District:

I. Enhancing Bank Transparency (pdf);

II. Operational Risk Management (pdf)

The following is from a statement by the Board of Governors of the Federal Reserve System:

As part of its ongoing work to improve risk management standards in banks, the Basle Committee on Banking Supervision (Basle Committee) has issued two papers, entitled Enhancing Bank Transparency and Operational Risk Management.

The first paper, on bank transparency, gives guidelines to banks and bank supervisors on public disclosures in bank financial reports. The paper recommends that banks make meaningful disclosure in six broad areas: financial performance; financial position (including capital, solvency and liquidity); risk management strategies and practices; risk exposures (including credit risk, market risk, liquidity risk, and operational, legal and other risks); accounting policies; and basic business, management and corporate governance information. The Basle Committee strongly recommends that banks address these categories in their financial reports and other disclosures to the public. Within each broad area, significant detail in disclosures may be required, depending in part on the institution's activities.

The second paper, on operational risk management, makes public the results of recent interviews with major banks in the G-10 countries on their management of operational risk. The purpose of these interviews was to assess the current state of art of operational risk management. The survey results indicate that, while senior management's awareness of operational risk has been increasing, most banks are only in the early stages of developing a framework for measuring and monitoring operational risk. The Basle Committee intends to continue monitoring developments in this area.

The text of these reports can be obtained from the Bank of International Settlements (BIS) Web Site on the Internet. They are also available from the Basle Committee's Secretariat at the BIS and from the Basle Committee member bank supervisory authorities and central banks.

III. Framework for Internal Control Systems

The Board also issued the following statement:

As part of its ongoing work to improve risk management standards in banks, the Basle Committee on Banking Supervision (Basle Committee) has issued a paper entitled Framework for Internal Control Systems of Banking Organisations. In this paper, the Basle Committee presents the first internationally accepted framework for supervisors to use in evaluating the effectiveness of the internal controls over all on- and off-balance-sheet activities of banking organizations. The paper describes elements that are essential to a sound internal control system, recommends principles that supervisors can apply in evaluating such systems, and discusses the role of bank supervisors and external auditors in this assessment process. It also comments on the lessons learned from recent internal control failures.

The internal control framework described in the paper is designed for international banking organizations. The guidance is broadly consistent with the Committee of Sponsoring Organizations of the Treadway Commission (COSO) document, Internal Control - Integrated Framework, that is extensively used by larger U.S. banks. The paper is being distributed to supervisory authorities around the world, to banks and to other interested parties.

The paper was previously issued as a proposal for public comment in January 1998 [see Circular No. 11026]. Prior to this proposal, the Basle Committee's guidance had discussed internal controls in specific areas of bank activities, such as interest rate risk and trading and derivatives activities.

The Basle Committee's press release and the paper can be obtained from the Internet or from the Basle Committee Secretariat at the Bank of International Settlements.

Questions on any of these papers may be directed, at this Bank, to Christine M. Cumming, Senior Vice President.