V. Study the following text and make up a plan, covering all crucial points

Perhaps the most detailed aspect of the legal framework should be on-going prudential requirements and prohibited or restricted activities which are designed to help ensure safety and soundness.

· An on-going capital requirement calling for a minimum ratio ensures a minimum level of capital is maintained as a bank grows.

- Traditional on-going capital requirements are simple gearing or leveraging ratios where eligible capital, as defined, must equal or exceed a set percentage of assets or deposits;

- A more modern and complex approach is to base the ratio on tiers of capital relative to a risk weighted total of both on and off-balance sheet items.

· A liquidity requirement, while not ensuring that sufficient liquidity is maintained for all circumstances, forces banks to hold a specified percentage of deposit categories in certain liquid assets, as defined.

· The supervisor should also have the authority to approve, or at least be satisfied with, the level of provisions (especially for bad debts) before annual accounts are finalized.

- This can be done through consultation with the external auditor and/or bank management and through submission of year-end reports on the status of risk assets and off-balance sheet exposures;

- A second option is to base this judgment on results of on-site examinations, including follow-up reports submitted on large classified assets.

· A legal lending limit sets the maximum exposure, through various types of credit facilities, a bank can make to one borrower or a related group of borrowers. The limit is usually expressed as a percentage of the bank's total capital.

- The limit may vary based on the type of security provided, if any, and the nature of the ties between affiliated or otherwise related borrowers;

- This safeguard can be severely diluted in value if the legal framework allows for various exceptions or exemptions from the limit;

- The Central Bank should have the authority to determine what constitutes a grouping of related borrowers for purposes of this limit and the length of time allowed for an excess exposure to be disposed of or reduced to within the limit.

· Limitations on credit facilities to bank directors and their interests, executive officers, and in some cases, staff, are intended to prevent abuse through excessive lending to “insiders”.

- Limits can either be expressed in maximum monetary amounts or as a percentage of bank capital;

- Policies may be established by the supervisor to ensure that banks do not relax credit standards on insider loans and do not make such loans on preferential terms.

· Finally, restrictions can be placed in a legislative framework to ensure banks do not engage in commercial trade (wholesale or retail) except in the course of banking business, and that real estate holdings be confined to bank premises or in satisfaction of a bad debt until such property can be resold.

While reliance varies among bank supervisors, authorization of and relationship to external auditors provide a useful safeguard in determining and monitoring a bank’s financial position.

· External auditors must, of course, be independent in all respects from the bank and its management. While the bank should appoint the external auditor, the firm should be one that is satisfactory to the Central Bank; in turn, the Central Bank can reject an audit and call for a new audit to be done.

· The legal framework should ensure that the auditor has full access to all bank records and documents.

· The auditor should submit a copy of his report to the Central Bank, normally within 90 days of the financial year-end, and also include a copy of any management letters commenting on weaknesses noted in the audit.

· The Central Bank should have the authority to call for trilateral meetings to include bank management and external auditors to discuss findings and matters of supervisory concern.

· Before audited accounts are finalised, the Central Bank should have the power to approve provisions for bad debts, as a safeguard to ensure the amount agreed upon by management and the external auditor is sufficient.

· While reliance on the work of external auditors often depends upon the extent of (and scope and depth of) the supervisor's on-site examinations. Competent external auditors can add an important link and source of independent information to the supervisor.

Since all bank supervisors rely, to some extent, on data received from banks, reports to and requests for information by the Central Bank should be addressed in the legal framework.

· In addition to receiving the audited annual accounts, the Central Bank should receive periodic returns for analysis on a weekly, monthly, or quarterly basis, as need be.

- Such returns should include, at a minimum: balance sheet, income statement, liquidity positions, data on large and problem loans, and foreign exchange activities.

- The time limit for submitting such data should be made clear, usually one month or less after the reporting date.

- While the law can call for returns in broad terms, a regulation specifying content, frequency, the need for accuracy, and how it will be verified, should be in place.

· The Central Bank should also have the authority to call for information as it sees fit in its supervisory role.

- Such information might include special one-time-only surveys on a certain banking subject.

- Calls for information might also be to investigate off-site a recently discovered weakness or problem, which may then lead to an examination.

The legal framework should also provide the Central Bank with the authority to conduct on-site examinations at its discretion.

· The framework should enable supervisors to conduct on site examinations, under conditions of confidentiality, whenever the Central Bank sees fit.

· In addition, powers should be available for supervisors to examine affiliated institutions, again at the Central Bank's discretion.

- Examples of such affiliated institutions might include a pension fund, joint venture, or various nonbank subsidiaries;

- The same powers as exist for the examination of the bank itself should be in place for the exams of affiliates.

· The bank under examination must also be required to produce for examiners all records, books, minutes, accounts, cash, securities, documents, and vouchers, etc. Penalties for failure to do so should be specified.

On-site examinations are only effective if sufficient enforcement powers are in place to allow the supervisory authority to take action to help correct unsound conditions. Such powers can be implemented in a variety of ways.

· If an unlawful or unsound aspect of a bank is disclosed, the Central Bank should have the power to require the bank to take such measures as may be considered necessary to rectify the matter. A common example would be to call for increased provisions for bad debts as a result of problem loans.

· In addition, the legal framework, preferably the law itself, should provide the Central Bank with several enforcement powers from which it can choose in dealing with problem banks, such as:

- Require that corrective action be taken by management through means of a formal written agreement signed by the bank's directors and management and the Central Bank;

- Appoint a qualified person to advise the problem bank on corrective measures to be taken, with costs paid by the bank concerned;

- Prohibit the declaration and/or payment of dividends until the problem is corrected;

- Withhold approvals on new branches or other expansion of activity;

- Initiate a legally binding cease and desist order to force a bank to stop an unacceptable practice;

- Initiate a legally binding removal or suspension of management on a temporary or permanent basis;

- Impose fines, consistent with law, on individual members of management for violations of law, regulations, or Central Bank directives.

IV. Opposites and Synonyms.

For each of the following words you are asked to provide a synonym and another word which is opposite in meaning:

	Synonym	Opposite
legal
framework
power
flexible
to cover
effective
to provide
seldom
overall
to carry out

VII. Join the halves.

On the left there are eleven halves of the sentences. On the right there are the other halves of the sentences, though not in the same order. Pair the halves and write your own list of complete sentences.

1. While there is no perfect system of ensuring that banks remain safe and sound at all times …	a) initial capital requirements and on-going capital requirements, usually expressed as a ratio.
2. It can be argued that the most important power for a supervisory authority is …	b) it is measured against the total of risk weightings both on and off the balance sheet.
3. The more specific the criteria, …	c) is a major area which prudential regulation should address.
4. As capital can be quantitatively measured, the framework should give minimum or …	d) where very large concentrations of credit can weaken a bank or even lead to its failure.
5. Prudential regulation must be fairly and consistently imposed, …	e) the power to license.
6. Asset diversification is based simply on preventing “too many eggs in one basket”, …	f) the supervisory authority must have the power to deal with problem banks as they arise.
7. The treatment of problem assets, often called non-performing assets, …	g) which has been earned on a loan but has not been collected.
8. Instead of capital being measured against total assets, …	h) prudential regulation, if well designed and properly enforced, can help prevent or at least limit the damage to a bank caused by poor management.
9. In order to ensure prudential regulation is effective, …	i) the Basle committee of bank supervisors agreed to a risk-based capital method that includes valid concepts for any country wishing to modernize its capital requirements for banks.
10. Many banks declare profits, which are misleading or even fictitious, by accruing into income interest …	j) the easier it is for a supervisory authority to determine the fitness of an applicant for a license.
11. In the attempt to find a prudential requirement for capital that took risk into account and established a standard for major financial centers, …	k) to create a fair marketplace and a “level playing field” for competition between banks.

VIII. Summarize the following passage in about 100 words and give an appropriate title.

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