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Reform Phase I

Phase I Banking supervision Reform

The banking reform unit was established in 2004 with the purpose of restructuring the banking sector. A restructuring plan was developed with the objective of strengthening the banking sector and increasing its robustness to enable it to face global and regionacompetition effectively and help achieve the targeted economic growth. The plan started in 2004 and ended in 2008 it entailed four main pillars:

o Privatization and consolidation within the banking sector,

o Addressing the issue of non performing loans (NPLs),

o Financial and managerial restructuring of state owned banks,

o Upgrading CBE banking supervision.

The successful upgrading of CBE's supervision sector was realized through the folowing objectives:

o Establish a proactive, future-oriented and highly analytical bank supervision framework that meets international standards.

o A shift from a compliance-based (rule-based) to risk-based supervision.

o Develop and upgrade the necessary specialized skills and knowledge among staff to meet current and anticipated challenges particularly in the area of risk management.

o An improved MIS system within Banking Supervision to provide the quality,timely data required in a risk-based supervisory system.

A memorandum of understanding and protocol were signed with the European Central Bank and four of the Euro System National Central Banks (Deutsche Bundesbank, Banque de France, Banca D’Italia and Bank of Greece) to provide a two-year technical assistance program for the upgrading of the CBE Banking Supervision. The program began in December 2005 with two main phases:

o Phase one focused on conducting a comprehensive diagnostic analysis of the current practices in the field of Banking Supervision and in the design of a development plan that is in line with international best practices.

o Phase two focused on developing and implementing appropriate supervisory tools and methodologies along with conducting a technical assistance program including comprehensive training.

As part of the recommendation to support capacity building, ensure implementation and keep the momentum going, six projects were identified concerning the core areas of Banking Supervision. Every project had a team headed by a designated leader from the CBEand another one headed by a mentor from the Eurosytem. The CBE team worked closely with the Eurosystem team to benefit from the best International practices. Clear mission and milestones for each project have been set until the end of the program.

According to the set objectives, the assigned teams for the projects presented the resuls of the work performed to define the general frame work and objectives for the core areas Central Bank of Egypt Banking supervision sector in Banking Supervision. In this context the assigned project teams started the practical workshops to transfer the knowledgeacquired through the Eurosystem teams to the rest of the staff members in the core areasof Banking Supervision for conducting supervision on a risk based approach according to international best practices.

There was a lot of focus on training related to supervisors to upgrade their skills and knowledge in various subjects. The courses conducted by International bodies, Central Banks, International Banks and study visits to achieve this purpose.

To build capacity in the market risk area a team of seven staff members from onsite,offsite was composed to focus on this area, coaching missions are ongoing to enhanceand upgrade skills.

Among the most important achievements of the program was the establishment of thfollowing departments:

1. The regulations department, which is responsible for issuing all the regulations to the banking sector, while ensuring the availability, accessibility and clear understandingof the issued regulations. This is done through following a standard for setting the regulations.

2. The macro-prudential department which aims to build a broad and deep understanding of the banking sector by regularly assessing financial soundness indicators, and systemic risks. The analytical framework of the MPRU is focusing around macro-prudential surveilla nce, the examination of the macro-economic indicators including financial markets to assess the impact on the banking sector.

The Technical assistance project conducted by the European Central Banks on Banking Supervision has successfully ended as per schedule at the end of November 2007.

The finalization of the first reform plan, whereby all its objectives have been successfully achieved, resulted in creating a sound, robust and efficient banking sectorcapable of facing external and internal problems. This was evident by the ability of thebanking sector to with stand the negative effects of the global financial crisis which hit in 2008.Moreover, it continuously shields the economy during crisis times such as thecurrent status of the economy after the January 2011 revolution.

Moreover the success achieved by the first reform plan set the corner stone and paved the way for building the second reform program which focused on several pillars out of which two were related to banking supervision as follows:

1-Review and enforce the implementation of Corporate Governance regulations in the banking sector and the Central Bank of Egypt. In this regards two achievements were made:

o The launch of the corporate governance regulation in August, 2011,which provides a comprehensive set of corporate governance provisions to strengthen: board practices and composition, board of directors committees, internal control functions (Risk, Audit, Compliance),disclosure and transparency. Banks are required to comply with the CBE's corporate governance regulation by March 1, 2012.

o Amending Law 88 of the year 2003, The Law of The Central Bank,The Banking Sector and Money articles 12, 13 introducing changes regarding improving CBE‘s own governance, reconstituting its own board of directors to remove conflicts of interest, and tightening supervisory capacity and processes.

2-A project to implement Basel II which lasted for three years starting first quarter of2009 and ended successfully in first quarter of 2012.