Lecture Legal and regulatory aspects of banking supervision – Chapter 17

The following will be discussed in this chapter: Supervisory methodologies, off site surveillance, organization issues, staffing and compensation, career path, training, inaction in restructuring banks.

MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING

SUPERVISION

OSMAN BIN SAIF

Session:

SEVENTEEN

Summary of last session

SECTION 4

Supervision

– On site Examination

2

Agenda of this session

OFF-SITE SURVEILLANCE

an important complement to on-site

examinations by providing early warning of actual or potential problems and a means for monitoring and comparing financial

performance

4

OFF-SITE SURVEILLANCE

(Contd.)

be viewed as a means to replace on-site examination as the primary form of

supervision in a developing country The quality of information and integrity of data provided by banks in all countries must be verified

OFF-SITE SURVEILLANCE

(Contd.)

information is frequently incomplete and inaccurate

accounting and control systems to ensure timely and accurate preparation of

information

6

OFF-SITE SURVEILLANCE

(Contd.)

inappropriate to rely on off-site

surveillance as more than a complement

to on-site examinations

OFF-SITE SURVEILLANCE

(Contd.)

reports, which form the basis for most site surveillance activities, are frequently limited to those concerning liquidity,

off-reserve requirement computations, and credit guidelines

8

OFF-SITE SURVEILLANCE

(Contd.)

compliance with certain balance sheet

ratios Rarely is information gathered to

meaningfully appraise risk

OFF-SITE SURVEILLANCE

(Contd.)

analysis to be effective, prudential reports must move away from statistical inputs,

liquidity and reserve requirement

computations, and simple balance sheet calculations to inputs that permit the

measurement of risk

10

OFF-SITE SURVEILLANCE

(Contd.)

data concerning a bank's loan portfolio,

including delinquencies and problem

assets, foreign exchange position,

off-balance sheet commitments, and other

risk areas, as well as balance sheet and

profit and loss statements

OFF-SITE SURVEILLANCE

(Contd.)

have the ability to prescribe the timing,

content, and format of the prudential

returns so that comparative data can be prepared and used in a consistent fashion

12

OFF-SITE SURVEILLANCE

(Contd.)

function be fully integrated into the

supervisory process so that weaknesses may be corrected

contact the bank by phone or letter to

discuss concerns identified off-site

OFF-SITE SURVEILLANCE

(Contd.)

necessary to send examiners into a bank

to follow up on the weaknesses identified off-site

prepared off-site can provide important comparative data on areas of risk and

efficiency and should be used by

examiners during their onsite

Organizational Issues in

Supervision

umbrella of a country's central bank Since the function of bank supervision is to

ensure a safe and sound banking system and to prevent financial system instability, the central bank, as manager of a

country's monetary policy and lender of

last resort, is a logical place to house

banking supervision

Organizational Issues in

Supervision (Contd.)

to suggest that operating from within the central bank affords a distinct advantage over the creation of an autonomous

supervisory agency provided that bank

supervision is insulated from political

influences, information derived in the

supervisory process is shared with those managing monetary policy, and the

agency is adequately funded through

Organizational Issues in

Supervision (Contd.)

solely responsible for bank supervision will devote greater attention to the fulfillment

of its role than one that also has

responsibilities for managing the nation's monetary policy

Organizational Issues in

Supervision (Contd.)

that where supervisory responsibility is

centered in a central bank, it is likely to be exercised with a wider degree of discretion than where the primary supervisory

agency is autonomous and operates

within defined statutory limits

18

Organizational Issues in

Supervision (Contd.)

central banks, it would seem inappropriate

to dilute their influence and authority by

assigning supervisory responsibilities to

another institution

Organizational Issues in

Supervision (Contd.)

for an independent supervisory agency is stronger In many high income countries, the division of responsibilities reflects

historical factors

20

Organizational Issues in

Supervision (Contd.)

supervisory agency within the Ministry of Finance or Treasury

least desirable since these ministries tend

to be highly politicized and the

coordination of policy with other

government agencies tends to be

problematic

Organizational Issues in

Supervision (Contd.)

the effectiveness of a bank supervisory body depends not so much on its

organizational location but on its

leadership and independence from

political influence

22

Organizational Issues in

Supervision (Contd.)

given country permits the bank

supervision unit to operate free from

inappropriate outside interference, that

arrangement is probably the most

desirable for the country

Organizational Issues in

Supervision (Contd.)

located within government, there are

important organizational steps that can be taken to enhance its effectiveness

24

Organizational Issues in

Supervision (Contd.)

its own identity on at least a par with other important units within the central bank or ministry or as an independent agency

Organizational Issues in

Supervision (Contd.)

a high ranking government official and

report directly to the central bank governor

or deputy governor or the minister of

finance or treasury

26

Organizational Issues in

Supervision (Contd.)

appropriate degree of credibility with the banking industry so that directives issued

by the supervisor will have effect

Staffing and Compensation

supervisors face resource and budget

constraints As a result, supervisory units are often understaffed

conduct bank examinations and perform other supervisory duties

28

Staffing and Compensation

(Contd.)

are frequently employed in the private

sector or in other activities where

compensation is greater

supervisors may not be as great as for

other parts of government even though

the responsibilities are greater

This affects the supervisor's ability to

Staffing and Compensation

(Contd.)

bank supervision, both in terms of quantity and skill levels, is a must

compensation should be competitive

within government and with the private

sector

30

Staffing and Compensation

(Contd.)

cannot afford additional staff or higher

salaries Nor can they justify differentiated salaries within government

contrary that governments cannot afford a banking crisis and its debilitating effects

on economic growth and development

Staffing and Compensation

(Contd.)

precedents for banking supervisors to be exempted from normal civil service

guidelines and salary scales

exceed the costs incurred in employing

and retaining competent staff, a situation clearly demonstrated by the U.S savings and loan crisis when requests for

additional staff were denied by the

government administration then in power

32

Career Path

viewed as a career, and employees are

rotated in and out of the bank supervision unit in only a few years

supervisors require four to five years just

to learn the skills necessary to examine

small, well-managed institutions

Career Path (Contd.)

be developed to provide meaningful and challenging responsibilities as well as

upward mobility

as promotion from an assistant examiner

to a full-fledged examiner to a senior

examiner and, ultimately, into the ranks of management

34

Career Path (Contd.)

departments could be accommodated as a means of broadening an individual's

knowledge and skills

career as a bank supervisor

job in a less than systematic manner so that skills are acquired in a hit-or-miss

fashion

affect the supervisor's ability to build a

skilled, knowledgeable, and competent

staff

36

Training (Contd.)

each supervisor receives not less than two weeks training per year

instruction, case study, and seminars

Training (Contd.)

conducted in a systematic fashion

mix with supervisors from other countries for cross-fertilization of ideas

38

Inaction in Restructuring Banks

supervisors attempt to minimize potential losses and liability to the government by closing banks near or at the point of

reaching technical insolvency

Inaction in Restructuring Banks

(Contd.)

absence of reliable information, an

inadequate legal framework, and the lack

of political will often permit banks to

remain open and losses to multiply, even though the banks may have lost their

reported book capital many times over

40

Inaction in Restructuring Banks

(Contd.)

also occur because the institutional

framework for dealing with insolvency is inadequate

approaches to dealing with insolvency

generally do not succeed

effectiveness of bank supervision may be

Inaction in Restructuring Banks

(Contd.)

powerless to take appropriate action

and mechanism for dealing with

insolvency is necessary

42

Summary of this session

THANK YOU

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