The following will be discussed in this chapter: Basel II, the accord in operation, policy goals of regulation, the four approaches to financial supervision, the institutional approach, the functional approach, the integrated approach, and the twin peaks approach.
Session: FIFTEEN MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION OSMAN BIN SAIF Revision session • BASEL II Basel II • Basel II is the second of the Basel Accords, (now extended and effectively superseded by Basel III), which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision Basel II (Contd.) • Basel II, initially published in June 2004, was intended to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks banks (and the whole economy) face Basel II (Contd.) • In theory, Basel II attempted to accomplish this by setting up risk and capital management requirements designed to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending and investment practices The accord in operation • Basel II uses a "three pillars" concept – – minimum capital requirements (addressing risk), – supervisory review and – market discipline Basel II and the global financial crisis • The role of Basel II, both before and after the global financial crisis, has been discussed widely While some argue that the crisis demonstrated weaknesses in the framework, others have criticized it for actually increasing the effect of the crisis Basel II and the global financial crisis (Contd.) • In essence, they forced private banks, central banks, and bank regulators to rely more on assessments of credit risk by private rating agencies Thus, part of the regulatory authority was abdicated in favor of private rating agencies Policy goals of Regulation • It is commonly understood that financial regulation should be designed to achieve certain key policy goals, including: (a) safety and soundness of financial institutions, (b) mitigation of systemic risk, 10 Management Structure (Contd.) • In addition to the office of the corporate secretary, following specialized offices are also reporting directly to the governor External Relations Department General Counsel’s Office Risk Management and Compliance Department Internal Audit & Compliance Department Other Major Management Committees: • In addition to above discussed committees of the board, the following committees have been also established to further strengthen management of the Bank: Monetary Policy Committee Investment Committee Banking Policy Committee Business Continuation Plan Committee SBP SUBSIDERIES Banking Services Corporation National Institute of Banking and Finance (NIBAF) The governor SBP is the chairperson of Boards of both the subsidiaries Core Functions of State Bank of Pakistan (Contd.) • Under the State Bank of Pakistan Order 1948, the Bank was charged with the duty to "regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in Pakistan and generally to operate the currency and credit system of the country to its advantage" 57 Core Functions of State Bank of Pakistan (Contd.) • The scope of the Bank’s operations was considerably widened in the State Bank of Pakistan Act 1956, which required the Bank to "regulate the monetary and credit system of Pakistan and to foster its growth in the best national interest with a view to securing monetary stability and fuller utilization of the country’s productive resources" 58 Core Functions of State Bank of Pakistan (Contd.) • The changes in the State Bank Act gave full and exclusive authority to the State Bank to regulate the banking sector, to conduct an independent monetary policy and to set limit on government borrowings from the State Bank of Pakistan 59 Core Functions of State Bank of Pakistan (Contd.) • • Like a Central Bank in any developing country, State Bank of Pakistan performs both the traditional and developmental functions to achieve macro-economic goals The traditional functions, which are generally performed by central banks almost all over the world, may be classified into two groups: 60 Classification of Core Functions • (a) the primary functions including issue of notes, regulation and supervision of the financial system, bankers’ bank, lender of the last resort, banker to Government, and conduct of monetary policy, and 61 Classification of Core Functions (Contd.) • (b) the secondary functions including the agency functions like management of public debt, management of foreign exchange, etc., and other functions like advising the government on policy matters and maintaining close relationships with international financial institutions 62 Classification of Core Functions (Contd.) • The non-traditional or promotional functions, performed by the State Bank include development of financial framework, institutionalization of savings and investment, provision of training facilities to bankers, and provision of credit to priority sectors 63 Classification of Core Functions (Contd.) • The State Bank also has been playing an active part in the process of islamization of the banking system 64 Main Responsibilities of The State Bank • The main functions and responsibilities of the State Bank can be broadly categorized as under Regulation of Liquidity Ensuring the soundness of financial system Exchange rate management and balance of payments 65 DEVELOPMENTAL ROLE OF STATE BANK • The responsibility of a Central Bank in a developing country goes well beyond the regulatory duties of managing the monetary policy in order to achieve the macro-economic goals This role covers not only the development of important components of monetary and capital markets but also to assist the process of economic growth and promote the fuller utilization of a country’s resources 66 DEVELOPMENTAL ROLE OF STATE BANK (Contd.) • The Bank’s participation in the development process has been in the form of rehabilitation of banking system in Pakistan, development of new financial institutions and debt instruments in order to promote financial intermediation, establishment of Development Financial Institutions (DFIs), directing the use of credit according to selected development priorities, providing subsidized credit, and 67 THANK YOU ... safety and soundness of financial institutions, (b) mitigation of systemic risk, 10 Policy goals of Regulation (Contd.) (c) fairness and efficiency of markets, and (d) the protection of customers and. .. responsible for – the stability of the payments system, – liquidity assistance to markets and – solvent institutions, and 35 Governance Structure of State Bank of Pakistan Governance Structure of State... concept – – minimum capital requirements (addressing risk), – supervisory review and – market discipline Basel II and the global financial crisis • The role of Basel II, both before and after