The following will be discussed in this chapter: After the successful completion of this course, students will have: Knowledge and understanding of: importance of banking supervision, banking sector in pakistan, role of the supervisor/regulator,...
Session: THIRTY ONE MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION OSMAN BIN SAIF Key Learning Outcomes After the successful completion of this course, students will have: • Knowledge and understanding of: – Importance of Banking Supervision – Banking sector in Pakistan – Role of the Supervisor/ Regulator Key Learning Outcomes (Contd.) – Laws which govern banking sector – Prudential Regulations – Banking Companies Ordinance – Other Banking Laws How a Bank earns Profit? • • • Just like any other business, a bank earns money so that it can run its operations and provide services First, customers deposit their money in a bank account The bank provides safe storage and pays interest on customers’ deposits The bank is required to keep a percentage of deposits in reserve as cash in its vault or in an account at The State Bank How a Bank earns Profit? (Contd.) • • • The bank can lend the rest to qualified borrowers Potential borrowers may wish to buy a house or a new car; However, they may not have enough money to pay the full price at one time Instead of waiting to save the money to pay for a new house, which could take years, they take out a loan from a bank Borrowers are charged interest on the loan – a bank’s primary source of income Safety and Soundness • Two major focuses of banking supervision and regulation are the safety and soundness of financial institutions and compliance with consumer protection laws What are Banking Regulations? • Bank Regulations are a form of government regulations which subject banks to certain requirements, restrictions and guidelines Key Objectives of Bank Regulation • The objectives of bank regulations, and the emphasis, varies between jurisdiction The most common objectives are: – Prudential—to reduce the level of risk bank creditors are exposed to (that is, to protect depositors); – Risk Reduction—to reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or major bank failures; – Avoid Misuse of Banks—to reduce the risk of banks being used for criminal purposes, e.g laundering the proceeds of crime; – To Protect Banking Confidentiality; – Credit Allocation—to direct credit to favored sectors Potential problems in Bank • Most of bank liabilities have shorter maturity period than assets – • • This can be a potential cause of bank failure incase all depositors take out money at once (bank run) Credit risk – Possibility that borrowers will be unable to repay their loans – More risk in prosperity period as lending terms tends to be relaxed Interest rate risk – Most deposits at floating rate – Loans at fixed rate Evolution of home mortgage Home loan funding 1930s Principal + interest payable over long term Lender-Banks • • Borrower-Individuals Owning a house was not affordable to many Great Depression brought industry to a halt Large scale defaulters and lenders could not recover by reselling 10 The Functional Approach Under the Functional Approach, supervisory oversight is determined by the business that is being transacted by the entity, without regard to its legal status • Each type of business may have its own functional regulator • Example : France • 39 The Integrated Approach Under the Integrated Approach, there is a single universal regulator that conducts both safety and soundness oversight and conduct-of-business regulation for all the sectors of the financial services business • 40 The Integrated Approach (Contd.) This model has gained increased popularity over the past decade It is sometimes referred to as the “FSA model” because the most visible and complete manifestation is the Financial Services Authority (FSA) in the United Kingdom • 41 The Twin Peaks Approach The Twin Peaks Approach is based on the principle of regulation by objective and refers to a separation of regulatory functions between two regulators: • • one that performs the safety and soundness supervision function and the other that focuses on conduct-ofbusiness regulation 42 The Twin Peaks Approach (Contd.) Under this approach, there is also generally a split between wholesale and retail activity and oversight of retail activity by the conduct-of- business regulator • This is also viewed by some as supervision by objective • Example : Australia • 43 Governance Structure of State Bank of Pakistan • • The governance framework of State Bank of Pakistan (SBP) is specified in the State Bank of Pakistan Act, 1956 amended at times to make it more autonomous The Act provides for an independent Central Board of Directors and empowers it with general superintendence and direction of affairs and business of the Bank Governance Structure of State Bank of Pakistan (Contd.) • The governor is the chairperson of the Central Board and manages the affairs of the Bank on its behalf Except for the governor, all directors of the Central Board are non-executive Committees of the Central Board • Committees of the Central Board – Audit – Investment – Building Projects – Human Resource – Monetary and Credit Policies 46 Management Structure (Contd.) • Heads of Clusters: After restructuring and reorganization of State Bank of Pakistan, four separate clusters were formed, which are: Banking Cluster Monetary Policy & Research Cluster Financial Market & Reserve Management Cluster Corporate Services Cluster Management Structure (Contd.) • • The Corporate Management Team (CMT) acts as the principal forum for debate and decision on critical operational issues affecting the quality of work at the institutional level The CMT is headed by the governor and consists of deputy governors, corporate secretary, economic adviser, executive directors, director HRD and managing director, SBP Banking Services 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" 50 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 51 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 52 THANK YOU 53 ... the successful completion of this course, students will have: • Knowledge and understanding of: – Importance of Banking Supervision – Banking sector in Pakistan – Role of the Supervisor/ Regulator... Safety and Soundness • Two major focuses of banking supervision and regulation are the safety and soundness of financial institutions and compliance with consumer protection laws What are Banking. .. safety and soundness of financial institutions, (b) mitigation of systemic risk, 34 Policy goals of Regulation (Contd.) (c) fairness and efficiency of markets, and (d) the protection of customers and