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The following will be discussed in this chapter: Banking supervision, bank supervision models in the industrialized countries, basel guidelines on supervision, supervisory methodologies, on-site examinations, financial sector of Pakistan,...
Session: THIRTY TWO MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION OSMAN BIN SAIF Banking Supervision • An ineffective legal framework may result in banking system distress but, more often than not, lack of enforcement and supervision are equally at fault Banking Supervision (Contd.) • Supervisory problems may be rooted in: – conflicting public policy goals for supervision; – political interference; – a lack of political will to deal with problems; – organizational weaknesses such as: • understaffing, • inadequate compensation, • poor leadership, and • divided supervisory responsibilities; and Banking Supervision (Contd.) • • • Problems may also result from examination methodologies that focus on technical compliance with laws In some cases, problems also occur because of the lack of an early warning system and off-site surveillance capabilities More often than not, though, supervisory problems result from a combination of these factors Bank Supervision Models in the Industrialized Countries • Bank supervision in the industrialized countries developed in response to financial crises, economic events, and political phenomena Basel Guidelines on Supervision • • • These guidelines are contained in the Basle Concordat," which embodied the following key principles: (1) supervision of foreign banking establishments is the joint responsibility of parent and host authorities, (2) no foreign banking establishment should escape supervision, Basel Guidelines on Supervision (Contd.) • • (3) supervision of liquidity should be the primary responsibility of the host authorities, (4) supervision of solvency is essentially a matter for the parent authority in the case of foreign branches and primarily the responsibility of the host authority in the case of foreign subsidiaries, and Basel Guidelines on Supervision (Contd.) • (5) practical cooperation should be promoted by the exchange of information between host and parent authorities and by the authorization of bank inspections by or on behalf of parent authorities on the territory of the host authority Supervisory Methodologies • • The growing integration of financial markets, especially among member states of the European Community, has led to a convergence of systems of bank supervision It is now widely accepted that an adequate system of bank supervision should allow for both on-site examination and off-site surveillance and that non-prudential ON-SITE EXAMINATIONS • • Traditional on-site examination methodologies in many countries frequently focus on compliance with banking regulations and directives As a result, prudential concerns for safety and soundness are often overlooked 10 Guiding principles for banks resolution policy (Contd.) • Preserving competitiveness In case of resolution by merger, acquisition, or purchase-and-assumption transaction, the selection of an acquiring bank should be done on a competitive basis 46 Guiding principles for banks resolution policy (Contd.) • Minimise disruption to market participants A bank closure may disrupt the intermediation of funds between lenders and borrowers, with potential negative effects on the economy Borrowers may find it difficult to establish a relationship with a new bank and may find existing projects threatened if expected bank credits are not forthcoming 47 Resolution techniques (Contd.) • The art of resolving bank problems often entails achieving a “legal closure” while avoiding an “economic closure” 48 Restructuring plans • While a weak bank may be required to reorganise its operations as a corrective action, if insolvency is imminent, the bank may be required to carry out a radical restructuring Such a strategy is only worth adopting if there is a real chance of getting the business back on a sound footing in the short term 49 Mergers and acquisitions • When a bank cannot on its own resolve its weaknesses, it should consider a merger with, or acquisition by, a healthy bank This is a private sector resolution technique 50 Purchase-and-assumption transactions • If a private sector M&A is not forthcoming or cannot be arranged, a purchase and assumption (P&A) transaction may be considered A P&A transaction is one where a healthy institution or private investor(s) purchases some or all of the assets and assumes some or all of the liabilities of a failed bank 51 Bridge bank • A bridge bank is a resolution technique that allows a bank to continue its operations until a permanent solution can be found The weak bank is closed by the licensing authority 52 Use of public sector monies in a resolution • Public funds are only for exceptional circumstances Public funds for the resolution of weak banks may be considered in potentially systemic situations, including the risk of loss or disruption of credit and payment services to a large number of customers An intervention of this nature should be preceded by a cost assessment of the alternatives, including the indirect cost to 53 Closure of the bank: Depositors pay-off • • If no investor is willing to step in to rescue the bank, the repayment of depositors and the liquidation of the bank’s assets are unavoidable In countries with a deposit insurance scheme, closure of the bank and depositor pay-off is also the right decision where a depositor pay-off is less costly than other resolution measures The costs of a depositor pay-off 54will fall in Public disclosure of problems • An important issue is whether, and at what point, the bank, the supervisor, central bank or perhaps the government, should comment publicly on problems faced by a weak bank As a general rule, disclosure should be favoured to the extent legally permissible and required 55 Lender of Last Resort • The discretionary provision of liquidity to a financial institution (or the market as a whole) by the central bank in reaction to an adverse shock which causes an abnormal increase in demand for liquidity which cannot be met from an alternative source 56 Indicators of Banking Crisis • These indicators predict banking crises relatively well – Slower output growth, – increases in real interest rates, – declining liquidity, – faster credit growth, – explicit deposit insurance, – poor legal systems, and – 57 a generally less-developed institutional Deposit insurance • • Deposit insurance is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due Deposit insurance systems are one component of a financial system safety net that promotes financial stability 58 Legislations • Banking Companies Ordinance • State Bank of Pakistan ACT • Foreign Exchange Regulation ACT • The negotiable Instruments ACT, • Financial Institutions Ordinance 2001 • Prudential regulations – For agriculture financing – For corporate / commercial banking 59 THANK YOU 60 ... comprises of: – Commercial Banks, – Development Finance Institutions (DFIs), – Microfinance Banks (MFBs), – Non -banking Finance Companies (NBFCs) – Modarabas, – Stock Exchange and – Insurance.. .Banking Supervision • An ineffective legal framework may result in banking system distress but, more often than not, lack of enforcement and supervision are equally at fault Banking Supervision. .. Sector of Pakistan (Contd.) • The commercial banks comprise of; – nationalized banks, – privatized banks, – 15 private sector banks, – 14 foreign banks, – provincial scheduled banks, and – specialized