Transcript Bank Regulations Are Changing For Better or Worse? Agree with continuous need to test effectiveness • By which metric? Stability? Profits? Intermediation ? Employment? •

Bank Regulations Are
Changing
For Better or Worse?
Agree with continuous need to test
effectiveness
• By which metric? Stability? Profits? Intermediation ? Employment?
• Using what information?
– State of regulation
– State of supervisory practices
– Impact of “supervisory allies”:
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Good governance
Good accounting and auditing
Other “preconditions”
A regulatory and supervisory framework that takes these allies into account
• No unduly high expectations of regulation per se: regulation cannot do it all.
No regulatory/supervisory system claims to even want to prevent all bank
failures. Effectiveness of the banking system is not seen to be the sole result
of good/bad regulation. Role of banking system in the economy is not the
first responsibility of regulation and supervision. But…nor should R&S
hinder banks playing their proper role
Question would be easier to answer
if regulations were the only element
of change: however:
• The balance between public and private “banking
discipline” is shifting:
– more responsibility on banks, more reliance on market
discipline, more risk based regulation and supervision
– See: revised Basel Core Principles, Basel II, ongoing Basel
Committee work on risk-based supervision
– More emphasis on good corporate governance
– And other private “allies” such as accounting and auditing
• So: public versus private: a false dichotomy? Effective
supervision a “public – private partnership”?
Besides: what is “Private
monitoring”?
• Interbank markets?
Investors?
Financial media?
Depositors large and small?
• All have different interests
• All have different monitoring needs and techniques
• Markets and depositors have different incentives from
supervisors/regulators:
• Private interests versus public good
Banking standards are becoming
more sophisticated and more
cognizant of limitations
• Risk based supervision
• Macro-prudential approaches: stability oriented,
versus compliance
• Revised Basel Core Principles: more risk
management, corporate governance
• Basel II: banks’ own responsibilities, individual
capital levels, disclosure and market discipline.
So: less scope for misalignment of private versus
public incentives
Policy Considerations
• Given different incentives markets/public: clear role for
R&S
• Reinforce good business practice, don’t make banks a
“public agency” (cash cow, data factory, administrator
of the BOP, cop )
• Don’t expect R&S to “do it all”, i.e. one and only
guardian of financial sector stability
• How can “allies” help, including banks’ own
governance and risk management, markets, auditors,
• Define expectations, and measure effectiveness against
those expectations
Taking the research agenda further
• Review supervisory practices and their effectiveness
• In particular risk based approach;
• Review significance of “preconditions” and other
elements of the operating environment;
• Review impact of banks’ risk management practices;
• Review impact of good bank governance;
• Effectiveness of “allies” in exercising discipline