Banking Supervision

In the context of separating banking supervision from Bank of England in the year 1997 and demands for similar separation in India, an argument is made against separation of banking supervision from central banks. It is concludedthat there is no evidence that separation will enhance the effectiveness of either supervision or monetary policy while putting both at the risk of becoming weak.

Over the past twenty years, the world's banking systems have been subjected to upheavals in banking market structure, in ownership, and in regulation. Over the same period, banking crises large enough to envelop national banking systems have been widespread. In the aftermath of these consequential events, policymakers, analysts, and bankers have considered the optimal structure for bank supervision. Two of the central issues are whether multiple bank supervisory authorities are preferable and whether central banks should be bank supervisors.

Macro-prudential analysis is a relatively new atea infinancial system supervision. The paper presents a synopsis of the main attributes of the area, noting that one of its main features is that it adds an element of dynamism to the existing framework of supervision. Based on these factors several lessons have been druwn which should have a bearing on establishing the mocro-prudential analytical framework in Zambia. In conclusion, it is noted that being a new area, there is still a lot of work that needs to be done in order to have an adequate analytical frameworkinplace.

This paper is focused on the economics of financing banking supervision. Two questions are investigated: What are the most common financing practices? Can we explain differences in current financing practices by country specific factors, using a path dependence approach? Given a sample of 90 banking supervisors (central banks and financial authorities), we perform an empirical analysis that identifies the determinants of the financing structure of banks´ prudential supervision. First, the financing rule is a function of the type of supervisory authority: if the supervisor is a central bank the public funding is more likely to occur, while the probability of a supervision funded via a levy on the regulated banks is higher if the supervisor is a financial authority. Secondly, the financing rule depends on the structure of the financial systems. In the bank oriented systems, the public funding is more likely to occur. Finally the geographical factor is also significant: European countries seem to be more oriented towards the private funding regime. In general we do not find evidence of the role of the political factor, the economy's size or the level of development and legal tradition.

The European Supervisory Authorities (the ‘ESAs’) form part of a large network of EU agencies and are classified as regulatory agencies, their principal tasks being the development and completion of the ‘single rulebook’ for the EU financial system. The ESAs also promote supervisory convergence in order to create a level-playing field in financial supervision and supervisory practices in the EU. In the absence of an explicit legal basis in the TFEU for the allocation of competence to EU agencies, their powers are delimited, shaped and amenable to judicial review in light of relevant CJEU jurisprudence, most importantly, the Meroni doctrine, laying down the core principles governing relations between EU institutions and EU agencies. In this study, we look into the gradually emerging (and increasing) asymmetry in supervisory terms between the ESMA, on the one hand, and the EBA and the EIOPA, on the other. The former’s direct supervisory powers have been progressively expanding and technocratic influence widening, accentuated by recent relevant case-law modernising the Meroni doctrine and the recent amendment of the ESAs’ founding Regulations mirroring the ambition to move towards further centralisation of supervision of EU capital markets. The aim of this paper is to contribute to the ongoing debate arising from the ESAs’ developing role and position within the EU financial system.

Abstract: This paper examines the incentive features of top-management compensation in the banking industry. Economic theory suggests that the compensation structures for bank management should have low pay-performance sensitivity because of the high leverage ...

This series of Handbooks in Central Banking has grown out of the activities of the Bank of England's Centre for Central Banking Studies in arranging and delivering training courses, seminars, workshops and technical assistance for central banks and central bankers of countries across the globe.

En la obra, a partir de una contextualización de los sectores bancarios español y europeo, se analizan los múltiples cambios que, en los últimos tiempos, han venido a afectar a la intervención sobre la banca, haciendo especial hincapié en la internacionalización del negocio y del marco regulatorio y supervisor.

En sede de este proceso de internacionalización del control sobre el sector crediticio destaca la implantación del Mecanismo Único de Supervisión que, imponiéndose frente a otras alternativas, ha supuesto la traslación de muy relevantes competencias supervisoras desde las autoridades nacionales hacia el Banco Central Europeo.

Esta europeización de competencias de fiscalización plantea diversas cuestiones, no pacíficas, a las que la obra pretende dar respuesta, como serían la suficiencia de la base jurídica escogida, el porqué de la elección del Banco Central Europeo como supervisor, el efectivo alcance subjetivo y territorial de la supervisión de la Unión, la eventual generación de duplicidades o la virtualidad de la aplicación de normas nacionales por parte de una institución comunitaria.

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Based on a contextualisation of the Spanish and European banking sectors, the book analyses the many changes that have recently affected intervention in the banking sector, with particular emphasis on the internationalisation of the business and of the regulatory and supervisory framework.

In the context of this process of internationalisation of control over the credit sector, the implementation of the Single Supervisory Mechanism stands out, which has entailed the transfer of very important supervisory powers from the national authorities to the European Central Bank.

This Europeanisation of supervisory powers raises a number of questions, not all of which have been resolved, to which the book aims to provide answers, such as the sufficiency of the legal basis chosen, the reason for the choice of the European Central Bank as supervisor, the effective subjective and territorial scope of the Union's supervision, the possible generation of duplication or the virtuality of the application of national rules by a Community institution.

This paper provides a detailed exposition on the concept of financial stability/instability and the role of regulation and supervision in mitigating all kinds of risks emanating from the financial sector with potential spillover effects on macroeconomic stability.

Pentru Banca Naţională a României, administrarea funcţiei de conformitate la nivelul fiecărei bănci continuă să reprezinte unul dintre obiectivele urmărite sistematic în cadrul supravegherii efectuate asupra băncilor. Trecerea de la supravegherea pe bază de conformitate la modelul supravegherii bazate pe evaluarea riscurilor semnificative, produsă la jumătatea deceniului precedent, pentru a putea ține pasul cu creșterea gradului de intermediere bancară și a numărului de debitori, în condițiile resurselor umane limitate de care dispune autoritatea de supraveghere bancară, nu trebuie să genereze confuzii terminologice. S-a renunțat la controlul de conformitate,
care presupunea examinarea caz cu caz a modului în care băncile respectau prevederile legilor și normele în procesul creditării. Dar, s-a internalizat funcția de conformitate la nivelul fiecărei bănci, acestei funcții revenindu-i un rol important
în asigurarea stabilității instituțiilor de credit.
Complexitatea asigurării conformității operațiunilor bancare cu legislația specifică a crescut odată cu întărirea reglementărilor din domeniu, ulterior gravelor dereglări produse de criza financiară internațională, care a generat importante costuri pentru finanțele publice și nivelul de trai al populației. Reglementarea a evoluat de la simplu la
complex. Fără îndoială, băncile trebuie să asimileze modificări importante ale regimului de reglementare. Funcţia de conformitate se situează la baza creării valorii adăugate la nivelul unei bănci, de aceasta depinzând încrederea publicului, reputaţia în faţa clienţilor şi menţinerea integrităţii propriilor activităţi.

The significant role of banks in stabilising the financial systems of countries and in spurring their economic growth explains the particularities of their own corporate governance. The specificity of banks, the volatility of financial markets, increased competition and diversification expose banks to risks and challenges. Managing financial risk is a key element for improving corporate governance in the banking sector. Banks are heavily regulated and supervised in all countries, which sets a particular corporate governance framework for the banking industry. This paper examines some key factors which contribute to ensuring an effective regulatory and supervisory framework for banks, in the context of financial integration. I place emphasis on the importance of consolidated bank supervision.

Over the last decade, Islamic banking has experienced global growth rates of 10-15 percent per annum, and has been moving into an increasing number of conventional financial systems at such a rapid pace that Islamic financial institutions are present today in over 51 countries. Despite this consistent growth, many supervisory authorities and finance practitioners remain unfamiliar with the process by which Islamic banks are introduced into a conventional system. This paper attempts to shed some light in this area by describing the main phases in the process, and by flagging some of the main challenges that countries will face as Islamic banking develops alongside conventional institutions.

Since the recent global financial crisis was caused by the interaction of micro and macroelements, it has become imperative for regulatory policies to concentrate on covering these interactions if the likelihood of future crises is to reduce. In doing so, regulators must strike a balance between the micro-prudential and macroprudential dimensions of financial stability.

This paper examines the distinction between micro-prudential and macro-prudential
perspectives of financial regulation and supervision and why the macro-prudential
perspective needs to be strengthened. In view of the need for a market-wide perspective of risks, the concerns over financial innovation as well as concerns over the procyclicality of the financial system, this paper argues that strengthening the macro-prudential aspect could achieve both the micro and macro-prudential objectives of financial stability, that is, engender the protection of consumers and depositors’ funds and at the same time achieve system-wide stability.

The paper examines the boundaries or perimeters of prudential regulation and the tasks and tools of microprudential and macroprudential regulation and supervision, the former in limiting the failure of individual financial institutions and protecting stakeholders such as depositors and financial consumers, and the latter in limiting system-wide disruptions to the economy. Finally, this paper highlights the conflicts between micro-prudential and macroprudential regulation and the governance challenges faced by authorities in implementing a macro-prudential policy regime.

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Over the last decade, Islamic banking has experienced global growth rates of 10-15 percent per annum, and has been moving into an increasing number of conventional financial systems at such a rapid pace that Islamic financial institutions are present today in over 51 countries. Despite this consistent growth, many supervisory authorities and finance practitioners remain unfamiliar with the process by which Islamic banks are introduced into a conventional system. This paper attempts to shed some light in this area by describing the main phases in the process, and by flagging some of the main challenges that countries will face as Islamic banking develops alongside conventional institutions.

Riga (Latvia) 2017 2 Starptautisko ekonomisko attiecību transformācija: mūsdienu problēmas, riski, iespējas un perspektīvas Kolektīva monogrāfija M. Bezpartochnyi zinātniskajā redakcijā Informācijas sistēmu menedžmenta augstskola Rīga (Latvija) 2017 3 UDK 339.9

This paper analyzes the pillar of modern central bank governance, i.e. central bank independence, highlighting three contributions. First, we provide a systematic review of the economics of central bank independence. Second, using a principal agent model we design a political economy framework, which explains how politicians can shape central bank governance in addressing macroeconomic shocks, taking into account both the wishes of the citizens and their own personal interests. This framework is then used to interpret the evolution of central bank independence from the Great Inflation throughout the Great Moderation – i.e. from the seventies to the first decade of the twenty-first century - and to the Great Recession during which recent reforms have shaken the design of the central banks by increasing their involvement in banking and financial supervision. Finally, we provide empirical evidence supporting this evolution of central bank independence using recently developed indices of dynamic central bank independence.

This paper reviews Latvia’s efforts to manage the increase in debt distress resulting from the unwinding of the 2000–07 credit boom and spillovers from the global financial crisis. The authorities have designed a strategy that strengthens incentives for marked-based debt resolution by improving the legal framework for credit enforcement, introducing tax incentives for debt write-downs, and strengthening financial sector supervision. These measures have started to yield results, but further steps are needed to speed up bankruptcy procedures and reduce credit enforcement costs. Latvia’s experience with market-based debt resolution may provide insights on managing debt distress in other countries with limited fiscal resources.

The economic unification of Europe is taking a long time.  It has become more challenging with the advent of financial integration and the single currency. Under the pressures of globalisation and, as a necessary by-product, of increased competition, the risk profile of financial systems has dramatically changed for the worse. In Europe, soft compromises, which the principle of subsidiarity entails,

This paper assesses proposals to redefine the scope of activities of systemically important financial institutions. Alongside reform of prudential regulation and oversight, these have been offered as solutions to the too-important-to-fail problem. It is argued that while the more radical of these proposals such as narrow utility banking do not adequately address key policy objectives, two concrete policy measures-the Volcker Rule in the United States and retail ring-fencing in the United Kingdom-are more promising while still entailing significant implementation challenges. A risk factor common to all the measures is the potential for activities identified as too risky for retail banks to migrate to the unregulated parts of the financial system. Since this could lead to accumulation of systemic risk if left unchecked, it appears unlikely that any structural engineering will lessen the policing burden on prudential authorities and on the banks. JEL Classification Numbers: G21, G24, G32, G38

Effective problem bank identification and resolution is crucial to ensure not only the soundness of a bank but also for the resilience of the financial system as a whole since banks are dominant players in the financial system. Successful problem bank management will reduce the potential of both individual bank failures and banking crisis as well as minimise resolution costs. Hence, a comprehensive, clear framework and guidelines for dealing with problem banks is crucial. This study aims at two main objectives: (i) to analyse the framework and process of problem bank identification, intervention and resolution in the SEACEN countries; and (ii) to identify key issues and lessons learned for an effective problem bank management. In general, bank supervisors in nine SEACEN surveyed countries have a clear legal and prudential framework in dealing with problem banks. However, the level of progress diverges from country to country depending on their legal and political settings as well as...

In order to correctly estimate the unpredictable effects on their transaction portfolios, the banks developed stress testing methods which turned out to be a very important tool in the bank supervision process. Moreover, the supervision authorities started using stress-testing methods for evaluating systemic risk and for determining the adequacy degree of capital in the banking sector. Taking into account the importance of these simulations, the present paper presents methodologies with which stress testing methods could be implemented by banks as well as their role in the management of credit risk, market risk and liquidity risk while also meeting the requirements imposed by the Basel II accord. By means of a case study we have simulated several scenarios in which the inter-bank market interest rate was varied, quantifying its impact on bank revenues as well as on the market value of their portfolios.

This Handbook explores some basic principles of banking supervision. First of all, it addresses the general question of why banks need to be supervised, and sets out the basic aims of supervision. It then examines the nature of banking risks. Next, the key areas of prudential supervision are discussed - namely, capital adequacy, liquidity, asset quality, risk concentration, management, and

The paper traces the emergence and development of banking supervision in Bulgaria. Particular emphasis is placed on the early years of the Bulgarian National Bank and its role in banking supervision institutionalization. Are followed upheavals in bank system under socialism. Also the restoration of effective banking supervision in the transition years considered.

Th is paper, based on presentations before audiences in Lisbon in 2010, provides an overview of the causes of the credit crisis and discusses one of the reports issued in the wake thereof, the De Larosière Report. Its main findings in respect of financial sector regulation are reviewed: a single European rulebook, colleges of supervisors, deposit guarantee schemes, bank resolution regimes and ‘living wills’ as well as transparent corporate structures of banks. The proposals for the establishment of a European Systemic Risk Board (ESRB) and a European System of Financial Supervisors (ESFS) are described and subjected to critical reviews, both from a legal angle and from a broader perspective. Emphasis is given to the European Banking Authority (EBA), as one of the agencies within the ESFS. Suggestions are made to broaden the legal underpinning of the proposals in order to place the new bodies on a firm footing. This paper argues that, even though major steps toward a stronger Union-wide response to difficulties in the financial sector, the De Larosière proposals and the
Commission’s legislative follow-up do not provide an adequate response to the lessons from the crisis. Federal authority for overseeing the financial sector is required: this implies Treaty change.

El régimen de intervención sobre el gobierno corporativo de la banca ha sido objeto de relevantes modificaciones en los últimos tiempos. Así, la europeización de potestades, conse­cuencia directa de la implantación del Mecanismo Único de Supervisión, se ha acompañado de una progresiva publificación del gobierno corporativo de las entidades de crédito, operada a través de la introducción de nuevas, y muy rigurosas, disposiciones jurídico-administrativas en ámbitos tradicionalmente reservados al derecho privado.

En este contexto de cambio, el presente trabajo pretende propor­cionar al lector un conjunto ordenado de conocimiento, que permita un provechoso acercamiento al control del gobierno corporativo de las entidades de crédito de la Unión Europea, así como a los principales problemas derivados del mismo.

A tal efecto, a lo largo de la obra se pone el foco sobre los aspectos más controvertidos del nuevo marco de disciplina. En particular, se abordan en profundidad cuestiones tales como el fundamento que justifica la intervención pública sobre el gobierno interno de las entidades de crédito, las disfunciones que esta intervención puede causar o la distribución de funciones de fiscalización entre el Banco Central Europeo y los supervisores nacionales. Asimismo, se analiza el régimen jurídico actualmente vigente en la materia, desarrollándose las concretas obligaciones y requisitos que se imponen por la regulación sobre las más variadas áreas, como las de estructuras, procedimientos, gestión de riesgos, idoneidad, remuneraciones o transparencia.

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The regime of intervention in the corporate governance of banks has undergone significant changes in recent times. Thus, the Europeanisation of powers, a direct consequence of the implementation of the Single Supervisory Mechanism, has been accompanied by a progressive introduction of public law in the corporate governance of credit institutions, operated through the introduction of new and very rigorous administrative provisions in areas traditionally reserved for private law.

In this context of change, the present work aims to provide the reader with an ordered set of knowledge that allows a useful approach to the control of corporate governance of credit institutions in the European Union, as well as to the main problems derived from it.

To this end, the book focuses on the most controversial aspects of the new disciplinary framework. In particular, it deals in depth with questions such as the rationale for public intervention in the internal governance of credit institutions, the dysfunctions that this intervention may cause and the distribution of supervisory functions between the European Central Bank and national supervisors. It also analyses the legal regime in force in this area, developing the specific obligations and requirements imposed by regulation in a wide variety of areas, such as structures, procedures, risk management, suitability, remuneration and transparency.

Purpose -The purpose of this paper is to empirically analyse the cross-countries determinants of nonperforming loans (NPLs), the potential impact of supervisory devices, and institutional environment on credit risk exposure. Design/methodology/approach -The paper employs aggregate banking, financial, economic, and legal environment data for a panel of 59 countries over the period 2002-2006. It develops a comprehensive model to explain differences in the level of NPLs between countries. To assess the role of regulatory supervision on credit risk, the paper uses several interactions between institutional features and regulatory devices. Findings -The empirical results indicate that higher capital adequacy ratio (CAR) and prudent provisioning policy seems to reduce the level of problem loans. The paper also reports a desirable impact of private ownership, foreign participation, and bank concentration. However, the findings do not support the view that market discipline leads to better economic outcomes. All regulatory devices do not significantly reduce problem loans for countries with weak institutions, corrupt environment, and little democracy. Finally, the paper shows that the effective way to reduce bad loans is through strengthening the legal system and increasing transparency and democracy, rather than focusing on regulatory and supervisory issues. Practical implications -First, higher CARs results in less credit exposures. Second, international regulators should continue their efforts to enhance financial development. The results suggest that foreign participation plays an important role in reducing credit exposure of financial institutions. However, in developed countries, foreign entry led to more problem loans. Finally, to reduce credit risk exposure in countries with weak institutions, the effective way to do it is through enhancing the legal system, strengthening institutions, and increasing transparency and democracy. Originality/value -The paper contributes to the literature on banking regulation and supervision. It examines aggregated data which best reflect the level of NPL of the banks in a country as opposed to individual data included in databases that suffer from the problem of representativeness. It considers the impact of regulatory variables after controlling for bank industry factors that alter primarily problem loans. Finally, the paper examines the effectiveness of regulation through the inclusion of institutional factors.

This paper reviews Latvia's efforts to manage the increase in debt distress resulting from the unwinding of the 2000-07 credit boom and spillovers from the global financial crisis. The authorities have designed a strategy that strengthens incentives for marked-based debt resolution by improving the legal framework for credit enforcement, introducing tax incentives for debt write-downs, and strengthening financial sector supervision. These measures have started to yield results, but further steps are needed to speed up bankruptcy procedures and reduce credit enforcement costs. Latvia's experience with market-based debt resolution may provide insights on managing debt distress in other countries with limited fiscal resources.

Bank failures are costly to customers and the wider market. Prevention is always better than cure but in light of recent economic downturns, it has become increasingly difficult for regulators to allocate more resources towards in-depth monitoring of banking practices. In this paper, we construct a tool that is able to predict bank failures ahead of time with reasonable accuracy. Through a logistic regression on a matched sample of 536 failed and non-failed US banks, we determine the financial indicators that most accurately predicts bank failure. From the regression, we construct a Bank Health Index that assesses a bank's propensity to failure. In-sample and out-of-sample tests show that our model is about 90% accurate two years prior to failure, and 95% accurate the year before failure. The accuracy and efficiency of the model and index provides a more efficient and effective tool for assessing a bank's propensity to failure besides requiring far less resources. With these methods, regulators will be able to take preventive measures at least one year before failure, saving the economy millions if not billions in the process.

We present a model of bank passivity and regulatory failure. Banks with low equity positions have more incentives to be passive in liquidating bad loans. We show that they tend to hide distress from regulatory authorities and are ready to offer a higher rate of interest in order to attract deposits compared to banks that are not in distress. Therefore, higher deposit rates may act as an early warning signal of bank failure. We provide empirical evidence that the balance sheet information collected by the Czech National Bank is not a better predictor of bank failure than higher deposit rates. This confirms the importance of asymmetric information between banks and the regulator and suggests the usefulness of looking at deposit rate differentials as early signals of distress in emerging market economies where banks' equity positions are often low.

The banking industry world wide is being transformed by global forces such as technological innovation; the domestic deregulation of financial services and opening-up to
international competition; and changes in corporate behaviour, such as growing disintermediation and increased emphasis on shareholder value. Recent banking crises in Asia and Latin America have accentuated these pressures. The banking industries in central Europe and Latin America have also been transformed as a result of privatisations of state-owned banks that had previously dominated their banking systems.

Prior to the 2007 -9 banking crisis, the UK Financial Services Authority presented itself as a 'proportionate' and 'risk-based' regulator, preferring firms to adhere to the spirit of high-level principles rather than the letter of detailed rules. Simultaneously, it developed a supervisory regime that was unprecedentedly complex, producing a 'Handbook' of intricate secondary legislation that ran to some 8000 pages. Explaining these contradictory aspects of the pre-crisis regime demands a reappraisal of the dominant explanations of the supervisory failures that contributed to the banking crisis. In contrast to accounts that focus on officials' uncritical adherence to efficient market thinking (regulatory groupthink) or the political clout of the financial industry (regulatory capture), this article suggests that supervisory officials' actions can be understood only by reference to their institutional and structural contexts. Amid heightened public sensitivity to risk, officials developed an elaborate and transparent supervisory framework as a defence against potential political censure. At the same time, collegial firm -supervisor relationships were preserved as state-of-the-art risk-management ideas were recombined and repackaged in line with the institutional legacies of earlier 'club-like' modes of supervision. Together, these divergent tendencies contributed to overconfidence in the use of predictive risk assessment and neglect of banks' fundamental business risks.

PurposeThe purpose of this paper is to explore the applicability of an information submission model based on OWL (Web Ontology Language) that permits the subsequent implementation of knowledge‐sharing systems, such as the Set of Experience Knowledge Structure, among the various EU banking supervisors.Design/methodology/approachRecent theoretical advances in the use of semantic web languages are introduced and put theoretically into force in the context. Additionally, a first‐hand questionnaire is directed to the supervisors, measuring the value compatibility of the semantic technology with the needs of the existing European banking environment.FindingsThe results illustrate that there exists a good level of value compatibility between the normative challenge and the new technology. Although there are some differences, these would perhaps not make the implementation of this technological framework particularly difficult, in that they focus on the same points that the regulators must ...

Financial liberalization, apart from increasing the number and varieties of financial institutions, also brought about increased distress in the financial system. As at 1995, there were reports that 60 out of 115 surviving banks (52.2%) were distressed. A very high proportion of non-bank financial institutions was also distressed. Because of the ensuing competition resulting from financial liberalization, the use of non-price strategies to attract customers became prominent. This led to a lot of adverse selection and incentive problems culminating in a high rate of non-performing loans, default and insolvency within the financial system. The need to have better understanding of the nature and determinants of the supervisory and regulatory agencies’ decisions in the early identification of non-healthy from healthy banks, therefore, becomes quite useful. This constitutes the main focus of this study. To address this, the study identified the nature and determinants of bank supervisory...

This paper analyzes the best practices related to liquidity risk management in financial institutions, in terms of both the existing standards on the issue and their application in several countries. To this effect, the paper compiles, in the first place, the best practices issued by the Basel Committee on Banking Supervision (BCBS), and then reviews the developments in European countries