A number of global economies faced a severe economic crisis in the recent times that spilled from the financial sector of the USA into the real economy, including all kinds of cross-border transactions. By virtue of global integration of world economies, the financial crisis hit the real economy and led to a global economic crisis. Several studies have pointed out weaknesses in regulation and supervision as one of the factors leading to the crisis. Comparing regulation and supervision before and after the global crisis, it has been observed that the overall regulatory response to the crisis had been slow but significant in a number of instances. In particular, capital ratios increased, deposit insurance schemes became more generous and reforms were introduced pertaining to bank governance and bank resolution. In some of these areas, there were visible differences between crisis and non-crisis countries.
There are evidences that the reform process is ongoing and there is still room for changes in both regulation and supervision frameworks exercised by the regulatory and supervisory authorities and central banks. The crisis emphasised the importance of combining strong, timely and anticipatory supervisory enforcement with better use of market discipline. It also highlighted the importance of basics-solid and transparent legal and institutional frameworks to promote financial stability. Though a number of developing countries like Bangladesh were not hit hard by the crisis, building supervisory capacity needs to be a priority for all. Notwithstanding the gradual and slow evolution of regulatory frameworks in most countries, there have been some notable changes in some areas of regulation and supervision. Regulatory and supervisory responses of a number of less- or non-crisis countries like Bangladesh are remarkable.
The crisis has brought changes in the approaches and standards of banking supervision at the global level. In response to the global financial and economic crisis, the G-20 mandated the Financial Stability Board to promote coordinated development and implementation of effective regulatory, supervisory and other financial sector policies. As part of this regulatory reform agenda, the Basel Committee has prepared new capital and liquidity requirements for banks under the third Basel framework, Basel III. Crisis experiences brought changes in the Core Principles for Effective Banking Supervision of the Basel Committee. Core Principles for Effective Banking Supervision formulated in 1997 have been a very influential guidance of the Basel Committee that codified Core Principles to provide supervisory authorities, bankers and their investors with comprehensive guidelines for ensuring safety and soundness of a banking system.
The core principles document has helped shape subsequent guidance issued under the auspices of the Bank for International Settlement on several relevant areas. The Core Principles were revised by the Committee in October 2006 in cooperation with supervisers around the world. In its October 2010 Report to the G20, the committee announced its plan to review the Core Principles to strengthen supervisory practices worldwide. In March 2011, an initiative was taken to review and update the core principles to conduct the review taking into account significant developments in the global financial markets and regulatory landscape since October 2006, including post-crisis lessons for promoting sound supervisory systems. The intent was to ensure the continued relevance of the Core Principles for promoting effective banking supervision in all countries over time in changing environment. As a result of this review, the number of core principles has increased from 25 to 29 that would continue to provide a comprehensive standard for establishing a sound foundation for regulation, supervision, governance and risk management in the banking sector. Given the importance of consistent and effective standards implementation, the committee has been working to implement the revised core principles in conjunction with other supervisory bodies and interested parties at the national and international levels.
At the national level many economies have enacted or are considering new laws and regulations in response to the lessons from the crisis. The crisis has also led to an active policy debate among regulators, policy makers and academics, giving rise to the number of multiple reform agenda. In several countries, changes are visible in the areas of bank capitalisation, governance, activities, diversification, auditing and deposit insurance. Furthermore, in some instances it can be observed that non-crisis countries exhibited an increase in their risk-based capital ratios and an increase in the regulatory limits on exposures.
Among many non-crisis countries there was an increase in the percentage of countries imposing regulatory rules or supervisory guidelines regarding asset diversification. Countries requiring audits and risk management procedures to be disclosed increased significantly across all countries. The importance of coordinated macro-prudential supervision received renewed impetus following the consequences of the financial and economic crisis. It is basically about interaction between micro and macro prudential supervision and its reflection in the design of regulatory institutions. The crisis lessons indicate that developing countries must overcome both legal and cultural barriers in order to move towards modern and proactive prudential supervision that combines micro and macro aspects. And very importantly, the capacity of supervisers to understand the risks is the key to ensuring quality of prudential supervision.
Targeting better financial stability and a sound and safe banking system in the country, the Bangladesh Bank brought changes in its approach and strategies in banking regulation and supervision in recent years. Prudential regulations have been streamlined in line with the international standards. For creating a 'Prudential Supervisory Framework', the central bank has initiated arrangement for monitoring the overall banking sector by using international standards and also by undertaking some innovative measures. Special importance has been attached to monitoring compliance with circulars and guidelines issued for better risk management in banks and emphasis has been laid on the capacity development of executives at the central bank for effective bank supervision.
In September 2014, the central bank governor disclosed the objective of formulating a strategic plan for the bank for the next five years. The plan would attach top priority to strengthening the bank's supervisory role. It is a continuous and right response. There is a widespread realisation throughout the world that strong supervision is essential to ensure accountability, transparency and good governance in the financial sector of a country.
Dr Shah Md Ahsan Habib is Director (Training) of Bangladesh Institute of Bank Management (BIBM). ahsan@bibm.org.bd
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