supervisory development and capacity building - world...

Supervisory Developmentand Capacity Building

ByOlivier Frécaut

Senior Financial Sector ExpertMonetary and Financial Systems Department

IMF

World Bank/IMF/Federal Reserve System Seminar for Senior Bank Supervisors from Emerging Economies

October 18, 2005

The Problem

Growing Needs

Quantitative: financial deepening

Qualitative:• Complexity• Basel II• IFRS• AML/CFT

Limited Resources

Financial limits

Expertise• Slow to build• Competition

Limited improvement ahead

World Population

3

4

5

6

7

1960 1970 1980 1990 2000

1960: 3.02 Bn

2003: 6.27 Bn

World GDP Per Capita

$2,000

$3,000

$4,000

$5,000

1960 1970 1980 1990 2000

Constant 2000 $

2003: $ 5,345

1960: $ 2,417

Workload of Banking Supervisors

World 1960 2003Population (Bn) 3.02 6.27GDP per capita(Constant 2000 $)

$ 2,417 $ 5,345

World GDP (Bn) $ 7,299 Bn $ 33,513

World - Domestic Credit by Banks(as % of GDP)

80%

100%

120%

140%

160%

180%

200%

1960 1970 1980 1990 2000

1960: 81.4%

2003: 162.1%

Workload of Banking SupervisorsWorld 1960 2003

Population (Bn) 3.02 6.27GDP per capita(Constant 2000 $)

$ 2,417 $ 5,345

World GDP (Bn) $ 7,299 Bn $ 33,513Banks Domestic Credit(% of GDP) 81.4 % 162.1 %Banks Domestic Credit(Bn of constant 2000 $) $ 5,941 Bn $ 54,325 Bn

China – Real GDP Per Capita

$100

$300

$500

$700

$900

$1,100

1977 1982 1987 1992 1997 2002

Constant 2000 $

2003: $ 1,067

1977: $ 139

Workload of Chinese Banking Supervisors

China 1977 2003Population (Million) 943 1,288

GDP per capita(Constant 2000 $)

$ 139 $ 1,067

GDP (Bn) $ 131 Bn $ 1,375Banks Domestic Credit(% of GDP) 39.4 % 177.9 %Banks Domestic Credit(Bn of constant 2000 $) $ 51.7 Bn $ 2,446 Bn

The Problem

Growing Needs



Limited Resources

Financial limits



Banking Supervision Affordability

GDP Bank Credit

Bank Credit 0.01%

$ Billion GDP $ Billion $ Million

United States $10,949 261.8% $28,660 $2,866

Japan $4,301 157.3% $6,767 $677

Germany $2,403 142.9% $3,435 $343

Rwanda $1.64 13.9% $0.23 $0.023

Lao PDR $2.12 10.1% $0.21 $0.021

São Tomé $0.06 23.2% $0.01 $0.001

2003

Some Participating Countries

0.01% of credit $ million 0.01% of credit $ million

China $252 Philippines $4.8

India $34 Czech Republic $4.4

Malaysia $16 Morocco $3.7

Saudi Arabia $15 Lebanon $3.6

Turkey $13 Croatia $1.9

Egypt $10 Tunisia $1.8

Singapore $8.1 Slovak Republic $1.5

Chile $5.1 Nigeria $1.4

Some Participating Countries

0.01% of credit $ million 0.01% of credit $ million

El Salvador $0.75 Haiti $0.11

Dominican Republic $0.73 Angola $0.09

Lithuania $0.43 Tanzania $0.09

Jamaica $0.31 Uganda $0.08

Albania $0.27 Antigua and Barbuda $0.07

Ghana $0.20 Guyana $0.06

Zambia $0.17 Malawi $0.04

The Problem

Growing Needs



Limited Resources

Financial limits



The Solution: Setting Priorities

• Strategic Thinking

• Guiding Principles

• Cost-extraction Approach

Strategic Thinking

• Focus on final objectives– Raising living standards through economic growth– Financial soundness to support the real sector

• Medium-term vision– Economic identity– Quantitative simulations

• Long-term efforts– Manpower– Procedures

Real GDP Per Capita

$100

$200

$300

$400

$500

$600

$700

$800

$900

1970 1980 1990 2000

Indonesia Sierra Leone

Guiding Principles:Two Sets

• The 25 Basel Core Principles

• Post-chaos Guidance

The 25 Basel Core PrinciplesDefining Three Categories

• Core Set

• “Diet” version possible

• Lower priority

The Basel Core PrinciplesFull-strength Core Set: 4 to 6 Principles

• BCP 14: Internal controls

• BCP 19: Third-party validation of information

• BCP 22: Corrective action

• BCP 10: Connected lending

• BCP 4: Ownership transfers

• BCP 2: Use of name “bank”

The Basel Core Principles“Diet” Version Possible: Up to 8 Principles

• BCP 1: Preconditions

• BCP 3: Licensing

• BCP 16: On-site & Off-site

• BCP 6: Capital adequacy

• BCP 7: Granting of loans

• BCP 8: Loan provisioning

• BCP 9: High loan exposures

• BCP 5: Major acquisitions

The Basel Core PrinciplesLower Priority: Up to 11 Principles

• BCP 21: Adequate records & fair reporting

• BCP 17: Contacts with management

• BCP 15: Ethical standards/KYC• BCP 12: Market risks• BCP 13: Other risks

• BCP 18: Capacity to review returns on solo & consolidated basis

• BCP 20: Consolidated supervision

• BCP 11: Country risks• BCP 23: Supervision of

international activities• BCP 24: contacts with host

countries• BCP 25: contacts with home

countries

Guiding Principles:Two Sets

• The 25 Basel Core Principles

• Post-chaos Guidance

Post-Chaos Guidance:Starting Banking Supervision from Scratch

• Located within the central bank

• Key legal powers:– Licensing– Requesting any information– Conducting on-site inspections– Exercising enforcement

powers

• Simple reporting formats

• Prudential regulations through simple circular letters

• Set of core regulations

• No explicit nor explicit deposit guarantees

• Internal controls/”four eyes”principle

Cost-extraction Approach

• Limiting the scope: less work and better results• Leveraging work of other stakeholders

– Foreign partners– External auditors

• Working by exception– On-site inspections: once a year ???– Off-site reporting: once a month ???

Conclusion: A Missing Component ?

• “International Grade” Banking Supervision might be too costly and over-engineered for most emerging countries

• Microfinance is and should remain lightly regulated

• Is there a Missing Component in regulatory frameworks and practices?

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