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
Quantitative: financial deepening
Qualitative:• Complexity• Basel II• IFRS• AML/CFT
Limited Resources
Financial limits
Expertise• Slow to build• Competition
Limited improvement ahead
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
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
Quantitative: financial deepening
Qualitative:• Complexity• Basel II• IFRS• AML/CFT
Limited Resources
Financial limits
Expertise• Slow to build• Competition
Limited improvement ahead
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
The Solution: Setting Priorities
• Strategic Thinking
• Guiding Principles
• Cost-extraction Approach
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
The Solution: Setting Priorities
• Strategic Thinking
• Guiding Principles
• Cost-extraction Approach
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?
