Regulating the Financial Sector : Domestic Regulatory Regime Strategies to support financial stability and develo

1. Regulating the Financial Sector: DomesticRegulatoryRegimeStrategies to support financialstability and development by Marion Williams Rio de Janeiro, August 23-24 2011

2. Financial stability and development • Finding the balance betweenfinancialstability and development • Sensitivity to the stage of development • Sensitivity to national peculiarities • Keepingregulation in stepwith the financiallandscape • Maintaining national policyspace

3. Choice of corporateform of establishment • Choice of subsidiary versus branchoperation and implications for regulator • Advantages and disadvantages of predominance of foreignownedbanks • National autonomy and international regulation • Importance of commitment of banks to national financial and development goals

4. Coverage of the financialsector • Design of the regulatoryframework. -direction of and communication withregulatedentities -clarity of regulations -scope of regulatorycoverage - beyondbanks -adherence to international norms- wherethese do not conflictwith national objectives -competence of supervisoryfunction -a supportinglegalframework -attitudes to compliance and enforcement

5. Key areas of regulation • Capital adequacy – without over-reliance on same • Use of marketmechanismswithoutreliance on the self correcting claims of the market • Judicious use of self regulation • Role of guidelines issued by professional bodies • Moral Suasion • Standards and codes

6. Risk Management • Measuring, monitoring and pricingrisk • Evaluating the implications of differentforms of risk Interest rate risk Exchange rate risk Liquidityrisk Operationalrisk Cross-border risk

7. Post- crisisemphasis on financialstability • Responsibility for financialstability and control over factorsinfluencingit • Cross –border collaboration and exchange of information • Powers of intervention • Capacity for crisis management • Good governance, audit functions and the role of the Board

8. Liquidity issues • Measuring and comparingliquidityrisks • The importance of secondary tiers of liquidity buffers • Developing a market to facilitateliquidity management • Requiring observance of liquiditylevels • Lender of last resortfacilities

9. Capital Adequacy • Ensuring capital adequacy ( from a developing country perspective) • Tier 1 and tierll capital • Risk- based capital of Basel ll and lll • Countercyclical aspects of Basel lll • Additional capital buffers • Implications of capital requirements for small business lending, SMEs and trade finance

10. Securitization • Securitization – guidelines on quality and quantity – role for the regulator ? • Transparency: linking the value of underlyingcredit to the value of the securitizedcredit • Self -securitization of originatedcredits: shoulditbecontrolled? • Investment and retailbanking: shouldtheybeseparated? A developing country perspective.

11. Accountingrules and marking- to- market and CRAs • Market values, debt and accountingrules • Disclosure and transparency • Treatment of off-balance sheetliabilities • Adequateprovisioning and guidelins on write- downs and write –offs • Bad loans and cultural attitudes to debt • Impact of CRAs on financial institutions in developing countries and role of regionalCRAs

12. Procyclicality • Countering pro-cyclicality in regulation • Basel ll and procyclicality • Countercyclical polices and the ability of regulators to implementthemwithoutcooperationfromotherauthorities • Stress- testing as a means of identifying and mitigatingprocyclicality

13. Difference in regulatorysystems in developing countries • Importance of flexibility in rule-making for developing countries • Regulation and sensitivity to creditaccess for SMEs • Are higherlevels of capital required in developing countries or shouldthatbeoptional ? (cases of Singapore and Thailand) • Should capital requirementvarywith the liquidity or illiquidity of markets? • Collaboration amongregulatorswithin and acrossbordersat the regionallevel as a supplement to lender of last resortfunding

14. Difference in Regulatorysystems in developing countries (cont’d) • Ensuringthatregulatory structures support stability, growth and welfare of developing countries • Minimizing the adverse externalities of liberalisation, possible increasedvolatility and exchange rate appreciation • Ensuringthat national policyspaceis not restricted