Bank Regulations Are Changing

1. Bank Regulations Are Changing For Better or Worse?

2. Agree with continuous need to test effectiveness • By which metric? Stability? Profits? Intermediation ? Employment? • Using what information? • State of regulation • State of supervisory practices • Impact of “supervisory allies”: • Good governance • Good accounting and auditing • Other “preconditions” • A regulatory and supervisory framework that takes these allies into account • No unduly high expectations of regulation per se: regulation cannot do it all. No regulatory/supervisory system claims to even want to prevent all bank failures. Effectiveness of the banking system is not seen to be the sole result of good/bad regulation. Role of banking system in the economy is not the first responsibility of regulation and supervision. But…nor should R&S hinder banks playing their proper role

3. Question would be easier to answer if regulations were the only element of change: however: • The balance between public and private “banking discipline” is shifting: • more responsibility on banks, more reliance on market discipline, more risk based regulation and supervision • See: revised Basel Core Principles, Basel II, ongoing Basel Committee work on risk-based supervision • More emphasis on good corporate governance • And other private “allies” such as accounting and auditing • So: public versus private: a false dichotomy? Effective supervision a “public – private partnership”?

4. Besides: what is “Private monitoring”? • Interbank markets?Investors? Financial media?Depositors large and small? • All have different interests • All have different monitoring needs and techniques • Markets and depositors have different incentives from supervisors/regulators: • Private interests versus public good

5. Banking standards are becoming more sophisticated and more cognizant of limitations • Risk based supervision • Macro-prudential approaches: stability oriented, versus compliance • Revised Basel Core Principles: more risk management, corporate governance • Basel II: banks’ own responsibilities, individual capital levels, disclosure and market discipline. So: less scope for misalignment of private versus public incentives

6. Policy Considerations • Given different incentives markets/public: clear role for R&S • Reinforce good business practice, don’t make banks a “public agency” (cash cow, data factory, administrator of the BOP, cop ) • Don’t expect R&S to “do it all”, i.e. one and only guardian of financial sector stability • How can “allies” help, including banks’ own governance and risk management, markets, auditors, • Define expectations, and measure effectiveness against those expectations

7. Taking the research agenda further • Review supervisory practices and their effectiveness • In particular risk based approach; • Review significance of “preconditions” and other elements of the operating environment; • Review impact of banks’ risk management practices; • Review impact of good bank governance; • Effectiveness of “allies” in exercising discipline