Lecture Legal and regulatory aspects of banking supervision – Chapter 20
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Transparency and cooperation
•
•
Inadequate or incorrect information from
the bank increases uncertainty for
everyone involved.
It can lead to misplaced supervisory action
and add to the costs of solving the
problems.
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Transparency and cooperation
(Contd.)
•
•
The bank and the relevant authorities
should aim for a high degree of
information sharing and transparency
about their intended actions.
Decisions on disclosures – or not - to the
wider financial community and the general
public are more difficult and must depend
on the specific situation.
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Transparency and cooperation
(Contd.)
•
•
These will generally need to be carefully
assessed in each particular case.
The overriding consideration must be
whether the disclosure contributes to the
supervisor’s objective in resolving the
weak bank and maintaining broader
systemic stability.
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Symptoms and causes of bank
problems
•
•
It is important to distinguish between the
symptoms and causes of bank problems.
The symptoms of weak banks are usually
poor asset quality, lack of profitability,
losses of capital, reputation problems,
and/or liquidity problems.
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Symptoms and causes of bank
problems (Contd.)
•
The different symptoms often emerge
together. Experiences from several
countries indicate that liquidity problems
have seldom occurred alone and their
emergence has generally been one
aspect of broader difficulties.
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Symptoms and causes of bank
problems (Contd.)
•
•
•
While banking difficulties usually result
from a combination of factors, they have
become evident as credit problems in the
majority of cases.
This should not be surprising given that
lending has been and still is the mainstay
of banking business.
More often than not, credit losses stem
from weaknesses in management control
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and credit risk management systems.
Loose Supervision results in
•
In particular, it is often true that
management and control processes have
not been sufficiently robust to prevent:
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Loose Supervision results in
(Contd.)
•
•
•
Poor lending practices, such as poor
underwriting skills or an overly aggressive
loan
expansion programme, coupled with an
absence of incentives to identify problem
loans at an early stage and to take
corrective actions.
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Loose Supervision results in
(Contd.)
•
•
Excessive loan concentrations.
Concentration of lending to one
geographic area or industrial sector has
been the cause of problems for many
banks.
Unless a bank maintains a diversified loan
portfolio, it is exposed to the risk that loans
to any particular area, or related group of
companies, could become impaired at the
same time.
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Loose Supervision results in
(Contd.)
•
Excessive risk taking. One reason for this
is that bank management may have
incentives to assume a higher risk profile
in lending activities so as to benefit from
short term increases in either the bank’s
profits or share price.
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Loose Supervision results in
(Contd.)
•
•
Overrides of existing policies and
procedures, such as limits on
concentration or connected lending.
Strong individuals within the bank, by
force of personality, dominant ownership
or executive position, may override
policies and procedures. In state-owned
banks, this can come through political
interference.
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Loose Supervision results in
(Contd.)
•
•
Fraud or criminal activities and selfdealing by one or more individuals.
Apart from credit risk, a bank’s weakness
may also stem from other risks, including
interest rate risk, market risk, operational
risk and strategic risk.
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Loose Supervision results in
(Contd.)
•
These risks are not new, although
historically they have been less important
in accounting for bank failures than credit
risk. Some of these risks may become
more important for banks.
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Loose Supervision results in
(Contd.)
•
For example, operational risk will come
into greater focus as banks make use of
more sophisticated systems, new delivery
channels and outsourcing arrangements
that increase the bank’s reliance and
exposure to third parties.
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Loose Supervision results in
(Contd.)
•
At the same time, the increase in one type
of risk is often compensated by a
reduction in another type of risk securitisation of assets, for example,
increases operational and legal risks but
reduces credit risk.
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Loose Supervision results in
(Contd.)
•
Banks should also benefit from improved
techniques and instruments for risk
reduction. The balance has to be carefully
managed in all banks.
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External factors
•
•
Weak banks have, in the past, contributed
to financial crises.
Equally, external factors such as negative
macroeconomic shocks (including a
currency crisis, a weak “real” sector;
inadequate preparation for financial sector
liberalisation, etc.) may also lead to
problems for banks.
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External factors (Contd.)
•
External factors may not overwhelm a
well-managed and financially sound bank
but will certainly expose deficiencies in
management and control in weaker banks.
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Summary of this session
•
What are Weak Banks?
•
Mandate of Basel Committee Task force
•
•
Supervisory objectives for Dealing with
Weak Banks
Guidelines and Principles for dealing with
weak banks
•
Symptoms and causes of bank problem
•
Result of loose supervision
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THANK YOU
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