Regulating the Financial Sector: Domestic Regulatory Regime Strategies to support financial stability and development by Marion Williams Rio de Janeiro, August

Financial stability and development Finding the balance between financial stability and development Sensitivity to the stage of development Sensitivity to national peculiarities Keeping regulation in step with the financial landscape Maintaining national policy space

Choice of corporate form of establishment Choice of subsidiary versus branch operation and implications for regulator Advantages and disadvantages of predominance of foreign owned banks National autonomy and international regulation Importance of commitment of banks to national financial and development goals

Coverage of the financial sector Design of the regulatory framework. -direction of and communication with regulated entities -clarity of regulations -scope of regulatory coverage - beyond banks -adherence to international norms- where these do not conflict with national objectives -competence of supervisory function -a supporting legal framework -attitudes to compliance and enforcement

Key areas of regulation Capital adequacy – without over-reliance on same Use of market mechanisms without reliance 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

Risk Management Measuring, monitoring and pricing risk Evaluating the implications of different forms of risk Interest rate risk Exchange rate risk Liquidity risk Operational risk Cross-border risk

Post- crisis emphasis on financial stability Responsibility for financial stability and control over factors influencing it Cross –border collaboration and exchange of information Powers of intervention Capacity for crisis management Good governance, audit functions and the role of the Board

Liquidity issues Measuring and comparing liquidity risks The importance of secondary tiers of liquidity buffers Developing a market to facilitate liquidity management Requiring observance of liquidity levels Lender of last resort facilities

Capital Adequacy Ensuring capital adequacy ( from a developing country perspective) Tier 1 and tier ll 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

Securitization Securitization – guidelines on quality and quantity – role for the regulator ? Transparency: linking the value of underlying credit to the value of the securitized credit Self -securitization of originated credits: should it be controlled? Investment and retail banking: should they be separated? A developing country perspective.

Accounting rules and marking- to- market and CRAs Market values, debt and accounting rules Disclosure and transparency Treatment of off-balance sheet liabilities Adequate provisioning 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 regional CRAs

Procyclicality Countering pro-cyclicality in regulation Basel ll and procyclicality Countercyclical polices and the ability of regulators to implement them without cooperation from other authorities Stress- testing as a means of identifying and mitigating procyclicality

Difference in regulatory systems in developing countries Importance of flexibility in rule-making for developing countries Regulation and sensitivity to credit access for SMEs Are higher levels of capital required in developing countries or should that be optional ? (cases of Singapore and Thailand) Should capital requirement vary with the liquidity or illiquidity of markets? Collaboration among regulators within and across borders at the regional level as a supplement to lender of last resort funding

Difference in Regulatory systems in developing countries (cont’d) Ensuring that regulatory structures support stability, growth and welfare of developing countries Minimizing the adverse externalities of liberalisation, possible increased volatility and exchange rate appreciation Ensuring that national policy space is not restricted