Aligning Supervisory Structures with Country Needs in Small Open Economies The Case of SubSaharan Af

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Aligning Supervisory Structures with Country
Needs in Small Open Economies The Case of
Sub-Saharan Africa

• Marc Quintyn and
• Michael W. Taylor
• Paper presented at the WB-IMF Conference on
  Aligning Supervisory Structures with Country
  Needs
• Washington, DC, June 5-6, 2006

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Overview

• Introduction
• Aligning Supervisory Structures Where do we
  stand?
• Aligning Supervisory Structures in SSA
• Conclusions

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I. Introduction

• In past decade, organizational structure of
  supervision has stepped out of the sphere of
  irrelevance
• First in advanced countries, now gradually
  reaching all corners of the world
• This paper focuses on the needs of small open
  economies, with special attention to SSA
• Goal is to develop analytical framework to guide
  the restructuring debate in SSA

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I. Introduction

• In light of the constraints in these countries,
  we argue for
• Gradual build-up of capacity
• Considering a variety of structural designs

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II. Aligning Supervisory Structures Where do we
stand?

• Three main arguments for unifying (restructuring)
  supervisory structures have been advanced
• Changing structure of the financial system
  argument
• Economies of scale argument
• Institutional strengthening argument
• Other arguments
• Redefining agency-roles within euro-zone
• Following the latest fashion

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II. Aligning Supervisory Structures Where do we
stand?

• Changing Structure argument
• Scandinavian countries - financial groups
• UK, Australia conglomerates cum blurring of
  boundaries
• Position of central bank was in both countries
  decisive

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II. Aligning Supervisory Structures Where do we
stand?

• Economies of Scale argument
• Also called small country/financial system -
  argument
• Bundling of tasks, staff, joint administration,
  IT, other support
• Played in Scandinavia as well
• FSA model not only model see Finland and
  Ireland also scale economies

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II. Aligning Supervisory Structures Where do we
stand?

• Institutional strengthening argument
• More frequently heard since turn of century
• Often in response to a financial crisis weak
  regulation and political interference contributed
  to crisis
• Indonesia, Korea, Japan also China PR
• Mixed experience so far unified regulator is
  not a guarantee for more effective
  regulation/supervision

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II. Aligning Supervisory Structures Where do we
stand?

• Institutional strengthening argument
• Restructuring can even be move by government to
  get more control over the supervisory process
• To be successful, needs to be accompanied by
  better governance and capacity building

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III. Aligning Supervisory Structures in
SubSaharan Africa

• Some SSA Countries have embarked on changes
• South Africa (separate case)
• Mauritius, Namibia, Zambia - implemented
• Botswana, Malawi, Swaziland, Uganda - considering
• Common factors
• SADC-related (drive for harmonization)
• Mainly Middle-income countries

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III. Aligning Supervisory Structures in
SubSaharan Africa

• Financial sectors and their supervision
• Low levels of financial development throughout
  SSA
• Development accelerating since late 1990s
• Bank-dominated systems (some still 100 percent)
• Strong foreign bank presence waning state-owned
  bank dominance
• NBFI sector more developed in English-speaking
  Africa
• Nonbank deposit-taking institutions are becoming
  important (microfinance, credit cooperatives)

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III. Aligning Supervisory Structures in
SubSaharan Africa

• Financial sectors and their supervision
• Central banks are dominant supervisors for banks
• Central banks often called to supervise emerging
  nonbank deposit-taking institutions
• In some countries, central banks also regulator
  of other sectors
• Impressive number of unregulated sectors
• Reorganization of supervisory structures is of
  recent date

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III. Aligning Supervisory Structures in
SubSaharan Africa
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III. Aligning Supervisory Structures in
SubSaharan Africa

• How does SSA-debate fit into broader debate?
• There is a clear need for reform highly
  vulnerable systems (Goodhart)
• Starting point is very different from advanced
  countries
• Institutional reform needs to be part of broader
  package to build effective regulatory capacity
• Structures need to be built in forward-looking
  manner
• Financial groups and blurring boundaries - No
• Economies of scale - Yes
• Institutional strengthening - Yes

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III. Aligning Supervisory Structures in
SubSaharan Africa

• An analytical framework for shaping supervisory
  structures
• Major hurdle capacity constraints
• Contrasts sharply with need for effective
  supervision
• Strategy to reconcile these two, is build around
• Regulatory scope
• Regulatory intensity
• Role of central bank

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III. Aligning Supervisory Structures in
SubSaharan Africa

• Regulatory scope (Carmichael and Pomerleano)
• Prioritize need for regulation and supervision
• Monitor developments in (sub)sectors
• Rank (sub)sectors according to riskiness
• As soon as a risky (sub)sector becomes
  systemically important, decision should be taken
  to regulate that sector

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III. Aligning Supervisory Structures in
SubSaharan Africa

• Regulatory intensity
• Once (sub)sector has been identified, decide on
  desirable intensity of regulation/supervision
• Intensity refers to reporting requirements,
  prudential regulations, supervisory activity
• Could start with reporting
• Once activity passes certain threshold, more
  intense supervisory regime should be put in place

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III. Aligning Supervisory Structures in
SubSaharan Africa

• Regulatory scope and intensity allow for gradual
  build up of supervisory capacity
• Role of central bank needs special attention in
  SSA
• Banking sectors are expected to remain dominant
  for foreseeable future
• Countries are more prone to financial crises than
  advanced hence closer involvement of central
  bank desirable
• One of few institutions with good reputation and
  some degree of independence (financial resources,
  quality of staff, economies of scope)
• Building a separate agency can be costly, not
  necessarily successful

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IV. Typology of possible models

• Based on previous analysis, which models could
  work in SSA?
• Unified in CB Singapore model
• Separate agency, sharing infrastructure with CB
  Irish model
• Partially unified A - only banks under CB
• Partially unified B - all deposit-taking
  institutions under CB)
• Unified outside CB - FSA model

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IV. Typology of possible models
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IV. Typology of possible models
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IV. Typology of possible models
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V. Conclusions

• Financial development in SSA is accelerating
• This prompts need to shape (more than reshape)
  supervisory structure
• In doing so, major issue to be taken into account
  is capacity constraints
• Paper discussed analytical framework that offers
  ways to balance constraints with need for
  regulation
• First step is decisions on regulatory scope
  whom to regulate

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V. Conclusions

• Second step is regulatory intensity how much
  regulation?
• When taking these steps, always take into account
  importance and role of central bank
• There are three important reasons to keep central
  banks involved in supervisory process in SSA
• Taking the above framework into account, one can
  identify a number of possible models (5)
• All in all, a theoretical preference emerges for
  model 2 (Irish model) or model 4 (central bank
  supervising all deposit-taking institutions)