New Issues in Bank Regulation (The Quaid-i-Azam Memorial Lecture)

In: The Pakistan development review: PDR, Band 41, Heft 4I, S. 333-356

Abstract

Deregulation, technology, and financial innovation are
transforming banking. Indeed, banking is no longer the business it was
even a few decades ago. The way banking services are provided has
changed dramatically, and in many countries they are even offered by
institutions that are quite different from traditional banks. As the old
institutional demarcations become increasingly irrelevant, increased
competition from other intermediaries has led to a decline in
traditional banking in which banks took deposits and made loans that
stayed on their books to maturity. Banks thus have been moving rapidly
into new areas of business. In this evolving financial environment, the
international banking community and the Basel Committee on Banking
Supervision of the Bank for International Settlements (BIS) are
currently wrestling with pinning down an appropriate regulatory
framework. The regulatory response to these changes has been a move away
from the increasingly ineffective command-and-control regulations to
greater reliance on assessing the internal risk-management systems, the
supervision of banks, and more effective market discipline. In the
language of the New Basel Accord, this represents a shift in emphasis
away from capital-adequacy rules toward supervision and market
discipline. This paper provides an overview of the profound and rapid
changes brought about by technology and deregulation, and discusses the
hurdles that will have to be negotiated for putting in place a suitable
regulatory framework. On the one hand, inadequate resolution of these
challenges will create the wrong incentives and lead to banking
fragility. On the other hand, overregulation carries the danger that it
will retard the development of national financial systems, hinder the
best use of available domestic savings, prevent countries from accessing
international capital, and ultimately lead to slower growth. Developed
financial systems are being challenged by the shift in regulatory focus,
and the definition and implementation of appropriate regulatory
standards is encountering substantial difficulties. Finding the right
balance between regulation, supervision, and reliance on market
discipline is likely to be even more difficult in developing and
transition countries.