Building Supervisory Structures in Sub-Saharan Africa An Analytical Framework

Transcription

1 Building Supervisory Structures in Sub-Saharan Africa An Analytical Framework Marc Quintyn and Michael W. Taylor Paper presented at Workshop Nigeria Financial System Strategy 2020 Washington DC, December

2 Overview 1. Introduction 2. Revisiting Supervisory Structures What are the arguments? 3. Building Supervisory Structures in SSA 4. Typology of models for SSA 5. Conclusions

3 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 SSA Goal is to develop analytical framework to guide the restructuring debate in SSA

4 II. Revisiting Supervisory Structures What are the arguments? Three main arguments for unifying supervisory structures have been advanced: Changing structure of the financial system argument Economies of scale/small economy argument Institutional strengthening argument Other arguments: Redefining agency-roles within euro-zone Following the latest fashion

5 II. Revisiting Supervisory Structures What are the arguments? In the process, it has become clear that unified model is not the only model: Partial unification with or without central bank participation

6 II. Revisiting Supervisory Structures What are the arguments? Changing Structure argument: Scandinavian countries - financial groups UK, Australia conglomerates cum blurring of boundaries Economic efficiency arguments are in both cases not the only ones...

7 II. Revisiting Supervisory Structures What are the arguments? 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

8 II. Revisiting Supervisory Structures What are the arguments? 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

9 II. Revisiting Supervisory Structures What are the arguments? Institutional strengthening argument: Restructuring can even be move a by government to get more control over the supervisory process Mixed experience so far unified regulator is not a guarantee for more effective regulation/supervision, and is not the only solution. To be successful, needs to be accompanied by better governance and capacity building

10 III. Building Supervisory Structures in Sub Saharan 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

11 III. Building Supervisory Structures in Sub Saharan 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)

12 III. Building Supervisory Structures in Sub Saharan 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

13 III. Building Supervisory Structures in Sub Saharan Africa Supervisory Models in SAA 0verview Supervisory model Central bank for banks, multisector agency for others Central bank for banks, separate agencies for others Separate agency for banks, others separate or not regulated Central bank for everything that exists Central bank for banks, rest unregulated Number of Countries countries 4 Botswana *, Mauritius, Namibia, South Africa 8 Ghana, Kenya, Mozambique, Nigeria, Rwanda, Tanzania, Uganda*, Zambia* 3 BEAC, BCEAO, Madagascar 6 Ethiopia, Gambia, Lesotho, Malawi*, Seychelles, Sierra Leone 4 Angola, Burundi, Swaziland*, Zimbabwe

14 III. Building Supervisory Structures in Sub Saharan 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

15 III. Building Supervisory Structures in Sub Saharan Africa An analytical framework for shaping supervisory structures: Structure follow strategy First step: regulatory strategy - prioritization Strategy needs to take into account: Capacity constraints Need for a role for central bank

16 III. Building Supervisory Structures in Sub Saharan Africa Capacity constraints Omnipresent in SSA Skilled and trained staff/equipment Salary levels Staff retention is big problem Need to follow worldwide trends (risk-based supervision, Basel II) Need to be reflected in strategy/structure

17 III. Building Supervisory Structures in Sub Saharan Africa 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

18 III. Building Supervisory Structures in Sub Saharan Africa Analytical framework: Regulatory strategy in response to capacity constraints, consisting of: Regulatory scope Regulatory intensity

19 III. Building Supervisory Structures in Sub Saharan Africa Regulatory scope (Carmichael and Pomerleano) Rank (sub)sectors according to riskiness Monitor developments in (sub)sectors As soon as a risky (sub)sector becomes systemically important, decision should be taken to regulate that sector

20 III. Building Supervisory Structures in Sub Saharan 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, and. once activity passes certain threshold, more intense supervisory regime should be put in place

21 III. Building Supervisory Structures in Sub Saharan Africa Awareness of regulatory cost Direct costs Indirect cost do not kill innovation! Too early and too much could reduce competition and stifle innovation

22 IV. Typology of possible models for SSA 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

23 IV. Typology of possible models Structure Advantages Disadvantages No regulatory gaps Not contentious CB logistical support Benefit from CB independence, prestige, budget, expertise Financial stability is for CB Economies of scale Crisis management unified Unified inside CB (Singapore model) Separate agency sharing infrastructure of CB ( Irish model ) CB logistical and budgetary support Benefits from CB expertise Indirectly benefits from CB prestige Economies of scale Financial stability Close to, but not in CB, therefore no moral hazard, no institution that is too powerful (unless perceived as such) No regulatory gaps Crisis management unified Moral hazard (LLR etc) All burden on CB CB very powerful CBs are typically small capacity limitations Will require expansion of CB staff/budget

24 IV. Typology of possible models Partially unified A (only banks in CB) Partially unified B (all deposit taking institutions inside CB) CB responsible for banks (fin stability, monetary policy argument) CB not involved too much in all sectors (remains small and not too powerful) Burden on CB limited Limits contentious issues (with MOF for instance) No regulatory gaps in most important subsectors from financial stability point of view No moral hazard issues Banks and other deposit taking institutions in continuum, no regulatory gaps, level playing field can be better guaranteed Limits contentious games Financial stability argument (Key sectors in CB) CB not too powerful Possibility for regulatory gaps remains Startup problems for other agency (see above) Crisis management coordination needed Transfer of responsibilities is needed when nonbank deposit taking institutions become banks Startup problems for new agency (capacity, prestige,...) Possibility of regulatory gaps remains but is more limited Crisis management coordination needed

25 IV. Typology of possible models Unified outside CB FSA model CB is not too powerful No moral hazard issues Economies of scale No regulatory gaps No tradition has to start from scratch Capacity building Coordination of crisis management with CB still needed

26 IV. Typology of possible models for SSA Summary preference for models 2 and 4 Take advantage of CB prestige and capacity Systemically most important activities supervised by CB l Allow for crisis management and coordination Model 4 allows build-up of capacity Regulatory gaps excluded in 2, unlikely in 4

27 V. Conclusions 1. Financial development in SSA is accelerating 2. This forces governments to focus on financial supervisory structure 3. In doing so, major issue to be taken into account is capacity constraints 4. Paper discussed analytical framework that offers ways to balance constraints with need for regulation 5. First step is decisions on regulatory scope whom to regulate

28 V. Conclusions 5. Second step is regulatory intensity how much regulation? 6. When taking these steps, always take into account importance and role of central bank 7. There are three important reasons to keep central banks involved in supervisory process in SSA 8. Taking the above framework into account, one can identify a number of possible models (5) 9. All in all, a theoretical preference emerges for model 2 (Irish model) or model 4 (central bank supervising all deposittaking institutions)

29 Thank you