Presentation on theme: "Modern Banking in Syria The Role of International Best Practice by Peter Hayward Damascus,2 July 2005."— Presentation transcript:
Modern Banking in Syria The Role of International Best Practice by Peter Hayward Damascus,2 July 2005
International Best Practice The basis for the recommendations and agreements of international organisations Derived from experiences over many years and in many differing environments
Outline Why are banks supervised and regulated? How are banks effectively supervised? What is good management? How should banks be governed?
Banks are Special Take deposits from the public Act as a store of value for private savings Source of credit to the business sector ad to individuals Provide a means of payment Medium through which monetary authorities can ensure monetary stability Banks are highly leveraged risk takers
Regulation and supervision Regulation is the process of determining who shall provide a service and on what terms –It can help ensure that banks honour their obligations –But too much will stifle innovation and competition
Regulation and supervision Supervision is designed to ensure that those who chose to provide financial services do so prudently, bearing in mind their responsibility to depositors and investors.
Regulation and supervision Supervision works best if it ensures that banks are well and prudently managed taking proper account of stakeholders as well as shareholders especially depositors So best practice in managing banks is the key
What is good management? Management of risk, especially –Credit risk –Liquidity risk –Market risk –Operational risk ‘Management’ does not mean the avoidance of risk, but controlling exposures to within the capacity of the bank to manage, in particular availability of capital and adequacy of management and controls.
Role of Corporate Governance How can good management be ensured? Corporate governance plays a key role Ensures –Effective internal and external controls –Prompted by good supervision Based on best practice
Ownership Relationship between the bank and its shareholders is the key factor in ensuring effective governance. Three models of ownership –Government –One or a group of controlling investors –Widely distributed shareholdings with none exercising control
Government as owner Conflict of interest – owner and regulator Lack of commercial skills Banking is capital intensive –Budget constraints Little incentive for innovation to meet customer demands
Government as owner Common model – –China, India, Eastern Europe, France, Italy Now state role as regulator and supervisor thought most effective role for government –Setting the rules of the game rather than playing it
Controlling shareholders Common model; for new and small banks everywhere Conflict of interest between shareholders’ responsibility to depositors and shareholders’ role as customer Risk concentration most common source of problems
Widespread ownership Most common model for large banks Requires an external accountability function Markets fill that role but only in countries where the markets are well developed. Otherwise conflict of interest between the shareholders and the managers
Corporate governance Corporate governance is the process by which effective management is secured and stakeholders’ interests safeguarded Increasing attention now paid in major countries, e.g. OECD Code, revised 2002 See also Basel Committee’s paper on corporate governance in banks - 1999
Corporate governance in banks “Sound Corporate governance makes the work of supervisors infinitely easier” Basel Committee 1999 paper on corporate governance in banks. Arguably supervision is no longer possible without effective corporate governance
Corporate governance 4 key elements: –Responsibilities of the board of directors –Make-up of the board –Internal and external controls –Supervision
Responsibilities of the Board Coherent strategy and business planning Setting tolerance for risk Clear lines of responsibility and accountability Setting and reviewing controls Assessing management and board performance
Board of Directors Capable leadership requires experience and competence of executive members Skills and experience of non-executives Independence must be neither too little nor too great
Internal and external controls Means by which management ensures that it can manage and control risk Need to be set by and reviewed by the board with the help of internal audit. Management is accountable to the board for their implementation External controls, e.g. external audit, a tool to enable the board to discharge its responsibility
Supervision Last line after management, internal audit and compliance, board review, external audit. “Sound Corporate governance makes the work of supervisors infinitely easier” Basel Committee 1999 paper on corporate governance in banks. Arguably supervision is no longer possible without effective corporate governance
Corporate governance and Basel II “The Committee believes that the revised Framework will promote the adoption of stronger risk management practices by the banking industry, and views this as one of its major benefits.” Basel II Press Release
Accountability and Disclosure Supervisors’ task is lightened by effective disclosure Market will then exert discipline over banks behaviour and moderate the taking of excessive risk Key element in Basel II proposals
Basel II and disclosure “Banks should have a formal disclosure policy approved by the board of directors that addresses the bank’s approach for determining what disclosures it will make.... In addition, banks should implement a process for assessing the appropriateness of their disclosures, including validation and frequency of them.” Basel II – Pillar 3
Conclusion “Sound leadership at the firm level, strong prudential regulation and supervision, and effective market discipline. These three elements provide the foundation for the health and soundness of the financial system as a whole.” William McDonough, (then Chairman, Basel Committee), September 2002
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