|
Expanded
regulatory oversight and effectiveness a national imperative
By
Ranel T. Wijesinha FCA, MBA
During the East Asian Financial Crisis, the
west was very liberal with its criticism of East Asia.
At a presentation I made to the Association of Professional
Bankers in Sri-Lanka in the year 2000, at its Annual
Sessions under the theme “Towards a Safer Banking
System”, in a special segment on “Learning
from the Lessons of the East Asian Financial Crisis”
I quoted, Arthur Levitt, Chairman of the US Securities
and Exchange Commission as follows: -
“The significance of transparent, timely and reliable
financial statements and its importance to investor
protection has never been more apparent. The current
financial situation in Asia and Russia (1998) are stark
examples of this new reality. These markets are learning
a painful lesson taught many times before: investors
panic as a result of unexpected or unquantifiable bad
news”.
I also recall quoting The President of the World Bank,
when he referred to South Korea as follows:
“The culture of the region has not been one of
disclosure. If you go back further it was a culture
of a smallish number of wealthy people. It was an agrarian
society with a lot of people in the country and significant
factors of power. It is reflected in the Chaebols. It
is reflected in the groups that come together. There
were centres of power. There was little disclosure.”
I wonder what Levitt & Australian born, Jim Wolfensohn,
who was Chairman of the International Advisory Board
of Citigroup after his ten year stint at the World Bank,
had to say for themselves in 2001/2002 after Enron and
WorldCom collapsed, and more recently after the US inflicted
on itself, the 2008 sub prime crisis which then “exported”
itself from the “Land of the Brave and the Home
of the Free” to all of us in the rest of the world.
In Sri-Lanka, over the last few months, I have been
witnessing with considerable sadness the plight of many,
after the collapse of Finance Companies here-particularly-Golden
Key, the investment vehicle of many simple but apparently
aware people, some who deposited their only “cash
assets” and who lived ordinary lives in their homeland
in order to educate their children overseas. In a message
in 2002 to the Confederation of Asian & Pacific
Accountants I recall saying:
“The collapse of the economies of nations - such
as what happened 4 years ago in East and South East
Asia, or the collapse of corporates - such as what happened
in none other than North America, a few months ago,
can be disruptive. It can devastate what otherwise could
have been only a continuation of a simple and less than
extravagant life style for many who are less privileged
than those at the higher levels of governance who are
typically better cushioned to absorb the shock and disruptions
these events bring. It is this segment of society that
I particularly wish to identify and empathise with,
since it is only through them that we realise the gravity
of the implications of sub par professionalism or poor
governance”
While commending the regulatory swiftness with which
the Central Bank placed Seylan Bank under the oversight
of the Bank of Ceylon, thus acting for example, very
similar to the Central Bank of Sweden almost 14 years
ago, and preventing a run on deposits on Seylan and
the resultant numerous implications, (which would have
resulted if it chose to await the outcome of a due diligence,
as some thought it should), there is now a greater challenge
ahead.
It is in this context that I wish to quote from the
Central Bank’s current website in its webpage on
Financial System Stability and under the subsection
“Surveillance of Financial Conglomerates”
which refers to an initial report of a Working Group
of Regulators for Financial Conglomerates to be “completed
in early 2007”. The full extract of the relevant
section is as follows:
Surveillance of Financial Conglomerates
“The existence of large financial conglomerates,
especially those that have banks as part of the conglomerate,
is another area that has attracted increased supervisory
concern in recent times. The regulation and supervision
of such financial conglomerates is becoming increasingly
more important and complex, due to the potential systemic
risk that could arise from the interrelated nature of
their activities. Large numbers of cross shareholdings,
common directors and inter company transactions are
areas that are of key interest in this regard, as it
could result in conflicts of interests and abuse of
power, which would not augur well for the stability
of the financial system. Since there are multiple regulators
in the financial system, the supervision of conglomerates
often falls under the purview of several regulators,
requiring close co-operation and supervision.
Therefore, a Working Group of Regulators for Financial
Conglomerates comprising of the Central Bank, the Insurance
Board of Sri Lanka, the Securities and Exchange Commission
of Sri Lanka, the Accounting and Auditing Standards
Monitoring Board and the Department of Registrar of
Companies has been established to monitor the systemic
risk of conglomerates. The mandate of this working group
includes identifying and defining financial conglomerates;
identifying the functions of the separate regulators;
assessing the systemic risk of such conglomerates by
sharing necessary information among regulators, recommending
a course of action for regulation and supervision of
the respective institutions in a consolidated manner;
and proposing necessary legal reforms to address the
existing limitations relating to regulation and supervision
of financial conglomerates. The initial report of the
Working Group will be completed in early 2007.”
(Extract of current Central Bank Website)
It is now a national imperative that the outcomes of
this Working Group (if it had been completed) are critically
reviewed to determine where it is incomplete in relation
to the Central Bank’s regulatory oversight and
effectiveness. Perhaps we could have saved the moneys
of depositors and the public moneys that would now go
towards bailouts and stimulus packages if greater attention
was paid to surveillance of Financial Conglomerates.
The idea of a “co-regulatory initiative” which
was extensively embraced by many nations after the East
Asian Financial Crisis of 1998, is laudable and I have
no doubt that the intentions of this initiative of the
Central Bank, which would have begun in early 2000 were
sincere. Now is the time to get back to the drawing
Board regarding this matter. I took up this issue at
a recent Transparency International Round Table Discussion
two weeks ago.
Having stated that I do not think the Auditor Generals
Department conducts a “Regulatory Oversight &
Effectiveness Audit” and appreciating the fact
that my fellow member in the profession the Auditor
General, Swarnajothi, who was present that day, and
indeed was sitting just next to me, did not take offence
to my comment, I conveyed my recommendation at this
Round Table that the “Regulatory Oversight (Scope)
& Effectiveness” of all regulators, in the
Financial Sector in particular must be subjected to
a rigorous review. Not only the Central Bank but also
institutions such as the Securities and Exchange Commission
of Sri Lanka, the Accounting and Auditing Standards
Monitoring Board and the Insurance Board of Sri-Lanka,
must submit to such a Regulatory Oversight & Effectiveness
Review. Enabling statues will also have to be reviewed
such that the scope and regulatory coverage or oversight
of these institutions is not constrained by inadequate
statutory provisions. Risk Mitigating or Minimising
measures such as Deposit Insurance, which has been tossed
around for over a decade and half or more in this country,
must now be identified and implemented. Hence it is
really a Legal or Statutory/Regulatory Review and Consumer
Protection measures that I seek.
Once the above is done, a key consideration will be
to then determine “institutional capacity inadequacies”
(human/technical) and to design and implement capacity
building initiatives. As far as the capacity building
of the Bank Supervision department is concerned I recall
making a suggestion to the then IMF resident representative
over 10 years ago at an ICASL seminar, that a programme
of technical/financial assistance be provided to this
division of the CBSL, with an expanded approach to have
a number of seasoned regulators from nations with robust
regulatory frameworks, to work side by side with a dedicated
team at the Central Bank such that capacity is built
and “succession planning” can be effectively
addressed.
If all regulators submitted to an independent review
and repositioning, over time, we will be able to manage
our regulatory obligations to the people of this country,
with competent indigenous people, with skill, knowledge
and experience. I hope that the Government and all regulators
will address their minds to this issue, positively and
pro-actively rather than defensively. This will be a
timely “Api Wenuwen Api Initiative”. Then
the less than aware mantra that the Market Economy has
failed will also subside. A Market Economy is not one
where there is freedom of the wild entrepreneur or philanthropy
without conscience or responsibility to the source of
money that enables it, but one driven by an economic
strategy, with desirable and effective regulation. While
recognising that I may be swimming against a global
tide, whether catalysed by Sarkosy in France, Chavez
in Venezuela or even by pockets in America, let alone
in Sri-Lanka, may I make bold to submit that the concept
of a Market Economy with Regulation, has been tried
and tested, is sustainable and is indeed, here to stay.
Sustainability of political parties on the other hand,
can well be made the outcome of all this, since this
will endear people – the depositor, the investor,
the consumer, the voter, to it, through a more affordable
and comfortable lifestyle, (where the Government focuses
its scarce resources on necessities like health, education,
water and electricity, roads and communication etc and
regulation of all of it) rather than a contrary strategy-that
Government intervention and ownership of banks and businesses,
is the new approach-the life of which strategy, will
be as short as a lie.
|
