Derick Latibeaudiere: Maintaining healthy banking and financial systems
Opening remarks by Mr Derick Latibeaudiere, Governor of the Bank of Jamaica, at the Tenth
Annual Assembly of the Association of Banking Supervisors of the Americas (ASBA),
Montego Bay, 10 October 2007.
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Ladies and gentlemen
It is a pleasure for me to be here this morning to welcome you to the Tenth Annual
Assembly of the Association of Banking Supervisors of the Americas (ASBA). I am
very pleased that this event is taking place in Jamaica and particularly delighted that we are
meeting in our enchanting "second city" - Montego Bay. Montego Bay and especially Rose
Hall, the estate on which this hotel now stands, has been a significant part of our
Spanish/English colonial heritage about which I am sure you will hear over the next two days.
It is with a great deal of appreciation and support that I commend the Association for the
work that it is doing to develop, disseminate, and promote sound banking supervisory
practices throughout the Americas. The range of items on the Agenda is a clear indication of
the continuing seriousness and strong commitment with which you have approached the task
of ensuring that these objectives are met. The Bank of Jamaica is very pleased to be a part
of this organization and we welcome the opportunity to be involved in organizing and hosting
this Assembly.
I must extend a special welcome to the Chairman of the Association, Paulo Sergio
Cavalheiro and to the other Board members of ASBA who met here yesterday for Board
discussions. I trust that the environment contributed to productive deliberations. We look
forward to hearing about the programmes that you have charted for the year ahead.
I would also like to welcome Mr. Rudy Araujo, the Executive Director of ASBA and the
other members of the ASBA Secretariat who have travelled to Jamaica from Mexico. Permit
me to thank them for their efforts in co-ordinating the arrangements for this Assembly, along
with my BOJ team.
With us also, are a number of specially invited guests - representatives from non-member
multilateral and regulatory organisations and from the private sector, who will be joining in
the discussions over the next two days. I will not venture to name all of you, and so I say
welcome all.
Mr. Chairman, one of the major lessons of the ten years since the start of these Assemblies
has been the heightened recognition of just how important it is for us to maintain a healthy
banking and financial system. A strong and healthy financial system is critical for the growth
and development of any country. Throughout the long history of financial markets, there have
been a number of banking and financial crises that have severely disrupted economies.
There is no reason for us to believe that there will be an end to these disruptions in an era of
continuing technological change and innovation.
What is therefore important is that we continually seek to prevent and mitigate future crises.
This we can do with a blend of sharp analysis, keen judgment, practical experience and a
rigorous understanding of the workings of financial markets in both normal and abnormal
times. I believe that this is what defines effective banking supervision. It is also this rigorous
understanding of the operations of financial markets that is of critical importance to the
development of macroeconomic policy inclusive of monetary policy.
Mr. Chairman, over two and a half centuries ago, in the 18th century to be exact, Adam
Smith wrote of the free-market system as the "invisible" hand that guides the market to
achieve the public good. While that concept has today still not lost its resonance, the
increase in the complexity of economic and financial affairs and the potential for instability
that this has fostered, has placed us in a new arena. An arena, whose sphere of influence is
constantly changing and one that therefore requires close and integrated monitoring in order
for us to understand and manage the risks that abound. The banking crises of the last
quarter of a century and particularly those of the last ten years have had a damaging impact
on economic activity and the repercussions have been devastating for a number of
economies. There is therefore no room for countries in our region to be less than aggressive
in ensuring a more careful, integrated and direct oversight of the financial system to
complement at least, that "invisible hand" of which Adam Smith wrote. This is of course, what
ASBA is trying to achieve.
I use the word integrated because in some of our jurisdictions, Jamaica for example,
supervision is divided among institutions. In the Jamaican case we have over the years
reduced the number of supervisory authorities in the financial sector to two. This has
achieved positive results in terms of the efficiency of supervision. It is my view that we could
achieve an even greater level of effectiveness by going one step further with the
establishment of a single supervisory authority for the financial system as a whole.
I also believe that there are significant advantages to be derived from the integrated interplay
between the roles of supervision and the effort to achieve financial and macroeconomic
stability. I believe that the benefits from this interplay are best realized when the supervisory
functions are integrated and placed in one umbrella organization such as the central bank -
the most logical location, bearing in mind the synergies that I mentioned. In other words, in
the Jamaican context, my preference is for an integrated and autonomous supervisory
authority within the central bank.
Traditionally, the central bank's main objective is the achievement of monetary and financial
stability as a means to enhancing macroeconomic stability, growth and development.
Financial stability has always therefore been an important aspect of central banking. In
pursuit of its twin functions, the central bank closely monitors developments in the financial
market, interacts regularly with its primary dealers and other market players and analyzes the
risks to the financial system. Over the last ten years the central bank's emphasis on financial
stability has increased because of the increased potential for systemic risk. The
transformation in the structure of financial markets and the continuing increase in volumes
and products, have contributed to increasing the potential for risk and fuelled the need for a
greater degree of interdependence in the pursuit of macroeconomic and financial stability.
We have seen the challenges that recent developments in financial markets have posed for
central banks both here and abroad. Indeed, these developments point to the dynamic and
intricate links between central banks and financial markets. The Northern Rock case certainly
reinforces the importance of these links and points to the need for a more integrated
approach to the analysis and management of financial market activities both from a central
banking and supervisory point of view. This is especially important in an environment of
continuing change and particularly relevant to emerging and vulnerable market economies
such as Jamaica.
There is no doubt that the achievement of a strong and resilient financial system is enhanced
by the continuous improvement in the analysis and management of risk. Indeed, that is the
subject of the Basel II framework. But the achievement of a strong and resilient financial
system is also augmented by sound and sustainable monetary and fiscal policies. The
linkages are therefore critical.
Furthermore, and speaking from the perspective of the Bank of Jamaica, the ability to act
effectively in a financial crisis is enhanced by the fact that the supervision of commercial
banks resides in the central bank. Indeed, the Bank's current supervisory function helps the
central bank to obtain timely and reliable information regarding conditions in the banking
sector and the payments system. But over the years the changing financial landscape has
spawned a variety of institutions other than the traditional commercial banks. The Bank of
Jamaica has no regulatory authority over these other institutions, which makes it difficult to
quickly gather and evaluate the necessary information to facilitate sound policy responses or
avert crises.
I believe that our central banking activities, coupled with the access to information from an
integrated supervisory authority under the umbrella of the Bank of Jamaica, would enhance
the effectiveness of the central bank's ability to manage crises. At the same time the
supervision of the financial sector as a whole would benefit from the results of central
banking activities in the financial markets. The Bank's technical expertise in monitoring
financial market developments would also be on hand to add value to prudential risk
evaluation.
The Bank of Jamaica is very pleased that the Government has indicated its commitment to
an independent Central Bank. We will be working towards this and in this context we will
pursue the matter of an umbrella supervisory authority under the central bank. There are
good reasons to believe that such an arrangement would significantly benefit the financial
system as a whole. After all, price stability and financial stability go hand in hand, and
prudence is as intrinsic to central banking as it is to financial stability and supervision.
Ladies and Gentlemen,
I believe that the Tenth Annual ASBA Assembly will serve to strengthen the bonds of banking
supervisors within the respective regions and provide meaningful insights into approaches to
current issues in banking supervision.
I know that your discussions over the next two days will produce valuable results and provide
the direction for an even more robust administrative year for ASBA.
Thank you.