Marion Williams: Governance and regulation of the financial sector -
post meltdown: what has changed?
Remarks by Dr Marion Williams Governor Central Bank of Barbados, at the Seminar on
"Governance and Regulation of the Financial Sector - Post Meltdown: What Has Changed?",
Bridgetown, 14 October 2009.
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Senator The Hon. Darcy Boyce, Distinguished speakers, Members of the Board of The
Central Bank of Barbados, Deputy Governors, Members of Management and Staff of the
Bank, Managers of Financial Institutions, Specially Invited Guests, Distinguished Ladies and
Gentlemen:
Welcome to the Central Bank of Barbados and to today's Seminar on Governance and
Regulation of the Financial Sector - Post Meltdown: What has changed? I extend a special
welcome to our overseas speakers Mr. Geoffrey Bell, Ms. Jane Darista, Mr. Amar
Battacharya and Mr. Osbourne Nurse. We thank you most sincerely for taking time out from
your busy schedule to be here. The high level of attendance this morning suggests a keen
interest in international and regional developments and their impact on the financial sector.
Our distinguished speakers will be discussing several critical issues as the world tries to
chart a way forward for the financial sector. I will offer some preliminary remarks about the
areas which I expect that we will cover.
Attitudes and perspectives
The global financial crisis and its bank failures, collapses, scandals etc. cannot be undone.
Whatever its genesis - developed and developing countries, offshore or onshore financial
centres, we all need to change attitudes, perspectives and strategies in order to ensure that
institutions all across the globe are strengthened and that we restore consumer confidence
and trust, globally, in financial systems.
The interconnectedness of financial systems is such that the failure of an individual
systemically important financial institution can reverberate globally. The dramatic changes in
the global financial landscape over the past year have been historical in their proportions. In
a period of such tremendous changes it will be necessary to take stock of where we are and
to question how the financial sector is being governed, regulated and supervised. Without
doubt there will be changes in global rules as we have already seen and in global cross-
border movement of funds, ownership structures and similar types of arrangements.
Research and discussion is needed on important subject areas that will be discussed today.
Basic questions
Even basic questions about who should have responsibility for regulation and whether the
lender of last resort function should be separated from the regulatory function are now
becoming important issues on the table. In the UK it now has political dimensions. The
breath of responsibilities of the regulator are now also being revamped, particularly in the
US, as is the question of how much should be left to the market and how much should be
directly regulated. The age of deregulation may well be about to witness some fundamental
changes and reversals.
Governance
Good governance aids regulation. Regulators are therefore calling on institutions to institute
voluntary governance practices to deal, for example, with excessive risk taking, rather than
opt for a system of imposed over-regulation. Adequate oversight by Boards is important, as
is adherence to codes of ethics.
Importance of collaboration
What has become very clear, and we have seen it even in the Caribbean, is that there is now
significantly more emphasis being placed on collaboration among regulators, and on
reducing regulatory arbitrage - that is, the ability of entities to cherry pick where they do
business, so avoiding the stricter type regulatory domiciles, because of differences in
regulation. This is particularly important in single economic zones like the Caribbean, and on
a larger scale, the EU.
Derivative trading
While the Caribbean has not been too heavily involved in derivative trading, the regulation of
derivatives has attracted a lot of attention, since many of the problems in the credit markets
were attributable to the ability of financial firms to originate poor credits and redistribute them
to others, thus leaving the burden of poor credits which they had originated on the books of
others. It is important that solutions are found to this issue.
Branch/subsidiary operations
The branch subsidiary responsibility and where it lies has also surfaced in many jurisdictions.
Because an entity is setup by way of subsidiary rather than a branch does that give the
parent an escape route? Or should the parent shoulder its responsibility even though the
entity is set up as a subsidiary?
Adequacy of capital
Another issue of importance is the question of the adequacy of capital. This has become an
important matter in the post meltdown period. Many jurisdictions have taken steps to
increase capital adequacy. Even before the global crisis Barbados had taken such steps.
However, the adequacy of capital is being increasingly critical. Will capital ever be a fail-safe
requirement? If it were, capital levels would have to be so high as to stymie the development
of financial institutions. What therefore is the balance which has to be struck? And what are
the accompanying requirements which must support capital requirements? These are
important areas to be considered.
Too big to fail
We have seen, even here in the Caribbean that there is such a thing as "too big to fail", or
rather, "too big to be allowed to fail". There is currently a debate as to whether large financial
entities should have a progressive scale of capital requirements, which require bigger entities
to hold more capital pro-rata. The other concern being debated is whether financial entities
should be allowed to become too large.
Transparency, accountability and trust
Another important factor observed during the meltdown was that the more sophisticated
securitization became, the more opaque the instrument, so that is was often not possible to
tell what the risks of the instruments were and who was bearing that risk. So much so that
entities then bought back some part of the securities they had distributed without realizing it.
A way needs to be found to track the risks in these securitized instruments.
Processes and practices
The micro prudential approach to supervision has emphasized protection of the small
depositor and reducing the likelihood of failure of an individual institution. In the past, this
might have been sufficient to bring comfort to many consumers. However, by re-focusing on
the financial system as a whole, we reduce the risk of concurrent failures of systemically
important institutions. Such a change is necessary to enable us to withstand and rally against
future shocks and developing a framework for macro-prudential regulation will be an
important step. This is another important area of focus on the post meltdown period to which
attention must be paid.
Emphasis on the risk behavior of both bank and non-bank financial institutions, and the
counter-cyclical approach of building buffers in good times is another needed change.
Indeed, the pro-cyclicality of the system has been frequently criticized.
Another area of interest is the scope of regulation. Given the propensity of risk to migrate
from regulated to less regulated sectors, requires that corrective approaches be equally
considered in both the bank and non-bank sectors. This wider regulatory coverage already
exists in Barbados in respect of non-banks but steps are in train to strengthen oversight of
other entities which will fall under the New Financial Services Commission. On a global
scale, the form which increased regulation will take is still being developed. I am sure that we
will get some early indications from our speakers on how this is likely to develop.
What the global crisis has taught us is that there is need to take the time out from managing
complex technical issues to ensure that there are crisis management plans that can be
activated when financial stability is under threat. I am pleased to say that, in the Caribbean
case, this project is well underway and is being piloted by the Caribbean Group of Banking
Supervisors.
Additionally, communication can instill confidence and trust by fostering a better
understanding of the financial markets and thus engender increased participation. On this
point, I am pleased to say that the Central Bank of Barbados recently launched a National
Financial Education Programme in August 2009, which will enhance the financial capability
of Barbadians and so lend to renewed participation in financial markets. We would like to
believe that if consumers in the US were more savvy the sub-prime crisis might have been
avoided. The important question is, to what extent can financial literacy prevent these
problems for the consumer?
Infrastructure
Efforts to find the optimum regulatory architecture are varied in form and pace. As we
rebound from the crisis and crystallize the lessons arising, it is important to proceed at a
pace that is steady and appropriate to the environment. Reform of the supervisory framework
is being paced addressed by several global and sub-regional groups. I am sure that we will
learn about the new European Risk Council and European System of Financial Supervision,
as well as the debate on whether to expand the powers of the Federal Reserve. Barbados
has accepted that change is needed in the regulatory architecture and the new Financial
Services Commission is targeted for establishment in mid 2010.
As we move to effect change, care must be taken to take stock of the status of the economic
crisis. We must be mindful that the combined impact of new requirements, such as the
introduction of anti-cyclical regulation (e.g. capital and liquidity buffers), should be timed such
that the core business of financial institutions (for example lending) can continue.
Fortunately, in the Barbados case there were significant liquidity buffers, but generally, policy
makers in instituting new requirements may need to set longer-term strategies rather than
attempt overnight correction.
The pre-lunch sessions speak to a range of interesting subjects. These include perspectives
on the economic activity in industrial countries, interest rates, prices, commodity prices and
exchange rates; changes in the global economic architecture; the approach of industrial
countries and organizations to international business and offshore financial centers; and
multilateral surveillance. We will also hear of issues surrounding rebuilding transparency,
accountability and trust; the ongoing refashioning of the regulatory landscape; and regulation
outside the box will surely stimulate further discussion. Lastly, what needs to be done with
respect, inter alia, to Basel Il; macro prudential regulation; International Financial Reporting
Standards; mechanisms to address global market stability; and governance of
remuneration/compensation schemes, securitization, and off-balance sheet operations are
issues which require further debate.
The post-lunch session is especially interesting as it brings a regional perspective to the fore.
The wealth of experience of the panelists will ably highlight the challenges and changes
needed to address matters relating to the CSME and the pace of harmonization of economic
and financial sector policies and regulation; cross-border banking, financial conglomerates,
financial holding companies - implications for regulation and consolidated supervision;
deposit insurance Schemes; and cross-border crisis management and crisis resolution for
systemically important financial firms.
My final point is that sometimes it takes a crisis to spur action and the search for voice and
participation for developing countries has improved tremendously since the crisis with the
establishment of G20. This is the first step and we look forward to others.
In closing, let me thank those who have gone to much effort to be here and I look forward to
the presentations.