Organization of Effective Bank Supervision

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BANK SUPERVISION

Unit IX

Different countries have used various ways to structure their bank supervision function, normally either through the Central Bank, the Ministry of Finance, or an independent agency.

· A Central Bank is the heart of a financial sector; most central banking laws accord the Bank the responsibility for the sector's soundness. Thus bank supervision is a common function of Central Banks, especially in developing countries.

· In some countries, the Ministry of Finance wishes to hold control over virtually all aspects of the financial sector, with major powers related to banking vested in the Minister.

· A third option is to have an independent agency, responsible to the Parliament or the President, conduct bank supervision. This could include a deposit insurance corporation which takes primary responsibility for supervision.

· With its complex banking system, the United States conducts supervision through its Central Bank (Federal Reserve), its Ministry of Finance known as the Treasury Department through the Comptroller of the Currency, and its independent agency for deposit insurance known as the Federal Deposit Insurance Corporation (FDIC).

Regardless of how bank supervision is organized and structured, the entity that is responsible for carrying out supervision should also be vested with the powers to do its task.

· All too often, especially in developing countries, the supervisory authority lacks key powers to do its job. Such powers should include the power to control entry (license), the power to impose prudential regulation, enforcement powers to deal with problem banks, and the power to seize and/or close banks which are insolvent or where depositors' funds are threatened.

· As we will see later, if a supervisory authority is not the authority which grants licenses, it does not have the proper say over who it will be supervising.

· Also, if the supervisory authority cannot take firm action on its own and must only do so with the approval of some other entity, its ability to do its job is severely compromised.

· Many developing countries have found that providing the powers needed to supervise within the Central Bank can be effective for supervision if structured through the Central Bank's Board of Directors which includes representation from the Ministry of Finance.

If the on-going responsibility of bank supervision is vested in the Central Bank, the work is usually done within a department which in turn reports to the Governor and/or Deputy Governor with ultimate policy coming from the Board.

· It should always be kept in mind that if the power to supervise rests within the Central Bank, the department with the responsibility for such supervision is only carrying out the directives from the Governor and/or the Board.

· However, day to day handling of bank supervision within a Central Bank is usually done by one department charged with bank supervision.

· The Director of Bank Supervision, or a Deputy in his absence, carries out the normal functions and reports to the Governor or Deputy Governor on a periodic basis with regard to events and findings from the Department's work.

· The work of the Bank Supervision Department should be brought to the attention of the Governor or Deputy Governor on a regular basis, normally through meetings of a management or executive committee.

· In addition, issues concerning bank supervision should be a regular feature of Board meetings of the Central Bank.

· Assuming that the Board has a representative from the Ministry of Finance, this serves to keep the Minister informed of issues involving the financial sector and allows the Ministry's views to be heard.

A Bank Supervision Department must be organized taking into account the types of financial institutions to be supervised and the methodology of supervision used.

· A department that only supervised banks might not need to divide itself into groups. However, if credit institutions and building societiesexisted, the department would probably need sections for each type of financial institution in place.

· Another subdivision would be by function, with one section in charge of on-site exams, another for off-site surveillance of banks, and perhaps a third for general research (legal issues, etc.) and special projects.

· The staff size is a paramount consideration. On-site exams consume a great deal of manpower and the on-site function normally requires the largest number of people.

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