Introduction to the Legal Framework

Effective bank supervision relies on a sound legal framework. While bank supervisors may often prefer to make recommendations and advise banks through informal “moral suasion”, this approach only works well if backed by strong and clear laws and regulations.

· A clear and specific legal framework allows all banks to "know the rules of the game."

· Bank supervisors must be given the powers and authority to conduct on-going supervision and to take prompt and effective action with problem banks.

· During periods when the financial sector is changing, such as allowing new banks to start or deregulation of the sector, it is essential that the legal framework be up to date.

These levels complement each other in establishing the supervisor’s authority and role for key prudential components; for example, the licensing of new banks as described below:

· The banking act would provide that no entity can engage in "banking business" as defined, without a license issued by the Central Bank (and/or the Minister).

· A Regulation on capital adequacy for banks would include a minimum amount of capital for all banks, including the minimum initial paid-up capital for a new bank.

· A Policy Statement on the licensing of new banks would be issued by the supervisory authority giving the guidelines used in the review of each application for a license to open a new bank.

While it may not be necessary to have all three levels in a legal framework, it should be remembered that regulations and especially policy statements provide the supervisory authority with some flexibility in how it implements the banking law. These can be changed much more easily than can an act.

The key prudential components in an effective legal framework can either be in the law itself or through a regulation; thus emphasis should be on ensuring that these prudential components exist and are comprehensive.

· A prudential component in the law itself has a greater sense of permanence and can be backed by specific legal penalties if violated. However, it is less flexible in changing financial circumstances.

· A prudential component issued in the form of a regulation will provide greater flexibility for the supervisory authority but may, in certain cases, carry less "legal clout" if not adhered to.

· In reviewing prudential components for a legal framework, it is not enough to simply check that they exist; consideration should be given as to how specific and potentially effective they are.

What follows is a description of several key prudential components which should be addressed in the legal framework.

In looking to see if a legal framework is complete and comprehensive for bank supervision purposes, it should be determined if all the key prudential components are in place. An absence or shortcoming in one of these areas can weaken overall bank supervision effectiveness.

1) Entry Control

2) Initial and Structural Requirements

3) On-going Prudential Requirements and Prohibited or Restricted Activities

4) Authorization of and Relationship to External Auditors

5) Reports to and Requests for Information by the Central Bank

6) Authority to Conduct On-site Examinations

7) Enforcement Powers

8) Seizure and Closure Powers and Liquidation Procedures

Дата добавления: 2014-12-29