What does banking reform mean

In the overhaul, the FSA will be abolished, and three new bodies created, the first two within the Bank of England, to regulate financial services:. Ordinary people who have savings have long been protected from losing their money if their bank goes bust. But since the onset of the crisis, the level of protection has more than doubled.

The FSA has moved to scrutinise more thoroughly banks' appointments of chief executives and board members in recent years. The regulator has to approve anyone wanting to serve in "significant influence functions" SIF at financial companies. It now uses formal panels to interview many would-be top executives. Former FSA chief executive Hector Sants has admitted that prior to the crisis the FSA did not do enough to assess the suitability of candidates or to look at the blend of individuals on a board.

Over the last two years, 39 SIF applications were withdrawn "demonstrably due to serious concerns identified by the FSA interview panel". Once the FSA is replaced under the new regulatory system, the Financial Conduct Authority will be involved in SIF interviews and will have the right to veto individuals.

So what has actually changed? Pay and bonuses. Bank levy. Who pays if a bank fails. It may then be desirable to liberalize bank interest rates only gradually, while encouraging greater competition and more rapid liberalization in other segments of financial markets.

Country practices show wide variations in terms of speed and sequencing of interest rate liberalizations. The Philippines preferred to liberalize long-term rates first, before moving on to short-term rates. Korea proceeded gradually, liberalizing loan rates first before embarking on a gradual freeing of deposit rates; long-term deposit rates and larger deposits were freed, before moving on to shorter rates and smaller deposits, in hopes that this would prevent sudden portfolio shifts.

Other countries see Chapter 2 have preferred to liberalize both loan and deposit rates simultaneously. A gradual approach to interest rate liberalization involves continuing the inefficiency in resource allocation over a short period of time, but this appears to offer a better opportunity to put in place the range of supporting reforms that would ensure the longer-term effectiveness of interest rate liberalization.

Most countries have liberalized money market rates first, even while pursuing a more gradual approach to liberalization of bank deposit and lending rates. As regards reforms of selective credit policies, generally, it is better to shift interest rate subsidies offered through the central bank to the budget, and to reduce the range of refinance facilities to a minimum needed for monetary control purposes.

Instruments and markets to facilitate maturity transformation—longer-term capital markets in particular—may have to be developed to avoid major disruptions in investment finance due to withdrawal of central bank support.

In the meantime, if banks are to be induced to continue to lend to certain high-risk sectors that are supported by central bank refinance policies, it may be necessary to increase the interest rate flexibility offered to banks, and reduce the costs of information and debt recovery.

The timing of Indonesian reforms of refinance policies illustrates these approaches. In Indonesia, central bank support for term lending by commercial banks was only withdrawn gradually while alternative policies to increase the supply of long-term capital were put in place.

Insofar as the existence of such selective refinance policies cause significant expansion in the reserve base, the authorities would have to strengthen the instruments to absorb excess reserves and make sure that interest rates on selective refinance facilities are promptly adjusted in line with market rates. Moreover, policies to improve the allocation of selective refinance between financial institutions, such as through auctions, can help mitigate the allocative efficiencies and institutional distortions of the refinance.

Some countries have first developed money markets for short-term instruments before developing ones for long-term securities. This is because money markets provide a more convenient vehicle to implement monetary policy in a market-oriented way. The dealership skills developed through short-term instruments can then be translated to long-term instruments over time.

In any case, central banks should play a major role in developing money and capital market intermediaries brokers, dealers, and market makers through liquidity and regulatory support—Indonesia and the Philippines are examples—and through fostering efficient clearing and settlement systems for payments e. On June 14, , the austral replaced the peso at the rate of 1 austral to 1, pesos.

On January 1, , the peso replaced the austral at the rate of 10, australes to one peso. Between , includes monetary absorption and consolidation bonds. For , monthly average.

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Download PDF 4. Abstract Full Text Related Publications. Country Experiences with Financial Sector Reform The presentations for each country describe the prereform financial structure and the broad economic circumstances that were associated with the financial reforms.

Prereform: The Argentinean economy of the mids was characterized by distortions in relative prices, a highly disorganized and repressed financial system, multiple exchange rates, and restricted international capital flows. Financial sector reform: In the context of an economic adjustment program aimed at curbing inflation, limiting the economic role of the government, and promoting the international integration of the economy through the reduction of tariffs and exchange controls , the Argentinean authorities introduced a range of measures to reform the financial system.

Effects of financial sector reforms: First, the reforms did not have a major effect on financial sector efficiency. Financial sector crisis In March a major bank failed.

Conclusions The financial reforms in Argentina for the years illustrate the risks of financial sector liberalization when other structural and macroeconomic policies are inadequate to support the liberalization. Prereform: The Chilean economy of the early s was characterized by weak GDP growth, domestic and external imbalances, and extensive controls on trade, capital flows, and enterprises. Reform and stabilization: The Chilean authorities followed programs of stabilization between and Results of the reforms: The financial reforms resulted in an increase in the number of financial institutions see Appendix II , Table 3.

Financial crisis In the early s, the Chilean authorities faced a financial crisis. Conclusions The financial liberalization in Chile illustrates the risks in financial reform even with fiscal adjustments and a restrictive monetary policy. Indonesia Indonesian reforms during initially followed a gradual approach; as the reforms accelerated they exposed financial sector weaknesses.

Prereform: Indonesia achieved high rates of growth during the s, mainly because of oil exports. Adjustment and financial sector reform: After , the Indonesian authorities adopted programs of adjustment that included exchange rate devaluations in and , fiscal retrenchment especially in public investments , progressive deregulation of trade and industry, and financial sector reform. Indonesia: Sequence of Financial Reform. Results of the reforms The removal of the credit ceilings, interest rate controls, and discriminatory regulations on different financial institutions benefited the more efficient private banks, and their balance sheets grew more rapidly than those of the state banks in the postreform period see Appendix II , Table 3.

Korea Korea followed a very gradual and managed process of financial sector reforms from to Financial reform: The financial reforms in Korea were part of a broader economic adjustment program that included currency devaluation, tight monetary policy, contractionary fiscal policy, strict wage guidelines, and increases in administered prices. Korea: Sequence of Financial Reform. The reform idea of autonomy, independence, and consolidation in that order was to signal that if there were any public purpose requirements, they had to be achieved through a non-discriminatory regulatory intervention that was ownership neutral.

Autonomy would allow these institutions to strategize and hopefully consolidate based on synergies and value creation. The state has lost the spirit of these recommendations completely. The committee suggested that Statutory Liquidity Ratio SLR should be seen as a prudential requirement and not as an instrument for financing the exchequer, and Cash Reserve Ratio CRR should be a monetary policy instrument and not a secondary expansion tool of the state. The public purpose of deficit financing through banks was removed with the abolition of automatic remonetization and the passing of the Fiscal Responsibility and Budgetary Management FRBM Act, Other prudential suggestions, from capital adequacy to improving accounting standards, were also implemented by and large, perhaps because there was no significant implication on public purpose.

The abolition of branch licencing; deregulation of interest rates; special tribunals for the recovery of non-performing assets NPAs ; and the promotion of asset reconstruction companies ARC. The branch licencing norms were indeed abolished. When it was seen that adequate branches were not being opened in rural areas, it was changed, but was done in a way which encouraged a level playing field for all banks by including the private sector banks.

Interest rates were fully deregulated except for agriculture, where a perceived public purpose was being served. ARCs were also set up. The credit was also to be directed only to small and marginal farmers and tiny, micro and small enterprises.

This was serving a larger public purpose, but was not implemented. However, since this is applicable irrespective of ownership, it should not be seen as a reform measure in public sector banking per se. The above instances illustrate that the state is unwilling to let go off operational control, especially when the pretext is a larger public purpose.

The interventions over the past two decades have often come via the operational route rather than as policy or regulatory measures. At the same time, the state believes that since the vehicles used for these interventions are commercial organizations, they ought to be subjected to the market discipline of profitability and valuation. Herein lies the dichotomy: they are commercial structures but carry a load of non-viable public purposes objectives.

The spirit of the reforms would be met if these institutions are completely made market facing. The intervention of the state for its public purpose objective should be through the policy and regulatory instrumentality and must be ownership neutral. In the case of RRBs, they continue to serve a larger public purpose. Their balance sheet would need periodic recapitalization and has to be dealt with on the basis of the merits of the public purpose they are addressing.

The approach of consolidation of RRBs and listing them while continuing to hold on to public purpose objectives is a mindless exercise. The state would never let go of the public and non-viable functions that these banks perform. The state hopes that as the picture becomes bigger, the warts will disappear. The mindless consolidation of PSBs is also not reform. It just destroys the enterprise value, as we have seen in the market response to the merger announcements.

The decision to merge should have been a market facing decision, made through a process of discovery of synergies, brand potential, physical outreach, technology platforms, human resources, and unique strengths that mutually reinforce value creation. This is a professional exercise, to be carried out autonomously.

But now its being carried out by people in administration who neither have the time nor the expertise to engage with value discovery and being implemented without much choice. Instead of solving a problem, this makes the problem bigger. The approach to reform, and the sequencing of reform, have been very well laid out in the recommendations of the PJ Nayak Committee.