Financial Stability: Financial Stability: Policy Choices for Small Economies Policy Choices for Small Economies Mohammed Al-Jafari Director General Jordan Deposit Insurance Corporation ١ Strengthening Financial Stability- Deposit Insurance Contributions (Rome- Italy 30 Sept. – 1 Oct. 2010)
Financial Stability Policy Choices for Small Economies: Outline • The Conventional Framework for Financial Stability Self Regulation and Risk Management Prudential Regulation and Supervision Monetary Policy Deposit Insurance Fiscal Policy • Consistency of Policy Objectives • Policy Choices for Policy Objectives • Main Features for Small Economies • Possible Policy Choices • Conclusion ٢
The Conventional Framework for Financial Stability Financial Stability Prudential Regulation and Supervision Self Regulation and Risk Management Monetary Policy Deposit Insurance Fiscal Policy ٣
Consistency of Policy Objectives Policy Primary Policy Objective Ultimate Objective Self Regulation and Achieve Sustainable Returns to Shareholders Risk Management Prudential Regulation Prevent Distress of Financial Institutions and Supervision Financial Stability that Promotes Economic Monetary Policy Maintain Price Stability Growth Deposit Insurance Protect Less Financially Sophisticated Depositors Fiscal Policy Manage Aggregate Demand ٤
Policy Choices for Policy Objectives • Each Authority has Several Policy Tools to Achieve its Primary Objective; • Primary Objective for One Policy could be a Secondary Objective for Other Policy; • No One Policy Does the Job; • No One Tool for Single Policy Objective; • No One Size Fits All; • Coordination and Harmonization Improve Policy Effectiveness. ٥
Main Features for Small Economies • Stronger Cyclicality • Greater Variation in the Length of the Business Cycle • Higher Variation in Budgetary Revenues • Venerable Current and Capital Accounts • Clearer Need for Anchor Currency to Support Exchange Rate Stability • Greater Role for Cost-Push Inflation ٦
Possible Policy Choices: Self Regulation and Risk Management Credit Risk Pursuant of High Higher Credit to TA Ratio; Returns (Unsustainable) Higher Concentrations; Higher Sensitivity to Business Cycle Liquidity Risk Market Risk Limited Exposure Distorted Less Advanced Risk Management Incentive Structure Techniques Insolvency Risk Operational Risk Stringent Internal Control System Excessive Leverage and Increased Risk ٧
Possible Policy Choices: Prudential Regulation and Supervision Compliance with Banking Regulations and Directives OR Off-site • Comprehensive Appraisal of Risks Supervision • Monitoring and Evaluating Safety and Soundness • Providing Early Warning of Potential Problems Compliance with Banking Regulations and Directives OR • Risk Assessment On-site • Assisting Banks in Managing their Risk Supervision • Evaluate Potential Problems Identified by Off-site Examination • Assessment of the Quality of Assets, Management, Earnings, Capital, and Funds Management, as well as the Bank's Internal Control, Audit, Management Information…etc. ٨
Possible Policy Choices: Monetary Policy Conventional Role to Play Conventional Role to Play • Reserve Management; • Reserve Management; • Lender of Last Resort; Fixed • Lender of Last Resort; • Exchange Rate Management; Constraint Exchange Rate • Exchange Rate Management; • Provision and Management of Regime • Provision and Management of Financial System Infrastructure (e.g.. Financial System Infrastructure (e.g.. Payment and Settlement Systems). Payment and Settlement Systems). Independent Free Capital Exceptional Policy Tools For Crisis Exceptional Policy Tools For Crisis Monetary Movement Management Policy Management • New Lending Programs • New Lending Programs • Open Bank assistance • Open Bank assistance The Impossible Triangle • Liquidity Support The Impossible Triangle • Liquidity Support • Asset Purchase • Asset Purchase • Capital Injection • Capital Injection Budgetary Position • Troubled Asset Relief Contingent Budgetary Position • Troubled Asset Relief • Supporting Inter-bank Lending • Supporting Inter-bank Lending ٩
Possible Policy Choices: Deposit Insurance Credible Well- Designed Limited- Coverage Deposit Insurance System In Compliance In Compliance Strengthens with the Core with the Core Principles for Principles for Effective Effective Market Monitoring Deposit Deposit Insurance Insurance Contains System System ( Compulsory ( Compulsory Membership, Membership, Moral Hazard Credible Credible Coverage Coverage Limits Limit, Limit, Risk Based Risk Based Premium Premium Banks Risk Taking etc.) etc.) ١٠
Possible Policy Choices : Deposit Insurance Absences of Deposit Explicit Blanket Implicit Blanket Guarantee Guarantee Guarantee Limited Explicit Deposit Limited Explicit Limited Explicit Deposit Insurance Deposit Insurance Insurance Different Outcomes for Incentive Structure Moral Hazard / Financial Stability Deposit Insurance may create incentive Deposit Insurance Deposit Insurance incompatibilities and thus Contains Moral Hazard Contains Moral Hazard moral hazard if the scheme is poorly designed ١١
Possible Policy Choices : Fiscal Policy Basic Function in Promoting Basic Function in Promoting Stability for Sustainable Contingent Stability for Sustainable Growth Growth Countercyclical Management of Countercyclical Management of Aggregate Demand Aggregate Demand Essential Role in Exceptional Fiscal Policy Exceptional Fiscal Policy Dealing with Global Tools For Crisis Management Tools For Crisis Management Crisis •Capital Injection •Capital Injection Economic •Debt Guarantee; Critical Role in Supporting Spillover •Debt Guarantee; Financial System Stability •Asset Purchase; •Asset Purchase; •Recapitalization Using Public Funds •Recapitalization Using Public Funds ١٢
To Conclude • Financial Stability is an Essential Prerequisite for Sustainable Growth; • Financial Stability is an Essential Prerequisite for Sustainable Growth; • Risk Management, by Itself, Can't Do It All; • Risk Management, by Itself, Can't Do It All; • Regulators Should Ensure the Harmonization among Primary Policy • Regulators Should Ensure the Harmonization among Primary Policy Objective (s) With the Objective of Financial Stability; Objective (s) With the Objective of Financial Stability; • Effectiveness of Policy Tools is Time Sensitive and Country Specific; • Effectiveness of Policy Tools is Time Sensitive and Country Specific; • The Achievement of Financial Stability Requires Effective Coordination • The Achievement of Financial Stability Requires Effective Coordination among All Policy Makers in Charge with: Prudential Regulation and among All Policy Makers in Charge with: Prudential Regulation and Supervision, Monetary Policy, Deposit Insurance, and Fiscal Policy; Supervision, Monetary Policy, Deposit Insurance, and Fiscal Policy; • Prudential Regulation and Supervision Along with Deposit Insurance • Prudential Regulation and Supervision Along with Deposit Insurance Must Play Wider Roles in Small Economies, Given the Limitation of Must Play Wider Roles in Small Economies, Given the Limitation of Monetary and Fiscal Policies. Monetary and Fiscal Policies. ١٣
Recommend
More recommend
