Executive Summary
-
Financial liberalization, which started in the 1970s, has altered the nature of financial operations dramatically. In contrast with the pre-1970s, often called the period of financial repression, good financial institution governance is now critical for the soundness of the individual financial institution, and, by extension, the stability of a country’s financial system.
-
In response to these deep and far-reaching changes in the financial sector, financial regulation and supervision has become much more important than ever before, and the nature of its business has been changing in equally dramatic ways.
-
Supervisors were likened for the longest time to compliance, or box-ticking officers. Now, in this governance-driven financial environment, they have become “governance supervisors,” monitoring the operations of the financial institutions on behalf of the diffused and ill-informed deposit-holders of these institutions.
-
Since the start of this transformation of the supervisory approaches, debates have been conducted about the optimal way to supervise the financial systems. Some jurisdictions believe in a principles-based approach, while others swear by a rules-based approach.
-
The discussion is about guiding, or keeping in check, financial institutions through broad-based principles versus well-defined, specific rules. Practice shows that life is too complex for any of these two extremes alone. Both systems have their pros and cons, and best practice seems to go in the direction of a supervisory approach that offers a balance of principles, supported by guidelines and rules. In the aftermath of a crisis, all sides call for more rules; in quiet times, all sides think that they can steer the course with principles. As normal times inherently carry the seeds of a crisis within them, any supervisory system should balance rules and principles.
- Page 1 of 4
- Next section Introduction
www.qfinance.com