Supervision beyond borders

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Sirjjan Preet | 13 Dec, 2012
Setting up of a supervisory college by the Reserve Bank of India (RBI), each for State Bank of India and the ICICI Bank Ltd., is an important milestone for Indian banking system in enhancing the existing mechanism for information sharing and collaboration.

Supervisory colleges are multilateral working groups (of relevant supervisors) formed for the collective purpose of enhancing effective consolidated supervision of an international banking group on an ongoing basis. They were initially seen as a tool for sharing prudential information on financial institutions with cross-border operations but after the recent financial crisis, the G20 and the Financial Stability Board (FSB) saw a stronger role for them in crisis management, prudential supervision and in achieving greater coordination and convergence of regulation and cooperation among supervisors. The RBI believes that these colleges can also complement wider peer review processes by promoting a coherent approach across different jurisdictions to the consistent and effective implementation of macro- and micro-prudential policy tools.

Although the supervisory colleges have the potential to become effective structures for meaningful supervisory coordination, they present significant challenges that need to be addressed for supervision to work properly.

First; the colleges are an informal, non-binding vehicle for cooperation, nonetheless, they should not be seen merely as a loose arrangement for information exchange or an educational tool. They should be able to provide prompt, reliable, actionable feedback on issues, ideas, or proposals made in the context of college presentations; Furthermore, accountability should be established as a principle in regard to functioning of colleges and they should be responsible for follow-up on deliberations and maximise the extent to which banks can rely on their outputs.

Second; the very fact that systemically important local players are being supervised at group level by a foreign authority accountable to foreign stakeholders may create political tensions in times of crisis. National authorities should therefore be able to design a credible supervisory framework whereby key tasks are delegated to a jointly governed actor in which each individual country has a stake.

Third; the G20 and the EU proposals on colleges stress the importance of two-way dialogue between the college and the bank, such that the bank can benefit from enhanced supervision. It also facilitates functioning of the college, improves quality of dialogue and avoids duplication of requests.

Fourth; banks' experiences of colleges suggest that rather than facilitating real exchanges between the banks and regulatory decision makers, supervisory colleges are being used to educate junior supervisors or as training seminars for smaller jurisdictions wishing to implement Basel II framework. If not taken care of, this can generate feeling of frustration within the industry

Fifth; supervisory college discussions are often marred by disagreements on crisis management and resolution for which responsibilities are unclear and incongruent with supervisory responsibilities. Thus, it becomes necessary to involve fiscal authorities and central banks in resolving disagreements and fostering cooperation among supervisors.

Finally; the success of colleges is heavily dependent on the establishment of trust amongst the supervisory community. This trust can be build by through better preparation, organisation and governance. Colleges can also enhance mutual trust by greater adherence to global supervisory standards; development of stringent confidentiality standards and by conducting joint supervisory visits on the basis of a commonly agreed supervisory programme.

It is true that complexity faced by supervisory colleges at the global level, along with the diversity of regulatory approaches only amplifies the challenges of effective cooperation and coordination. Nevertheless, supervisory colleges offer the right model for supervision and regulation of internationally active banking groups. Therefore, colleges established by the RBI will go a long way in achieving supervisory efficiency and effectiveness by building and nurturing relationships among supervisors beyond formal rules, regulations and geographical borders.

* Sirjjan Preet is Assistant Director at Federation of Indian Chambers of Commerce and Industry (FICCI), New Delhi.
* The views expressed by the author in this article are his/ her own and do not necessarily reflect the views of SME Times.