Financial Sector Assessment:A Handbook consolidated basis,which includes their ability to review both banking and non-banking activities conducted by the bank. 6.4 Assessing Regulatory Practice and Effectiveness The regulatory regime for OFIs should help meet regulatory objectives-effective compe. tition,good conduct of business and financial integrity,and prudent operations- while ensuring that regulations reflect the specific operational characteristics of the OFIs and promote their development.From this many core 6 and als OFIs.The general is that fina anciali tions that general pu do not need to b taking OFIs would follow the standards contained in the BCPs.Financial institutions that are banklike in all but name should also be just as closely regulated and supervised.In several countries,OFIs that were(formally or informally)taking deposits from the general nublic and were either not required to conform to banking regulations or did not come under the supervision of the main supervisory authority have faced difficulties that neces- sitated the intervention of the gove ment(World Bank 1999). nthe dive tha of institutions of OFIs ertain additional principles and sid ions can comp he nd he pt them to the supervision of OFls.Such principles and considerations.regardles of the institution structure (unified or segmented),include modifying prudential rules to accommodate the operational characteristics of OFls;ensuring consistency in decision making:recognizing the unique risks of OFI;ensuring that supervision is proportionate and consistent with costs and benefits;and maintaining resources and skills sufficient and adequate to face the mplementation can be challe ge.For example ing fin stitutions, offer depo y checking accounts)and may need to ted as ba g institutions(se operational cha acteristicso the OFIs and avoiding overregulation is important for the development of the sector For the majority of OFIs where retail deposits and systemic issues are not involved, competition and market conduct regulations-such as entry and disclosure requirements and monitoring association with other institutions-should be sufficient.With regard to entry requirements.the regulator would encourage low barriers to entry into these sec tors by ensuring that there are minimal restrictionson the corporate form and ownership structure of OFIs,freedom of e ry for for ign firms and st ondit prevent exce tion in the industry.Disclo nd tim mation to ma arket participants comp ments supervisio Regarding th OFls with other institutions,particular attention should be given to OFIs establis as subsidiaries of regulated institutions as a means of circumventing the regulation.The dangers of excessive growth in unregulated subsidiaries were highlighted in a number of crises (see World Bank 2001)
176 Financial Sector Assessment: A Handbook 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 of banking supervision is regulators’ ability to supervise the banking organization on a consolidated basis, which includes their ability to review both banking and non-banking activities conducted by the bank. 6.4 Assessing Regulatory Practice and Effectiveness The regulatory regime for OFIs should help meet regulatory objectives—effective competition, good conduct of business and financial integrity, and prudent operations—while ensuring that regulations reflect the specific operational characteristics of the OFIs and promote their development. From this perspective, many core principles of effective bank supervision and regulation also apply to OFIs. The general rule is that financial institutions that do not have deposit-like liabilities to the general public do not need to be regulated and supervised as closely as those that do. The tools and techniques for deposittaking OFIs would follow the standards contained in the BCPs. Financial institutions that are banklike in all but name should also be just as closely regulated and supervised. In several countries, OFIs that were (formally or informally) taking deposits from the general public and were either not required to conform to banking regulations or did not come under the supervision of the main supervisory authority have faced difficulties that necessitated the intervention of the government (World Bank 1999). Given the diversity of institutions that make up the group of OFIs, certain additional principles and considerations can complement the BCPs and help adapt them to the supervision of OFIs. Such principles and considerations, regardless of the institutional structure (unified or segmented), include modifying prudential rules to accommodate the operational characteristics of OFIs; ensuring consistency in decision making; recognizing the unique risks of OFI; ensuring that supervision is proportionate and consistent with costs and benefits; and maintaining resources and skills sufficient and adequate to face the growth of the OFIs sector. Those principles are similar to those applying to banks, and are further explained in Annex 6.A. Their implementation can be a challenge. For example, housing finance institutions, including building societies, often offer deposit services (not necessarily checking accounts) and may need to be regulated as banking institutions (see box 6.1). In many cases, tailoring regulations to the specific operational characteristics of the OFIs and avoiding overregulation is important for the development of the sector. For the majority of OFIs where retail deposits and systemic issues are not involved, competition and market conduct regulations—such as entry and disclosure requirements and monitoring association with other institutions—should be sufficient. With regard to entry requirements, the regulator would encourage low barriers to entry into these sectors by ensuring that there are minimal restrictions on the corporate form and ownership structure of OFIs, freedom of entry for foreign firms, and strong antitrust conditions to prevent excessive concentration in the industry. Disclosure of correct and timely information to market participants complements supervision.3 Regarding the association of OFIs with other institutions, particular attention should be given to OFIs established as subsidiaries of regulated institutions as a means of circumventing the regulation. The dangers of excessive growth in unregulated subsidiaries were highlighted in a number of crises (see World Bank 2001)
Chapter 6:Assessing the Supervision of Other Financial Intermediaries Box 6.1 The Case of Financial Institutions Providing Housing Finance ing banks and other specialized banks,which have more diversified balance sheets itutio there is eve a case for stricter regulation of thos often offer the sam estate finance means that their risks may be highl ee the ntr ted,and a large short-term funding,and market risk at the time of wever,in securiries market may help those institutions man onditions under which deposits can be with- their risk profile and minimize the concentration of eintitutionsaecftennentionel 141 housing finance institutions and are viewed as justi- hich an very similar to banks in terms of the range of finan 6 enttal rule cial services offe are grouped together wit sing fin other not on n th be regulated with standards smilar to those ofk must be regulated at the hete rogeneity of other financi nd institutions are sometimes greater than those of ing housing finance. When corporate laws are still evolving,however,additional conditions in financial regulation car pport the good market conduct and prudent operation of OFls.Those additional conditions could cover the following 。Licens ng requirements.As with any financial institution,the purpose of licens ing OFls should be to ensure adequate capitalization and sound management not to limit entry or restrict competition.Regulators should have the authority to screen potential owners and managers to prevent those lacking professional ense should not come a simple alternative fo applicant who could no meet the requirements to be granted a commercial bank license.Liberal entry into the financial system should not mean unqualified entry.Countries with easy entry have often experienced problems with insufficiently regulated,undercapitalized and poorly managed institutions In s ne count ies once an OFI has been licensed,it conducts activities thatar normally not permissible under the range of activities specified in its license.The balance sheet restrictions for each group of financial institution should,therefore be closely monitored (e.g.,limits on assets and liabilities,prohibition on particular classes of assets or liabilities,restrictions on the types of assets held,and mandated of parti mum capital requirements. Vith regard tominimum capital requirements (and all the main rules for the conduct of the institution),the requirements for banks 177
177 Chapter 6: Assessing the Supervision of Other Financial Intermediaries 1 I H G F E D C B A 12 11 10 9 8 7 6 5 4 3 2 When corporate laws are still evolving, however, additional conditions in financial regulation can support the good market conduct and prudent operation of OFIs. Those additional conditions could cover the following: • Licensing requirements. As with any financial institution, the purpose of licensing OFIs should be to ensure adequate capitalization and sound management, not to limit entry or restrict competition. Regulators should have the authority to screen potential owners and managers to prevent those lacking professional qualifications, financial backing, or moral standing from obtaining a license. An OFI license should not become a simple alternative for applicants who could not meet the requirements to be granted a commercial bank license. Liberal entry into the financial system should not mean unqualified entry. Countries with easy entry have often experienced problems with insufficiently regulated, undercapitalized, and poorly managed institutions. In some countries, once an OFI has been licensed, it conducts activities that are normally not permissible under the range of activities specified in its license. The balance sheet restrictions for each group of financial institution should, therefore, be closely monitored (e.g., limits on assets and liabilities, prohibition on particular classes of assets or liabilities, restrictions on the types of assets held, and mandated maximum or minimum holdings of particular assets). • Minimum capital requirements. With regard to minimum capital requirements (and all the main rules for the conduct of the institution), the requirements for banks Box 6.1 The Case of Financial Institutions Providing Housing Finance In the housing sector, banks and other specialized financial institutions such as thrifts, mortgage societies, primary mortgage institutions, or mortgage banks often offer the same products. Those institutions face similar risks, including credit risk exposure to the borrowers, liquidity risk from the possible loss of short-term funding, and market risk at the time of maturity. The conditions under which deposits can be withdrawn from those institutions are often mentioned as differentiating factors between banks and specialized housing finance institutions and are viewed as justification to impose different prudential rules (such as on liquidity). The general rule, however, is that when specialized housing finance institutions solicit deposits directly from the public and when those institutions’ deposits are guaranteed implicitly or explicitly by the government, those institutions must be regulated at least to the standards of banks. Given that the risks of specialized housing finance institutions are sometimes greater than those of banks, which have more diversified balance sheets, there is even a case for stricter regulation of those institutions. The concentration in housing and real estate finance means that their risks may be highly concentrated, and a large overconcentration can be the source of systemic failures. However, in some countries, the availability of a mortgage-backed securities market may help those institutions manage their risk profile and minimize the concentration of exposures. In some countries, building societies—which are very similar to banks in terms of the range of financial services offered—are grouped together with other nonbank financial institutions (NBFIs) and are supervised separately, even though they need to be regulated with standards similar to those of banks. More generally, the heterogeneity of other financial institutions often results in inappropriate regulation and supervision of some financial institutions providing housing finance