Financial Regulation in Developing Countries
This paper sees that less developed countries (LDCs) have implemented reforms to strengthen the prudential regulation and supervision of their financial systems and:
- Examines the progress made by LDCs in implementing reforms;
- Analyses the weaknesses in their prudential systems;
- Discusses policy options for further reform.
The occurrence of banking crises during the 1990s despite considerable improvements in financial systems shows that many countries have yet to build robust prudential systems which can protect their banking systems from systemic crises.
Weaknesses include:
- Loopholes in the prudential regulations;
- Shortages of skilled supervisors;
- Regulatory forbearance and leniency.
There are also difficulties in replicating developed country models of regulation which rely heavily on accurate financial information, highly skilled technicians and an impartial bureaucracy. LDCs offer a financial environment characterised by weak accounting and legal frameworks, acute shortages of skilled personnel and pervasive political interference in public administration.
The paper concludes by suggesting options for further reform including:
- Higher capital adequacy standards;
- Explicit rules covering intervention policy in distressed banks;
- Restraints on competition in banking markets;
- Greater use of the market for monitoring banks.
