Why ex-regulators should stay away from private sector banks

Thursday, 10 July 2014 00:00 - - {{hitsCtrl.values.hits}}

MP Eran Wickramaratne raised an issue that ministry secretaries are private sector boards. In nearly every major financial crisis of the past decade — from Europe to Asia to Russia, Turkey, and Latin America — political and regulatory interference in financial sector institutions helped make a bad situation worse. Political pressures not only weakened financial regulation generally, they also hindered regulators and the supervisors who enforce the regulations from taking action against banks that ran into trouble. In so doing, they crippled the financial sector in the run-up to the crisis, delayed recognition of the severity of the crisis, slowed needed intervention, and raised the cost of the crisis to taxpayers. Increasingly, both policymakers and policy analysts have finally recognised the need to shield financial sector regulators from outside pressure to improve the quality of regulation and governance with the ultimate goal of preventing financial crises. Surprisingly, however, few analyses have systematically discussed why private banks need a substantial degree of independence — not only from the Government but also from the regulator — to fulfil their mandate to achieve and preserve financial sector stability. It also looks at the need for keeping regulators accountable even after they retire as they exercise far-reaching powers delegated to them by their government. Regulators and supervisors in nations around the world are charged with managing the health of banks and other financial institutions and preserving the stability of the financial system. Governments regulate financial institutions for two main purposes. The first is consumer protection. This is much the same reason they regulate public utilities and telecommunications: to provide a framework of rules that can help prevent the excesses and failures of a market left entirely to its own devices. Second, regulation in the financial sector has the additional goal of maintaining financial stability, a clear public good that justifies a more elaborate framework of regulation and supervision. In this situation, it is both morally and ethically wrong to appoint retired regulators to Bank Boards and then appoint them the head of the institution. Sri Lanka has had a tradition where Supreme Court Justices have stayed from joining the private bar or the private sector after retirement. How ethical is it then for regulators to come and serve in an institution where he or she has regulated for many years. Moreover, a regulator does not have the knowhow of running an enterprise that is vibrant and changing all the time. Banks needs qualified professional people who are well grounded in commercial enterprise and has had a clean track record and won the confidence of the public. Appointing ex-regulators with questionable backgrounds will only retard the confidence of the banking sector both locally and oversees. Moreover if the person in question has his/her kith and kin sitting in the regulators office regulating the very institution they join, should be immediately disqualified. That is also now acceptable given that the current Governor has six close relatives either heading or as directors on bank boards. The lack of independence of financial supervisors can only weaken the governance in a bank and contributed to prolonged banking sector problems. The regulator in part as an attempt to improve the independence of supervision must put a code of ethics that prevent Central Bank retirees to join institutions that they have regulated. Leave the competence aside of the individual to deliver it is both morally and ethically wrong. Ultimately, it is President Rajapaksa who will have to be accountable and pay the price for the actions of his powerful Finance Secretary and the Governor of the Central Bank. Priyantha, Colombo