Christine Lagarde, managing director, International Monetary Fund, today speaks on financial stability and pan-African banking at the Conference on Cross-Border Banking and Regulatory Reforms in Mauritius
| By Christine Lagarde |
GOVERNOR Basant Roi, thank you for your kind welcome, particularly on this special day marking the 166th anniversary of the abolition of slavery on this island. It is an honor to be in Mauritius for this conference on pan-African banking. Ladies and gentlemen: good afternoon. Thank you for traveling so far to join the conference today.
I would like to thank our co-sponsors—the Basel Committee on Banking Supervision and Making Finance Work for Africa. By teaming up, we emphasize the significance of the rapid expansion of cross-border banking in Africa. And we highlight the common issues facing banking supervisors around the world.
I would also like to express my thanks to our IMF colleagues at the Africa Training Institute for organizing this conference. This institute is a testament to the deep commitment to Africa of the Fund and the Government of Mauritius. I am grateful that our host continues to devote resources to the center for the benefit of the entire region.
I travel each year to several African countries to deepen my understanding of one of the world’s most dynamic and diverse regions where the Fund is deeply involved. Despite the current economic slowdown, I remain amazed by the vitality I witness: business startups investing in the future, innovators creating mobile apps, new infrastructure under construction, and a growing middle class. I have had the honor of meeting people from all walks of life who are building better futures for themselves and their countries. They share a vision of development based on strong, sustainable, and inclusive growth.
Your countries share similar hopes—not least of which is the need to develop well-functioning financial systems that are critical for Africa’s growth. But in many countries, access to finance remains limited.
Since the global financial crisis, pan-African banks and other institutions have become important features of the continent’s financial landscape. They are one more piece of evidence of the region’s dynamic changes. These institutions—including some participating in this conference— have filled the gap left by the retrenchment of European and American banks since the crisis. They have supported the growth of individual countries with better products and services. They have advanced economic integration and helped foster financial inclusion, they have leveraged technologies, including disruptive ones—witness the great gains of mobile banking in Kenya.
These are important advances that can offer lessons to the world outside of Africa.
All over the world, these advances present central bankers and supervisors with new challenges; vigilance and cooperation will be needed to ensure stability and resilience. The growth of pan-African banks comes at a time of regulatory change worldwide. These reforms—spurred by the 2008 crisis—aim at building stronger defenses against future crises.
Much of the work to preserve financial stability falls to the group assembled here today. The new regulatory demands require your resources and skills. And you are asked to achieve unprecedented cooperation with other African supervisors—and with international regulators.
In addition, you face a delicate balancing act: you need to enhance regulation and supervision but, in implementing global standards, you also must take into account local circumstances.
Fortunately, you are not alone. The IMF and other bodies recognize the challenges you face and are committed to drawing on our global experience to assist you.
Today I will delve into some of the issues that you face, with a focus on the supervisory challenges of pan-African banking in the international context, and the IMF role in this work.
- The Supervisory Challenges of Pan-African Banking
Let us begin with the regulatory challenges. As bankers and bank supervisors, you understand the potential vulnerabilities that current slow global and regional growth presents. The changes in Africa’s financial sector landscape over the past decade call for added vigilance.
The expansion of cross-border banking has been impressive. Ten African banks now have a presence in at least 10 countries on the continent, and one is present in more than 30 countries.
This expansion inevitably has brought a host of new complexities. With varying regulatory regimes across countries at different stages of financial sector development, it should not be surprising that effective oversight of cross-border banking presents immense challenges. Unified accounting and reporting standards are absent. Data weaknesses abound. National secrecy laws and constraints on information flows impair cooperation among supervisors in home and host countries.
The key is to ensure that supervision takes place on a consolidated basis.
Bank holding companies are headquartered in one country and have subsidiaries across the region that operate under their hosts’ rules and regulations. This places an important burden on supervisors who have primary oversight of the holding companies. It is also essential that host countries are informed and consulted, and for host country supervisors to be involved.
Resolution frameworks and mechanisms are insufficient in any number of countries—let alone on a regional basis. This takes on added significance in light of the recent sharp slowdown in African growth.
I know that each and every central banker, supervisor, and bank executive in this room is deeply aware of these issues. You have taken important actions already.
Several of you who are home to pan-African bank groups have established supervisory colleges. This allows you and supervisors in host countries to conduct more comprehensive assessments of risks at individual institutions. Home supervisors need to ensure that supervisory colleges work well and that host countries are informed and regularly consulted. Host supervisors need to be active in this collaborative process as well. Home supervisors need to be aware of how their decisions affect smaller host countries.
It is also good to see that the countries of East Africa have provided a model for harmonizing supervisory data and practices as part of their effort to create an integrated economic community.
These are welcome developments. The challenge is to build on the successes in countries where steps have already been taken, and extend this effort throughout Sub-Saharan Africa.
- Cross-Border Banking—the International Experience
Now let us turn to the international context. Clearly, cross-border banking is not just an issue for Africa. Nearly a decade after the global crisis, financial sectors remain fragile around the world, and the international community continues to focus on the reform agenda.
This effort is more advanced in other regions—although it remains incomplete. Nonetheless, reforms by the European Union, the U.K., and the U.S. can provide valuable guidance for Africa.
The Fund has contributed time and energy to this effort. In addition, the Basel Committee’s work on consolidated supervision and the Joint Forum’s work on supervision of financial conglomerates have been important. So I am appreciative that Governor Stefan Ingves is taking the time to speak with us tomorrow about the European and Nordic experiences.
I expect you will have fuller discussions on your panels, but would like to touch on some of the takeaways from the work that has been done since 2008.
Before doing that, though, let me make a point about bank supervisors. They are on the front lines in an era of rapid change in the banking industry. Their work requires both sufficient resources and political support.
It is always tempting to ease up on supervision when there are worries about economic growth and banks face pressure to expand credit. But we ease up at our own peril.
There are lessons from the recent experience of the U.S. and Europe—in terms of both the adequacy of regulation and the commitment to supervision. Let me highlight three:
- First, complex institutions—including cross-border financial groups—require enhanced regulatory and supervisory frameworks. As shown during the crisis, supervisors failed to understand the risk profiles of cross-border institutions. These entities built up complicated market positions, shifted business across borders, and became too large to manage. Three examples were Royal Bank of Scotland, Lehman Brothers and, in the non-bank arena, AIG. Regulation and supervision failed to keep pace. What this means for Africa is that prudential rules affecting capital and liquidity requirements need to match the risks found in a bank group. This requires sharing more information among supervisors. It also means that supervisors need the power and confidence to do their job properly—including by challenging bank management.
- The second lesson is something I have already touched on: the importance of cooperation among supervisors in identifying and addressing risks in cross-border banks. For example, stronger cross-border dialogue could have helped spot the build-up of risks in Icelandic banks, including massive imbalances between assets in Iceland and deposit and other liabilities outside the country. Experience in Iceland and elsewhere points to the need for effective supervisory colleges that proactively discuss emerging risks and the appropriate responses.
- Third, experience tells us that there will be times when all of these efforts are insufficient. To avoid expensive taxpayer support to sustain banking systems—as we saw in the global financial crisis—it is essential to put in place robust frameworks for the resolution of cross-border institutions that give regulators the authority to close banks. Supervisors need to be able to work across borders to develop practical resolution and recovery plans. This is not easy to do, but it is clear that trust and cooperation must be built up during normal times.
- The Role of the IMF
Effective cross-border regulation and supervision also depend on technical expertise. This is where the IMF can help you build capacity and keep up with the rapid changes in the banking industry.
We constantly engage on these issues as a participant in international bodies, where we seek to provide a voice for all of our member countries. And we have worked with your governments for many years to provide advice and assistance across a range of economic policy issues.
Financial sector development is integral to this work. Our policy analysis and advice now consistently focus on financial issues, including under the Financial Sector Assessment Program. Increasingly, this work also is taking on a regional profile, highlighted by the 2015 report on the opportunities and challenges for cross-border oversight presented by pan-African banking.
Our regional centers across Africa deliver training and technical assistance related to consolidated and cross-border supervision. For example:
- Experts in banking supervision at AFRITAC East in Tanzania are working with member countries—particularly Kenya—to implement consolidated supervision. This includes organizing supervisory colleges to oversee banks with significant cross-border operations.
- AFRITAC West in Cote d’Ivoire is working with the WAEMU region on a framework for introducing similar consolidated supervision.
- And here in Mauritius, AFRITAC South has provided technical assistance on supervisory colleges and crisis management groups, and on establishing cross-border information sharing and cooperation.
The Fund is also launching a new capacity development instrument to support financial stability and inclusion in the region.
In conclusion, the IMF strongly supports your efforts to strengthen the environment for financial sector development in Africa. Strong and sound pan-African banks are a crucial part of this effort.
At the end of the day, a strong regulatory and supervisory setting can help ensure that healthy banks are able to provide the lifeblood of Africa’s economic resurgence. This will be a long-term effort, and we will be with you every step of the way. Thank you.
Christine Lagarde, managing director of International Monetary Fund made the remarks entitled “Financial Stability and Pan-African Banking” for the Conference on Cross-Border Banking and Regulatory Reforms in Mauritius, February 1, 2017
— Feb 1, 2017 @ 17:30 GMT