Is the supervisory regime of the Central Bank of Liberia adequate to provide effective and efficient bank supervision that will ensure a stable financial system?

Donzo, Fonsia M. (2007-03)

Thesis (MBA)--Stellenbosch University, 2007.

Thesis

ENGLISH ABSTRACT: The primary purpose of the research study is to establish whether the supervisory regime of the Central Bank of Liberia (hereinafter referred to as CBL) is adequate to provide effective and efficient bank supervision that will ensure stability in the financial system. Stability in the financial sector and safety and soundness of the banking industry are of paramount importance due to its linkages with all other sectors of the economy. Adequate supervision and prudential regulations are central in ensuring financial sector stability. This research focuses on the prudential regulations and other supervisory directives used in the supervision of licensed bank-financial institutions, in terms of capital adequacy, asset quality, management, earnings, liquidity and sensitivity to market risk, the supervisory approach and the legal framework. The adequacy of the prudential regulations and other supervisory directives are determined by comparing with international standards. The results revealed that the prudential regulations largely meet international standards. Thus, the supervisory regime is adequate and capable of providing stability in the banking industry. Banks are exposed to various kinds of risks in the conduct of their trading operations; therefore, management is required to maintain a capital position that will cover the nature and extent of risks to the bank:. The capital consists of two tiers; Tier I (primary) capital and Tier 2 (secondary) capital. Banks are required to permanently maintain a capital adequacy ratio that matches their total exposure to risk at the level of at least 8%. The prudential regulations of the Central Bank of Liberia places assets into two risk baskets while international organizations like the Bank for International Settlement has four or five risk baskets based on the category of borrower, sovereigns, banks or corporates. Earning assets reflect the bank's quality and existing potential of exposure to counter-party associated with loan and investment portfolios, as well as off-balance sheet transactions. Banks are required to make adequate provisioning against deteriorating loan portfolios and general provisions for performing loans. Sound and competent management is the most significant requirement for the strength, potency and growth of any financial institution. Indicators of the quality of management's competence are primarily specific to individual institutions. Moreover, it is not easy to draw any conclusion vis-à-vis management soundness on the basis of monetary indicators, as characteristics of a good management are rather qualitative in nature. Strong earnings and profitability profiles of a financial institution reflect its capacity to absorb losses, fund expansion, be competitive in the banking industry, replenish and/or increase capital base and pay dividends to shareholders. Good earnings quality is relied upon by banking institutions as their first line of defense against capital reduction due to credit losses, interest rate risk, operational risk and decline in asset value. Liquidity is often considered as an attestation of solvency for banking institutions. Banks must maintain a minimum level of liquidity to settle obligations such withdrawals and for giving out loans. Liquidity is a strong early warning signal, the shortage and/or the lack of which erodes public confidence in a bank. Banks must guide against structural maturity mismatch. Imprudent lending practice increases a bank's exposure to liquidity risk. All licensed banks are statutorily required to maintain a minimum daily liquidity ratio of 15%, which is a measure of the banks' liquid assets vis-à-vis deposits. Each commercial bank is required to maintain reserve requirements representing 18% of average deposits. A suitable legal framework is a prerequisite for effective banking supervision. Supervisors can be expected to act, free from political pressures, only if they cannot be dismissed for doing their job. The New Financial Institutions Act 1999 and the Central Bank Act 1999 give the Central Bank powers to grant and revoke bank. licenses, supervise commercial banks and have unlimited access to privileged information. There is a need to further strengthen the supervisory capacity in terms of providing continuous short-term training and long-term or post-graduate studies.

AFRIKAANSE OPSOMMING: Die hoofdoel van hierdie navorsingsverslag is om te bepaal of die toesighoudende stelsel van die Sentrale Bank van Liberie (hierna verwys na CBL) toereikend is om doeltreffende en doelmatige banksupervisie te verskaf wat stabiliteit in die finansiële stelsel sal verseker. Stabiliteit in die finansieie sektor, en die veiligheid en betroubaarheid van die bankbedryf is uiters belangrik as gevolg van die verwantskap met alle ander sektore van die ekonomie. Voldoende supervisie en verstandige regulasies vorm die kern van stabiliteit in die finansiële sektor. Hierdie navorsing is gerig op die verstandige regulasies en ander toesighoudende bepalings wat gebruik word in die supervisie van gelisensieerde bank-finansiële instellings ten opsige van kapitaaltoereikendheid, bategehalte, bestuur, verdienste, likiditeit en sensitiwiteit ten opsigte van markrisiko, die benadering tot toesighouding en die regsraamwerk. Die toereikendheid van die verstandige regulasies en ander toesighoudende bepalings word bepaal deur dit met internasionale standaarde te vergelyk. Die resultale toon aan dat die verstandige regulasies grootliks aan internasionale standaarde voldoen. Die toesigboudende stelsel is dus toereikend en daartoe in staat om stabiliteit aan die bankbedryf te verskaf. Banke word blootgestel aan verskeie soorte risiko in die uitvoer van hul handelsbedrywighede. Daar word dus van die bestuur verwag om 'n kapitaalbasis te handhaaf wat die aard en omvang van die risiko vir die bank sal dek. Die kapitaal bestaan uit twee vlakke: Vlak I (primêre) kapitaal en Vlak 2 (sekondêre) kapitaal. Daar word van banke verwag om permanent 'n kapitaaltoereikendheidsverhouding te handhaaf wat ooreenkom met hul totale blootstelling aan risiko op 'n vlak van ten minsle 8%. Die verstandige regulasies van die Sentrale Bank van Liberie plaas bates in twee risiko-mandjies terwyl internasionale organisasies soos die Bank for International Settlement vier tot vyf risiko-mandjies het wat op die kategorie van die lener, selfbesturende entiteit, bank of korporasie gegrond is. Opbrengsgewende bates dui op die bank se gehalte en bestaande potensiaal vir blootstelling aan teenpartye wat verband hou met lenings- en beleggingsportefeuljes sowel as buitebalanstransaksies. Daar word van banke verwag om toereikende voorsiening teen verslegtende leningsportefeuljes te maak en om algemene voorwaardes vir presterende lenings te stel. Betroubare en bevoegde bestuur is die heel belangrikste vereiste vir die krag, vermoë en groei van enige finansiële instelling. Aanwysers van die gehalte van die bestuur se bevoegdheid is hoofsaaklik op individuele instellings van toepassing. Verder is dit nie maklik om enige gevolgtrekking ten opsigte van 'n bestuur se betroubaarheid te maak op grond van monetêre aanwysers nie, omdat die kenmerke van 'n goeie bestuur eerder kwalitatief van aard is. Sterk opbrengste en winsgewendheidsprofiele van 'n finansiële instelling dui op sy kapasiteit om verliese te absorbeer, fondse uit te brei, mededingend in die bankbedryf te wees, sy kapitaalbasis aan te vul en/of te vergroot, en dividende aan aandeelhouers te betaal. Bankinstellings maak staat op goeie opbrengsgehalte as hul eerste verdedigingslyn teen kapitaalvermindering as gevolg van kredietverliese, rentekoersrisiko's, bedryfsrisiko's en 'n afname in batewaarde. Likiditeit word dikwels beskou as 'n bevestiging van solvensie vir bankinstellings. Banke moet 'n minimum vlak van likiditeit handhaaf om verpligtinge soos onttrekkings na te kom en om lenings toe te staan. Likiditeit is 'n sterk vroeë waarskuwingsteken, en die tekort en/of gebrek daaraan knou openbare vertroue in die bank. Banke moet waak teen 'n strukturele wanafstemming van looptye. Onverstandige uitleenpraktyk verhoog 'n bank se blootstelling aan likiditeitsrisiko. Alle gelisensieerde banke word statutêr verplig om 'n minimum daaglikse likiditeitsverhouding van 15% te handhaaf, wat 'n maatstaf is van 'n bank se likiede bates teenoor deposito's. 'n Toepaslike regsraamwerk is 'n voorvereiste vir doeltreffende banksupervisie. Daar kan van toesighouers verwag word om sonder enige politieke druk op te tree slegs indien hulle nie afgedank kan word omdat hulle hul plig doen nie. Die New Financial Institutions Act van 1999 en die Central Bank Act van 1999 gee aan die Sentrale Bank die mag om banklisensies toe te staan en herroep, om toesig oor kommersiële banke te hou en om onbeperkte toegang tot beskermde inligting te kry. Daar is 'n behoefte om die toesighoudende kapasiteit deur die verskaffing van deurlopende korttermynopleiding en langtermyn- of nagraadse studie uit te bou.

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