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The Regulation and Supervision of Domestic Financial Conglomerates C. Supervisory Philosophy
The supervisory response to conglomerates needs to be assessed and formulated in the context of the ongoing efforts in many countries to upgrade basic supervisory objectives and strategies. 26/ These new philosophies and approaches often can be characterized as more forward-looking and risk-oriented than traditional rules-based approaches. They incorporate an explicit recognition of the practical limitations on supervisory agencies attempting to "ensure" the stability and soundness of the financial system, and rely more heavily on market participants and market forces to "promote" such stability. The task of supervision is seen more as having the capacity to make qualitative assessments regarding riskiness and management quality, and less as a process of testing compliance with an extensive set of rules. Consistent with this increasingly-adopted philosophy, supervisors need to clearly define and communicate their expectations regarding the roles and responsibilities of directors, managers and external auditors, not only in terms of individual financial institutions, but also in terms of the conglomerates of which those institutions are a component. For example, directors and managers responsible for individual institutions should be held accountable for maintaining their decision-making autonomy within a group context. Directors and managers responsible for the broader financial group should be held accountable for ensuring transparency, and for minimizing the potential for contagion by implementing sound risk management practices and by developing appropriate group-wide liquidity and capital contingency plans. External auditors should be held accountable for reporting substantive risks and concerns regarding the overall group that come to their attention in the performance of their work. Supervisors need to be equally clear regarding their role. They must avoid falling into the "trap" of allowing their supervision to function as a substitute for sound policies and practices within the institutions they supervise. Rather, they need to focus their efforts on encouraging all relevant market participants to work toward the objective of the systemic financial soundness of the principal financial markets, and on identifying and remedying situations which threaten achievement of that objective. |