Banking Soundness and Monetary Policy


Charles Enoch, and J. Green
Published Date:
September 1997
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In response to Mr. Mehran’s comments, Mr. Padoa-Schioppa noted that dramatic improvements in joint regulatory arrangement across segments of the financial industry could not be expected, since the differences in institutional arrangements could not be easily overcome. He also thought that the expectations raised by the Halifax Summit might be too ambitious and probably would not be met in the next two years. Mr. Padoa-Schioppa stressed that the purpose of banking supervision was not to prevent all banks from failing; a healthy sector allows for exit. Bank failures do not necessarily indicate a failure in the supervision process. However, supervisors need to ensure that the rate of failure is not too high. He noted that, ideally, banking regulations do not, and should not, represent limitations to banks’ operations. Rules should be designed to enhance economic freedom rather than to limit it.

Mr. Hamda suggested that, in many cases, reconciling central bank operational objectives could be difficult. He noted as examples the reconciliation between the objectives of prudential regulation and monetary policy; and between provisioning for bank loan losses and making banks attractive banks to investors. Mr. Wang asked whether the supervision function across all segments of the financial industry should be consolidated in one authority.

Mr. Padoa-Schioppa reiterated his view that institutional changes take time, and recommended enhanced cooperation for the time being.

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