Banking Soundness and Monetary Policy


Charles Enoch, and J. Green
Published Date:
September 1997
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Mr. Musch commented on several of the issues that were raised by the discussants. On attaching a positive risk to claims on government, he understood there was an inclination among participants that in some cases risk rating for government could be appropriate, but it might not be possible given the political sensitivity of the issue. He noted that changes in credit culture are necessary for the development of a healthy banking system. He emphasized that supervisors should be careful to adhere to their supervisory role rather than creating and enforcing too many guidelines that could impose high risk-averse attitude on bankers, thus resulting in low returns on capital.

Mr. Wang commented that, although current practice is to attach zero weight to OECD countries’ risk, risk varies among the various OECD countries. Some credit rating companies still rank banks by their asset volume and do not take into consideration Basle Committee standards, which is misleading. Referring to risk associated with government lending, Mr. Wang argued that loan risk classification should be based on the ability to repay regardless of ownership.

Mr. Assiga-Ahanda commented that countries created banking commissions for the purpose of strengthening banking supervision. As regards the introduction of Basle Committee standards, he noted that the adoption of global standards might not be appropriate in the context of African countries where specific characteristics and cultural differences should be taken into account. As examples, he mentioned government risk and credit culture.

Mr. Khandruyev reported that the Central Bank of Russia was taking measures aimed at strengthening on- and off-site supervision and was moving gradually to international standards. He emphasized the role of information in off-site inspection, and noted that problems arose when financial institutions presented distorted information reflecting misrepresented financial positions and false profitability. He favored the development of reporting guidelines to ensure the quality of information.

In response to Mr. Khandruyev, Mr. Musch noted that the Basle Committee was setting up an information group and an accounting task force. An effort was being made to harmonize treatment of market risk. He emphasized the difficulty in harmonizing accounting frameworks as these frameworks were very different across countries. As for asset classification, he warned that quick and easy solutions in attempting to develop asset classification rules worldwide were not envisaged, as the matter is very complex. On the risk classification of OECD countries, Mr. Musch agreed that there were different country risks within the OECD. The current treatment of OECD as a unit for the purposes of risk classification was a simple and practical solution, but it was not necessarily the best solution.

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