Speech of H.E. Dr. MUHAMMAD BIN SULAIMAN AL-JASSER
Governor of SAMA
Session I: Requirements for Rebuilding Banking and Financial Regulatory Systems
in Light of the Global Crisis
Kuwait Financial Forum- Kuwait
October 31 � November 1, 2010
At the beginning, I am pleased to express my thanks to His Highness, the Prime Minster of Kuwait Sheikh Nasir Mohammad Al-Ahmad Al-Sabah for his sponsorship of the Kuwait Financial Forum. I also thank all who have worked and contributed to the success of this important conference, which is held at a time when signs of recovery have started to arise in the global economy. I also extend my thanks to His Excellency, Sheikh Salem AbdulAziz Al-Sabah, Governor of the Central Bank of Kuwait, for his invitation and hospitality.
His Excellency the Chairman, Ladies and Gentlemen,
The title of this session of the forum is "Requirements for Rebuilding Banking and Financial Regulatory Systems in Light of the Global Crisis ". As you know, the last decades witnessed various financial crises in different regions of the globe. The last one has had the most adverse impact on the performance of the global economy. Global and regional financial institutions, and different media have studied this crisis, the reasons behind it, and lessons to be learned from it. Therefore, I would not repeat what had been stated earlier, but the context of my speech makes it inevitable to briefly review the most prominent reasons of the crisis, at the top of which is the excessive growth of the financial sector during the last two decades by much higher rates than the growth and expansion in the real sector, that it has turned out as an independent entity per se, whose expansion and growth does not rely on its key role of meeting financing needs, and providing banking and financial services to real economic activities. This has been aggravated by poor risk management of many of this sector's units, leading to an excessive leverage and maximized use of financial derivatives accompanied by lax supervision and control by the authorities concerned, an excessive belief in market fundamentalism, expansion in monetary and fiscal policies for prolonged periods inconsistent with the growth of the real production. Furthermore, modern technologies in communications, payments systems, and information exchange have helped to link markets with each other. Therefore, domestic developments have turned out to have a clear effect on the global scene as a whole. The recent example is the crisis in some European countries and its impact on Europe and other regions.
Dear Audience,
According to an Arabic proverb, "an evil may turn out to be a blessing in disguise". In spite of the great adverse impacts of these subsequent financial crises, they still have positive results, including the obvious joint international efforts to review the global financial system and the initiation of rebuilding necessary banking and financial regulatory systems to perform its role effectively and positively in global economic activity. The G-20 Group, which constitutes 80 percent of the world economy, has set out a comprehensive work program to strengthen the global financial system. The most salient achievement was the establishment of the Financial Stability Board (FSB) in April 2009 to coordinate and prioritize regulatory reforms and to encourage and monitor their rapid implementation. FSB brings together not only the G-20 countries and other major financial centers but also the various standard setting bodies such as the Basle Committee, IOSCO, IASB, etc. and international institutions such as the BIS, IMF, International Bank for Reconstruction and Development, OECD and others.
During the last year, much progress was made on the Regulatory front in areas of capital definition and adequacy, liquidity risk management, compensation regulation of chief executive officers in financial sector, transparency of registration of hedge funds and rating agencies. The implementation of these standards over the forthcoming years will, hopefully, lead to significant strengthening of the global financial institutions and markets.
The new Basel III Capital Adequacy rules and the new liquidity regulations are to be phased in over the coming years to ensure a smooth transition and to prevent impeding the global economic recovery. The Basel Committee has made great efforts to calibrate new capital adequacy rules and standards after extensive consultations with regulators of the banking industry. The new standards aim to ensure having countercyclical capital changes without the need for rescue processes of public funds. National Regulators are expected to supplement the new standards with their own measures. The challenge posed is to apply rules that are uniform across different economies and to ensure that, while countries develop individual approaches, they do not create an unlevel playing field. We must ensure that the new standards are not compromised, in the same way as the old Basle standards. The old standards were intended as a minimum but were treated as the maximum in the "light touch regulation" paradigm that prevailed during the boom years in some countries.
It is important to indicate that in spite of strengthening the supervision of banks based on Basel III and other standards, there are still concerns about the shift of financial services and related risks to financial sectors for which no regulatory controls are set, such as hedge funds, private share funds and financial companies that have an influential role in financial markets. It is appropriate that supervisory authorities cooperate to monitor non-regulated sectors to detect potential risks that may affect the global financial system.
The successive events of the financial crisis have heightened our awareness of a fully interconnected and interdependent global economy and international, integrated and fair financial markets. We have witnessed how the failure of one international bank affected the liquidity in all markets and how cross border banking flows contracted. We have also seen how the potential failure of a single insurance company could have created havoc in the global insurance industry and a sharp volatile in the entire global banking sector.
Ladies and gentlemen,
Some people may ask to what extent will the rebuilding of banking and financial regulatory systems can affect the banking industry in our region! In my opinion, that depends largely on the level of integration and interconnection of not only the banking and financial system in every country, but also on its economy and foreign trade with the international community. It is obvious that there is a clear difference in the status of the countries of our region. However, some countries have poor interconnection and integration with the outside world, sparing them the direct impacts of the global financial crisis, yet, they have, at the same time, lost many opportunities of benefiting from economic and financial services provided by international markets. On the other hand, others, like GCC countries, have been characterized by their open economies to the outside world. Therefore, they have benefited and affected more from and by, the reforms made in the global banking and financial system. So, it is important for the countries of region to exert joint efforts and continue their work on enhancing the financial and banking system in each country through several steps, including:
- Enhancing financial solvency and promoting integration between the units of the financial system in order to create entities capable of competition internationally.
- Enhancing control and supervision organs of the banking system and implementing best international practices and supervisory standards of the banking and financial system.
- Promoting consistency and coordination between monetary, fiscal and banking policies as well as exchange rate polices to support economic growth.
- Intensifying economic and trade cooperation among the region's countries.
- Enhancing the role of joint regional financial institutions at the top of which is the Arab Monetary Fund.
- Increasing investment in human capital and utilizing modern technology.
Dear Audience,
In order to make the best of rebuilding the financial and banking regulatory systems, it is important that every country in our region reviews the status of its banking and financial system, and works on improving it to compete and achieve integration at both the regional and international levels. I would like now to review briefly the Kingdom's experience represented by the efforts exerted by SAMA throughout the past decades to establish a domestic sound and stable financial system with a highly adequate capital, freedom of, capital flows, adequate liquidity for financing, a competitive economic environment, and sophisticated secure payment systems; a system that would interact positively and efficiently with external developments so that the effects of fluctuations in international markets and financial systems on the domestic economy will be neutralized as much as possible to a minimum level. The Kingdom's financial infrastructure has developed through a series of regular steps and procedures, laying the foundation for achieving this financial stability of which we are reaping the fruit. Salient steps included the following:
- In the seventies, the Government adopted the policy of merging foreign banks in joint stock companies and encouraged their rapid spread by establishing a network of branches throughout the Kingdom, thereby, contributing to achieving vital growth and expansion in this sector.
- During the last two decades of the past century, the legislative and regulatory system witnessed a marked new stage by the issuance of rules for Corporate Governance; imposition of internal control requirements on banks; issuance of a series of laws and regulations for the banking sector, including new standards for capital adequacy based on calculation of the size of risk, rules for external and internal auditing, rules for auditing committees, issuance of laws for anti-money laundering and combating terrorism financing, financial fraud and other laws and regulations aimed at promoting the consolidation of the financial system. Banks were also directed to implement International Accounting Standards, enhance transparency and disclosure of their financial data; and they were also encouraged to raise their capital and solicit credit ratings by international assessment and rating agencies.
- During the current decade, the Saudi financial system has witnessed an expansion and growth in financial and banking services and products, and introduction of modern technology to payments systems. This has been coped with the efforts exerted by SAMA to enhance its control practices. For instance, SAMA has taken major steps in implementing risk-based control of banks, and application of international capital adequacy standard prescribed by Basel II, which has been fully applied since the beginning of 2008.
With this background, the Saudi economy has not been affected considerably by the global financial crisis due to our long practice of conservative and prudent oversight and control policies. Implementation of prudent practices by the Kingdom of Saudi Arabia has had its notable impact on financial stability. For instance, attention has been paid to countercyclical capital buffers and provisioning. In this regard, SAMA encouraged Saudi banks to take advantage of a growing economy to raise proper capital and to internalize their reserves in the form of capital. Consequently, the banking system's capital during the period (2003-2007) increased by 240%. Of course, such increase has been very useful in subsequent periods of economic slowdown and in the fall-out of the recent domestic and regional events. Similarly, on the provisioning front, Saudi banks have practiced counter-cyclicality by raising their provisions for non-performing loans ratio.
As for executive bankers� remunerations, you may have followed over the past year the increasing discussion in some advanced markets regarding the remuneration practices of major banks. Some countries have moved to taxing excessive bonuses, while others have threatened to do so. The Financial Stability Board (FSB) and the Basel Committee made the issue of remunerations reforms in the banking sector a priority item in their agenda and issued international standards in the past year for this issue. It may be noted that the remuneration practices have never been a major concern in the Kingdom of Saudi Arabia, because of the proactive attitude of the Saudi Arabian Monetary Agency taken on this subject over the past few decades. This has included capping the remunerations for boards of directors and their audit committees, encouraging banks to set remuneration committees.
Dear Audience,
In conclusion, I wish to emphasize that the global banking and financial system is currently undergoing a new era of reform and reconstruction to strengthen its role in production and growth. The Arab states must make advantage of these reforms by using the same approach to develop their financial and banking systems, and to benefit from the regional and international experiences in this area. The march of economic and social development needs to be enhanced and the door for cooperation and integration between the Arab world and the international community should be opened.
I repeat my thanks to the organizers for inviting me to speak to this honorable audience, and thank you for listening.