Online edition of Daily News

Deputy Governor P.M.Nagahawatte speaks at the opening of the Maharagama branch of the Nations Trust Bank. Bradley Emmerson, Head of Retail Banking, Nations Trust is also in the picture.

The Central Bank as the supervisor and regulator of banks is committed to ensure that the business of banks is carried out efficiently and prudently by their directors and the management, since the soundness and viability of a bank largely rest on the competence and integrity of the directors and the management, Deputy Governor of the Central bank, P.M.Nagahawatte said.

There is, however, a common misconception and a wrong notion that regulation and supervision of banks by a Central Bank or other regulator alone account for the success or failure of a bank. "It must be emphasised that no amount of regulation and supervision are adequate to make a bank stable and sound. Because the simple rules that regulators prescribe for all banks and are applicable to all banks are incapable of addressing the complex issues faced by a particular bank in carrying on its business," he said at the opening of the Maharagama branch of the Nations Trust Bank last week.

The task of achieving the soundness and stability of a bank rests predominantly with its directors, management and major shareholders who are responsible for the internal governance of the bank. Thus analysts have said that the fall of the large Barings Bank a few years ago, was not a regulatory failure, but a failure of internal governance by persons responsible for the management of the bank. Analysts also say that if a failure of a bank is to be prevented by a regulator, it would require supervision and regulation to an extent that is so comprehensive, intrusive and expensive as to be practically impossible.

It would almost amount to the regulator running the bank. A regulator cannot and does not do that. A regulator does not step into the shoes of the directors and the management of a bank. A regulator only stipulates minimum prudential standards that banks must follow. Therefore the success or failure of a bank would depend on the control and management excercised over its affairs by its directors and senior management.

Today the challenges and complexities in banking are much more than they were before. Earlier banks were mere financial intermediaries which mobilised deposits from the public and lent the funds mobilised to customers. Today, banks are also players in the market, investing and trading in derivatives and other instruments which entail much greater risks and require a greater degree of competence and integrity from the directors and management of banks.

These risks if not properly managed, could result in the balance sheet of a bank changing for the worse in a very short time. This new phenomenon in particular requires banks to be well-managed sound institutions that strive for excellence, following internationally acknowledged best practices. Banks that fall short of these standards will be vulnerable to Takeovers or will have to exit the market.

The regulator's task is made more difficult if not impossible where a bank seeks to defy or avoid the regulatory regime and also engages in fraudulent activities. Regulation becomes ineffective in such a situation.

Then it calls for a more comprehensive investigation beyond the parameters of the action that could be taken by a regulator of banks. It would be impossible for a regulator to carry out such extensive investigation in respect of every bank and investigations into complex fraudulent transactions and activities are beyond the skills and aptitude of a regulator of banks and require investigation by the police or law enforcement authority.