Regulatory framework critical for banks: report

January 18, 2003

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ISLAMABAD, Jan 17: The regulatory framework for banks is of fundamental importance in developing countries since banks perform a critical function in the process of economic progress.

This was stated in a research paper, titled “New issues in banking regulation” conducted by director, IMF Institute, International Monetary Fund, Washington.

Presenting his paper at the 18th annual general meeting and conference of Pakistan Society of Development Economists, Dr. Khan said there were many hurdles that had to be crossed in order to put in place a suitable regulatory framework in developing countries.

He said deregulation, technology and financial innovation were transforming banking, and banking was no longer the business it was a few decades ago.

He said the nature of banking services was still the same but the way of their provision had changed dramatically. In fact, in many countries such services are being provided by institutions that are quite different from traditional banks. Banks, thus are moving into new areas, he added.

Mr Khan said such a step was imperative to deal with new challenges raised by technology and deregulation. He warned that inadequate resolution of these challenges will create wrong incentives and lead to banking fragility.

However, over- regulation carries the danger that it would retard the development of national financial systems, he added.

Dr. Khan said it was a well-known fact that banks and other financial intermediaries performed three key functions- channelling funds from savers to investors; providing a payment system for transactions, and distributing risks across space and time to those best able to bear them.

While the former two functions continue to remain for the functioning of the real economy, the risk distribution function has become increasingly important, as the financial instruments have become more complex, he said.