Financial Stability: Financial Stability: Policy Choices for Small - - PowerPoint PPT Presentation

▶
financial stability financial stability policy choices
SMART_READER_LITE
LIVE PREVIEW

Financial Stability: Financial Stability: Policy Choices for Small - - PowerPoint PPT Presentation

Feb 21, 2024 129 likes •275 views

Financial Stability: Financial Stability: Policy Choices for Small Economies Policy Choices for Small Economies Mohammed Al-Jafari Director General Jordan Deposit Insurance Corporation Strengthening Financial Stability- Deposit Insurance

slide-1
SLIDE 1

١

Financial Stability: Financial Stability: Policy Choices for Small Economies Policy Choices for Small Economies

Mohammed Al-Jafari Director General Jordan Deposit Insurance Corporation

Strengthening Financial Stability- Deposit Insurance Contributions (Rome- Italy 30 Sept. – 1 Oct. 2010)

slide-2
SLIDE 2

٢

Financial Stability Policy Choices for Small Economies: Outline

  • The Conventional Framework for Financial Stability

Self Regulation and Risk Management Prudential Regulation and Supervision Monetary Policy Deposit Insurance Fiscal Policy

  • Consistency of Policy Objectives
  • Policy Choices for Policy Objectives
  • Main Features for Small Economies
  • Possible Policy Choices
  • Conclusion
slide-3
SLIDE 3

٣

The Conventional Framework for Financial Stability

Prudential Regulation and Supervision Monetary Policy Deposit Insurance Fiscal Policy Self Regulation and Risk Management

Financial Stability

slide-4
SLIDE 4

٤

Consistency of Policy Objectives

Maintain Price Stability Monetary Policy Achieve Sustainable Returns to Shareholders Self Regulation and Risk Management

Financial Stability that Promotes Economic Growth

Manage Aggregate Demand Fiscal Policy Protect Less Financially Sophisticated Depositors Deposit Insurance Prevent Distress of Financial Institutions Prudential Regulation and Supervision

Ultimate Objective Primary Policy Objective Policy

slide-5
SLIDE 5

٥

  • Each Authority has Several Policy Tools to Achieve its Primary

Objective;

  • Primary Objective for One Policy could be a Secondary

Objective for Other Policy;

  • No One Policy Does the Job;
  • No One Tool for Single Policy Objective;
  • No One Size Fits All;
  • Coordination and Harmonization Improve Policy Effectiveness.

Policy Choices for Policy Objectives

slide-6
SLIDE 6

٦

  • Stronger Cyclicality

Main Features for Small Economies

  • Greater Variation in the Length of the Business Cycle
  • Higher Variation in Budgetary Revenues
  • Venerable Current and Capital Accounts
  • Clearer Need for Anchor Currency to Support Exchange Rate

Stability

  • Greater Role for Cost-Push Inflation
slide-7
SLIDE 7

٧

Possible Policy Choices: Self Regulation and Risk Management

Credit Risk Higher Credit to TA Ratio; Higher Concentrations; Higher Sensitivity to Business Cycle

Excessive Leverage and Increased Risk Distorted Incentive Structure Pursuant of High Returns (Unsustainable)

Market Risk Limited Exposure Less Advanced Risk Management Techniques Operational Risk Stringent Internal Control System

Liquidity Risk Insolvency Risk

slide-8
SLIDE 8

٨

Possible Policy Choices: Prudential Regulation and Supervision

Compliance with Banking Regulations and Directives

OR

  • Risk

Assessment

  • Assisting Banks in Managing their Risk
  • Evaluate Potential Problems Identified by Off-site Examination
  • Assessment of the Quality of Assets, Management, Earnings,

Capital, and Funds Management, as well as the Bank's Internal Control, Audit, Management Information…etc.

Off-site Supervision On-site Supervision

Compliance with Banking Regulations and Directives

OR

  • Comprehensive Appraisal of Risks
  • Monitoring and Evaluating Safety and Soundness
  • Providing Early Warning of Potential Problems
slide-9
SLIDE 9

٩

Possible Policy Choices: Monetary Policy

Conventional Role to Play

  • Reserve Management;
  • Lender of Last Resort;
  • Exchange Rate Management;
  • Provision and Management of

Financial System Infrastructure (e.g.. Payment and Settlement Systems). Conventional Role to Play

  • Reserve Management;
  • Lender of Last Resort;
  • Exchange Rate Management;
  • Provision and Management of

Financial System Infrastructure (e.g.. Payment and Settlement Systems). Exceptional Policy Tools For Crisis Management

  • New Lending Programs
  • Open Bank assistance
  • Liquidity Support
  • Asset Purchase
  • Capital Injection
  • Troubled Asset Relief
  • Supporting Inter-bank Lending

Exceptional Policy Tools For Crisis Management

  • New Lending Programs
  • Open Bank assistance
  • Liquidity Support
  • Asset Purchase
  • Capital Injection
  • Troubled Asset Relief
  • Supporting Inter-bank Lending

Free Capital Movement Fixed Exchange Rate Regime Independent Monetary Policy

The Impossible Triangle The Impossible Triangle Constraint Contingent Budgetary Position Budgetary Position

slide-10
SLIDE 10

١٠

Possible Policy Choices: Deposit Insurance

Credible Well- Designed Limited- Coverage Deposit Insurance System Market Monitoring Banks Risk Taking Moral Hazard

In Compliance with the Core Principles for Effective Deposit Insurance System (Compulsory Membership, Credible Coverage Limit, Risk Based Premium etc.) In Compliance with the Core Principles for Effective Deposit Insurance System (Compulsory Membership, Credible Coverage Limit, Risk Based Premium etc.)

Strengthens Limits Contains

slide-11
SLIDE 11

١١

Explicit Blanket Guarantee Absences of Deposit Guarantee Deposit Insurance may create incentive incompatibilities and thus moral hazard if the scheme is poorly designed Deposit Insurance Contains Moral Hazard Deposit Insurance Contains Moral Hazard Limited Explicit Deposit Insurance Limited Explicit Deposit Insurance Limited Explicit Deposit Insurance Implicit Blanket Guarantee

Possible Policy Choices: Deposit Insurance

Different Outcomes for Incentive Structure Moral Hazard / Financial Stability

slide-12
SLIDE 12

١٢

Possible Policy Choices: Fiscal Policy

Basic Function in Promoting Stability for Sustainable Growth Countercyclical Management of Aggregate Demand Basic Function in Promoting Stability for Sustainable Growth Countercyclical Management of Aggregate Demand Exceptional Fiscal Policy Tools For Crisis Management

  • Capital Injection
  • Debt Guarantee;
  • Asset Purchase;
  • Recapitalization Using Public Funds

Exceptional Fiscal Policy Tools For Crisis Management

  • Capital Injection
  • Debt Guarantee;
  • Asset Purchase;
  • Recapitalization Using Public Funds

Contingent

Essential Role in Dealing with Global Crisis Economic Spillover

Critical Role in Supporting Financial System Stability

slide-13
SLIDE 13

١٣

To Conclude

  • Financial Stability is an Essential Prerequisite for Sustainable Growth;
  • Risk Management, by Itself, Can't Do It All;
  • Regulators Should Ensure the Harmonization among Primary Policy

Objective (s) With the Objective of Financial Stability;

  • Effectiveness of Policy Tools is Time Sensitive and Country Specific;
  • The Achievement of Financial Stability Requires Effective Coordination

among All Policy Makers in Charge with: Prudential Regulation and Supervision, Monetary Policy, Deposit Insurance, and Fiscal Policy;

  • Prudential Regulation and Supervision Along with Deposit Insurance

Must Play Wider Roles in Small Economies, Given the Limitation of Monetary and Fiscal Policies.

  • Financial Stability is an Essential Prerequisite for Sustainable Growth;
  • Risk Management, by Itself, Can't Do It All;
  • Regulators Should Ensure the Harmonization among Primary Policy

Objective (s) With the Objective of Financial Stability;

  • Effectiveness of Policy Tools is Time Sensitive and Country Specific;
  • The Achievement of Financial Stability Requires Effective Coordination

among All Policy Makers in Charge with: Prudential Regulation and Supervision, Monetary Policy, Deposit Insurance, and Fiscal Policy;

  • Prudential Regulation and Supervision Along with Deposit Insurance

Must Play Wider Roles in Small Economies, Given the Limitation of Monetary and Fiscal Policies.