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Prudential Regulations of SBP & its comparison with the World Bank


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Prudential Regulations of SBP & its comparison with the World Bank

  1. 1. Prudential regulations of SBP Presenter: Shaikh Faizan Ahmed Reg #: BB-1-05-2820 Supervisor: Dr. Manzoor Ahmed Khalidi Dated: 23 rd October, 2008 and its comparison with the World Bank
  2. 2. Objective <ul><li>“ What are those basic set of regulations that are being practiced in the world and those that are being practiced in the Pakistan in order to minimize the risk and exposure faced by the banks and whether the regulations followed by Pakistan are of international standards or not.” </li></ul>
  3. 3. Prudential Regulations “ the set of laws, rules, and regulations which are designed to minimize the risks banks assume and to ensure the safety and soundness of both individual institutions and the system as a whole”
  4. 4. Literature Survey <ul><li>Caprio and Klingebiel (1997) showed that a mixture of bad policies and bad banking causes bank insolvency. Furthermore, excessive expansion of credit is also one of the main causes of insolvency. </li></ul><ul><li>Lindgren, Garcia, and Saal (1999) have found that prudential regulation and supervision are weak in most countries that experienced financial crises. </li></ul><ul><li>Williamson and Mahar (1998) have observed that the countries with high-quality supervision have experienced less costly financial crises. </li></ul>
  5. 5. Prudential Regulations Outline By World Bank <ul><li>Criteria for entry: </li></ul><ul><li>Since newly-licensed banks are particularly vulnerable to failure, the initial decision to grant a license is an important one. </li></ul><ul><li>Capital Adequacy: </li></ul><ul><li>Capital is necessary to absorb unusual losses. </li></ul><ul><li>Asset diversification: </li></ul><ul><li>Banks can increase their returns or reduce their risks or generally achieve a better combination of risk and return by diversifying their operations. </li></ul>
  6. 6. Contd… <ul><li>Loans to insiders: </li></ul><ul><li>A frequent cause of loan problems is credit granted to bank insiders and other connected parties. Such credit may not meet the same standards as that extended to outside borrowers and the amount of credit often exceeds prudent levels. </li></ul><ul><li>Asset classification & provisioning: </li></ul><ul><li>Banks should systematically and realistically identify their problem assets and provide adequate reserves for possible losses. </li></ul>
  7. 7. Prudential Regulations Outline By State Bank of Pakistan <ul><li>Exposure Per Individual / Group / Clean lendings / contingent liabilities / unsecured assets. </li></ul><ul><li>Minimum Conditions for taking exposure. </li></ul><ul><li>Classification and provisioning for non performing loans. </li></ul><ul><li>Violations & Penalties: </li></ul>
  8. 8. Conclusions <ul><li>Prudential regulations that are being followed by the State Bank of Pakistan and those which are being followed by other central banks internationally don’t differ much. </li></ul><ul><li>The main problem lies with in the difference between the minimizing bank’s exposure and its ability to take necessary steps in order to continue business. SBP should differentiate between the two and take measures mainly for minimizing bank’s exposure and risk taking by putting forward the rules and regulations for it under the title of “Prudential Regulations”. </li></ul><ul><li>The latter one can also be handled but not under prudential regulation but under the “Guidelines for Bank Operations”. </li></ul><ul><li>Hence some corrective steps are needed in order to comply fully with the international banking standards and banks should be allowed independency in taking some decisions on their own discretions. </li></ul>
  9. 9. Questions