EAST AND SOUTHERN AFRICA BANKING SUPERVISORS GROUP (ESAF)

Regional Seminar cum Workshop on Credit Risk

Pointe aux Piments, Mauritius, 17 - 21 July 2000

Speech by Mr R. Basant Roi, Governor of the Bank of Mauritius

Chairman ESAF

Distinguished Speakers

Ladies and Gentlemen

It is a pleasure for me to welcome you this morning to the five-day ESAF Regional Seminar hosted by the Bank of Mauritius, with the assistance of the Financial Stability Institute. I extend a special welcome to the speakers who come from several highly respected national and international organisations, including the Basel Committee on Banking Supervision, the Financial Stability Institute, the Deutsche Bundesbank, the New York State Banking Department and the Dresdner Bank.

I am impressed by the range of subjects that this seminar cum Workshop will address for the benefit of banking supervisors of the Eastern and Southern African region. The topics that will be visited by the distinguished speakers include the measurement and management of market risk, credit risk modelling and the internal ratings approach underlying the new capital adequacy framework, fundamentals of derivative contracts, the Core Principles for Effective Banking Supervision, credit risk and loan portfolio management and on-site inspection of banks.

Against the background of unprecedented innovations in the field of banking coupled with the rising concerns relating to the need for improving supervisory standards world-wide in recent times, I imagine the choice of topics could not have been more apt and comprehensive to ESAF’s objectives, that is, to raise the standards of supervision in the region to the level of best international practices.

In July 1999, that is more than a year back, I personally and forcefully requested the banking community of Mauritius to do their utmost in order to foster the soundness of the banking system of Mauritius, in keeping with the strong direction given in this regard by the Bank of Mauritius in its role of supervisory authority. I have to say that the firm stand adopted by the Bank of Mauritius and the greater focus by the majority of bankers on prudential management has since paid off handsomely.

The lesson we can draw from this turn of events is that a solid understanding of stakes involved by the supervisor and the supervised is essential to the promotion of sound market practices, avoidance of systemic risks and guaranteeing financial system stability. Understanding and managing the risks involved at the micro level and their implications for macro-economic management is the foundation stone on which we can work together safely in today’s highly networked global financial markets. Provided such level of understanding of issues is achieved, it would not be necessary for financial system supervisors to twist the arms of the supervised in order to ensure market discipline.

Much work is being done at the level of the Basel Committee on Banking Supervision as well as the regional supervisory groups to promote the provision of improved financial services to customers in a risk-mitigated environment while respecting the freedom of markets to innovate, to employ new technology as well as to extend their reach well outside their geographic or jurisdictional boundaries. No matter what we do, we cannot arrest the technology-driven closer integration of financial and other markets currently taking place all over the world. There is no reason to do so. However, we need to co-operatively design mechanisms so as to contain risks associated with these far-reaching changes in order to prevent the whole edifice from crumbling.

In this process, there is a need for operators to be given the necessary incentives to push for higher levels of self-governance and for supervisors to better apprehend the working of the markets. A well-informed supervisor should be able to add value to the changing market processes rather than act as a hindrance to market development. This is where, I believe, synergies between the two sides, namely supervisors and the market, will help lift up the stage and bring about the much needed dynamism in market development, particularly in our region. At the same time, it is clearly the role of the public to monitor closely the financial institutions in which they have their stakes and give clear signals to them to reinforce their good governance as required.

The Bank of Mauritius is committed to play a big role in the strengthening of the domestic financial system infrastructure. This is why we have undertaken an ambitious project to establish a Real Time Gross Settlement (RTGS) platform before the end of this year for the further modernization of the payment system of Mauritius. In the emerging environment, treasury management by market operators will perforce become more dynamic. In turn, this changeover will have implications in terms of development of financial instruments and techniques of management adopted by financial sector operators while consumers of financial services will obtain further scope for efficiency in their financial dealings.

The Bank of Mauritius is conscious of both the monetary policy and prudential management implications of the new platform being established. There are risks associated with the higher speed of transactions. There are rewards as well. And it is because we consider such rewards to outweigh the risks that we are inducing those changes.

In any case, the use of derivatives, about which the distinguished speakers will deal more fully with the ESAF supervisors, themselves comprise a hedge against risks. The point I am making is that you need to know how such products, in increasingly deregulated market environments, are helping rather than hindering the development of the market process and the containment of associated risks.

I am aware that our region has its own specificities. It is in the context of these specificities that the present seminar will provide scope for supervisors to devise suitable standards for bank regulation and supervision. I feel confident that the range of issues tabled for consideration at this seminar will heighten the awareness of supervisors to the responsibilities that they are expected to shoulder, given the current levels of financial market development in our different countries. We need to demonstrate to the world that we have in our region sufficient supervisory skills of the needed depth not only to keep our financial system stable but even to share with the world insights into how the global financial system can be better managed. I throw this challenge to the supervisors here present.

Finally, I would like to put on record our deep appreciation to the distinguished speakers who have come all the way to Mauritius to share their knowledge with the supervisors of the ESAF region. Through you, I would like to extend our thanks to the organizations which have made your services available for furthering our objectives at strengthening banking supervision in the individual countries of the ESAF region. May I request you, Mr. Raskopf, to convey to your Chairman, Mr John Heinmann, our sincere thanks for contributing to disseminate supervisory skills to supervisors of our region as well as to those of other regions.

Thank you