More powers for the SBP

The new banking regulations have been passed unanimously in both the Senate and the National Assembly.


Editorial February 27, 2011

It is not often that a good piece of legislation faces such little resistance in parliament. But the new banking regulations have been passed unanimously in both the Senate and the National Assembly. The bill will dramatically expand the powers of the State Bank of Pakistan to deal with financial crises, including taking over banks and replacing their managements and writing down and imposing losses on debt and equity shareholders alike.

Given the fact that the top five banks in the country control up to 80 per cent of all deposits, Pakistan’s financial sector has a very serious ‘too big to fail’ problem. If one of the major commercial banks runs into trouble, the government has absolutely no choice but to bail it out, owing to the systemic risk a bankruptcy would pose to the health of the financial system. The management of these banks, of course, knows this and thus has an incentive to take excessive risks in order to increase their banks’ profitability, a problem of bad incentives known to economists as ‘moral hazard’.

The amendments to the Banking Companies Ordinance would address this problem. If bank managers know that they can lose their jobs in the event of a crisis at their bank, they are likely to be more prudent in taking risks. If investors in stocks and bonds of banks know that they could lose their money in the event of a bankruptcy, they are likely to urge the bank’s management to be more cautious. Moral hazard and the threat of a systemic risk to the banking network, in other words, stands ameliorated with the introduction of this law.

Given the fact that at least 13 banks are in violation of the central bank’s minimum capitalisation requirements, a banking crisis is likely. Giving the central bank more tools to confront the problem before a problem arises seems like a good idea and one that we can fully support.

Published in The Express Tribune, February 28th, 2011.

COMMENTS (2)

Meekal Ahmed | 13 years ago | Reply Good article and good news. However, if I recall correctly the SBP has taken over troubled banks in the past (big or not) even without this law.
neelum | 13 years ago | Reply Amid the turmoil of blame game politics, its good to hear that new banking regulations have been passed unanimously in both the Senate and the National Assembly which will dramatically expand the powers of state bank of pakistan to deal with financial crises which include taking over banks and replacing their manegements and above all writing down and impossing losses on debt and equity shareholders alike. pakistan facing political and economic upheavel, its worth appretiating that the central bank has been given the power to confront these problems which are hazardous to the health of financial system.As your editorial rightly mentions that our financial sector has the 'too big to fail'problem where the top five banks have controlled over 80 percent of the deposits which gives the management the incentive to expand their profitability while taking excessive risks knowing that the governemnet would bail them out as it cannot afford to pose any further risk of bankruptcy to the already fragile economy. the amendments to the banking companies ordinance would ensure that those responsible would be made accountable for any such illicit act. thus if rule of law is to prevail and good governance is to acheive, such steps must be taken in all public sector enterprises so that the economy can be saved from the brink of collapse.
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