Editorial Note

Objective of Banking Supervision

A revision of the objectives of the different banking supervision institutions of the region shows a wide variety of them that, from the perspective of the financial market customer, could lead to confusion in relation to the role of the banking supervisor and the public good it provides.

The different definitions of the role of the banking supervisor in the region include, among others, the protection of the consumer of financial services and the task to monitor that the supervised agencies comply with the established rules and enforce the strictest control of their operations and businesses.

The wide range of objectives does not promote a clear understanding of the role of the supervisor that, in public documents, include the protection of the resources of depositors, the maintenance of a stable financial system, the promotion of competitiveness in the banking system, the defense of the consumer rights vis-à-vis the financial intermediaries and even the avoidance of abuse, usury and the utilization of the funds of clients in benefit of the institutions of the financial system. Therefore, it is not surprising that when problems arise in the financial system, legislators, citizens, enterprises and all of the institutions threatened by the negative effects of a potential financial crisis turn their attention to the banking supervisors and ask them to render report over their work.

In order to promote a more constructive dialogue of the role and of a banking supervisor it is important to share some of the conclusions of several discussions carried out in the Association. During these discussions, the participants concluded that the main role of the supervisor is to promote financial stability. This objective is simple to establish but its implementation is complex because it depends on the interpretation of the concept of financial stability and of the quality of the institutional framework within which banking supervision is carried out, the quality of the human and information resources and of the powers that the supervisors have to act in crises situations.

In general terms, financial stability is reached or maintained when the financial system operates without major setbacks or undesirable effects on the present and future development of the economy and when it shows increasing resiliency to absorb shocks. In this framework, the banking supervisor should monitor that the entities under his supervision carry out their activities in a sound and transparent way and with an adequate profitability. Therefore, the supervisor should contribute to the development of laws and regulations as well as to monitor that in the entities under supervision there is congruency between their exposure to risk in the conduct of their activities and the level of capital they keep to absorb potential losses.

The banking supervisor, through supporting financial stability, contributes to the development of economic activities in a society. Therefore, the clients of the financial system should be the first ones to be interested in an effective supervision and that the supervisory function complies with its objectives without interference from the supervised entities or the government.
However, the establishment of adequate objectives is only part of the way. There is need for the appropriate people to carry out the activities to reach the commented objectives. Therefore, the banking supervisor should have the highest moral and ethical values and a profound knowledge of the technical, legal and structural aspects of the financial intermediation activities. In addition, it is crucial that the personnel of the supervisory entities, as well as the information systems that support their work, are of the highest technical quality and that the personnel have sufficient budgetary and legal support to carry out their activities in an uninterrupted way and protected from legal demands, which only delay the adoption of timely decisions.

Therefore, it must be understood that a key condition for the banking supervisor to carry out his duties in benefit of the adequate functioning of the economy and society, is the absence of interference from the supervised entities or the government. The interference of the bank supervisor’s work weakens the trust of the people in the financial system, harms the soundness of financial intermediation and postpones economic growth. Because of this, the supervisor, in return, should privilege the accountability and transparency, by establishing clear mechanisms to report over its activities and
results to the State, enterprises and society.

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