By UDEME CLEMENT

An expert in economic management is seeking the application of macro-prudential supervision in ensuring financial sector stability for optimum growth.

Speaking during a workshop entitled ‘Advanced banking supervision and financial stability’, organised by West African Institute for Financial and Economic Management (WAIFEM) for participants in the ECOWAS sub-region, the Director General, Prof. Akpan Ekpo, represented by the Director of Administration and Finance, Mr. Eurackly Williams, said that macro-prudential supervision plays a crucial role in the financial system and in the economy as a whole, as the current crisis has shown.

He added, “With increasing number of financial institutions now active in the continent, global financial stability has become more important. A stable financial system is one in which financial intermediaries, markets and market infrastructure facilitate the smooth flow of funds between savers and investors and, by doing so, helps promote growth in economic activity. Conversely, financial instability is a material disruption to this intermediation process with potentially damaging implications for the real economy.”

He explained that safe-guarding financial stability must be a forward-looking task, one that seeks to identify vulnerabilities within the financial system and, where possible, takes mitigation action.

“Some of these vulnerabilities have maro-economic dimension, such as changes in the condition of household and corporate sector balance sheets, and developments in credit and asset markets, all of which have the potential to affect the level of distribution of financial risk within the economy.

Other vulnerabilities relate to the way in which financial intermediaries and financial market participants price and manage their various risks.  A resilient financial system is one in which there are well developed crisis management arrangements for handing distressed financial insitutions, in such a way that public confidence in the financial system will not be undermined” .

He pointed out: “In fulfilling its mandate to promote financial stability, supervisory authorities have a role to play both in mitigating the risk of financial disturbances with potentially systemic consequences, and responding in the event that a financial system disturbance does occur.

“Supervisory authorities can reduce financial instability through macro-prudential supervision and regulation. A fundamental conclusion drawn from the financial crisis is that the supervision and regulation of financial firms in isolation, which are purely micro-prudential approaches, are not sufficient to maintain financial stability.

“Rather, a macro-prudential approach, which evaluates and responds to financial system as a whole is necessary. The ultimate goals of macro-supervision and regulation are to minimize the risk of financial disruptions that are sufficiently severe to inflict significant damage on the broader economy.

“The course was designed to assist participants understand the mechanisms of risk-focused banking supervision, in particular to provide opportunities for participants to develop skills in risk-based supervision. To enable participants relate the core principles of effective banking supervision to current supervisory environment and issues relating to financial stability.

The aspects covered included, contemporary regulatory issues, tools for assessing financial sector vulnerability including stress testing, risk-based supervisory approach, costs, benefits and implementation challenges.

Other areas included Credit risk and credit examination procedure, contingency planning, framework for managing systemic banking crisis, analyzing bank deposits, electronic banking, banks internal controls measures, bank financial statement analysis including ratio analysis and financial stability towards a macro-prudential approach to banking supervision.

“The institute, however, made a paradigm shift in 2001 and embarked upon an integrated holistic Capacity Building Programmes (CBP), involving  not only human resources development but also organisational and structural development like processes and procedures in policy formulation and implementation.

“The modalities/strategies utilised by the institute to execute its mandate includes short-term training courses and workshops, advisory and follow-up missions, fellows’ schemes, e-learning/distance learning, and best practice studies. The coverage of beneficiaries has widened to include non-traditional users such as the mass media, national parliaments and private agencies”.