Abstract
Staff Studies is the bi-annual (March and September) peer-reviewed journal of the Central Bank of Sri Lanka. The Journal aims at stimulating innovative research for the analysis of current macroeconomic issues and policy challenges faced by central banks while providing a forum to present recent theoretical and empirical research.
Highlights
At times of crisis, financial supervision is under spotlight
The financial crisis that crippled the world in 2007-09 had the legislators, the policy makers, the supervisors, the market analysts and such other stakeholders of the financial sector including the depositors and the general public questioning the effectiveness of supervision in the background of its expected functions, roles, goals and responsibilities.(The Group of Thirty 18) While there is no one perfect method of financial supervision that can cure any instability and prevent all crises, the crisis saw more than one finger being pointed at the financial supervisors for failures and lapses on their part, which have allegedly fanned and fuelled the crisis to reach beyond territorial limits and cause wide havoc around the world (Bernanke)
The failure of the Financial Supervisory Authority (FSA) to identify the build-up of systemic risk within the UK financial sector was categorised by HM Treasury as a key failure that led to the crisis in 2007 whereby ‘the regulators and supervisors failed to provide the robust scrutiny and challenge that banks and other financial institutions needed to ensure that risks building up on their balance sheets were manageable – at the level of individual firms, but across the system as a whole’
Summary
Financial supervision is under spotlight. Goodhart states that ‘a supervisor is only noticed when either he/she angers the regulated by some restrictive or intrusive action, or when supervision “fails” in the sense that a financial institution collapses or a customer gets ripped-off’.(Goodhart 21). Some depositors of some financial institutions, both regulated and unregulated, took the Central Bank of Sri Lanka (CBSL) to courts over alleged negligence, mala fide actions and derogation of duties and responsibilities.. The Supreme Court of Sri Lanka, which is the apex court in the country, has required the CBSL to be involved in repayment processes of unregulated shadow banking institutions all the while broadly and generally interpreting the provisions of the Finance Companies Act.. The powers conferred on the CBSL as the financial supervisor would be analysed against the Basel Core Principles.(Supervision) The balance between immunity and accountability would be discussed in general and several cases instituted by depositors against the CBSL would be analysed to ascertain the judicial thoughts on the role and the function of the CBSL.
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