Financial regulation in developing countries

Abstract

Many LDCs have implemented reforms to strengthen the prudential regulation and supervision of their financial systems. This article examines the progress made by LDCs in implementing reforms, analyses the weaknesses in their prudential systems and discusses policy options for further reform. While considerable improvements have been achieved, the occurrence of banking crises during the 1990s indicates that many countries have yet to build robust prudential systems which can protect their banking systems from systemic crises. The weaknesses include loopholes in the prudential regulations, shortages of skilled supervisors, and regulatory forbearance. Furthermore, there are difficulties in applying the developed country model of regulation, which relies heavily on accurate financial information, highly skilled technicians and an impartial bureaucracy, in an environment characterised by weak accounting and legal frameworks, acute shortages of skilled personnel and pervasive political interference in public administration. Options for further reform include higher capital adequacy standards, explicit rules covering intervention policy in distressed banks, restraints on competition in banking markets and greater use of the market for monitoring banks.