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Editorial Note During my two years as Deputy Chair of the Board of ASBA, financial markets have continued to evolve with further consolidation, cross border expansion and innovations in products and services. At the same time, international standards for the supervision of the industry have also continued to evolve, most notably being the release of the International Convergence of Capital Measurement and Capital Standards: a Revised Framework - Basel II. Supervisory Authorities are increasingly being challenged in very practical ways to keep pace with the rate and nature of changes in both the financial landscape and in supervisory methodologies. Some of these practical concerns are as basic as recruiting and maintaining the requisite expertise and skills; this is made even more challenging in the context of remuneration rates that often lag behind the financial services industry. Other practical considerations include the on-going training of staff members to ensure that they remain current with new supervisory methodologies and standards, and notably the acquisition of appropriate information technology (IT) infrastructure to capably underpin the changing business processes and needs of banking supervision. I would wish to say some more on the matter of adequate IT infrastructures, as this is an issue which is of critical importance in supporting the conduct of effective supervision and one which we as bank supervisors don’t discuss often enough in our various fora. In recent years, financial institutions have been giving increasing focus to their IT infrastructures in recognition of the operational benefits and potential this generates for ultimate competitive advantage as core banking business in the 21st Century is essentially technology driven. For supervisors it is of equal importance that heightened attention be given to implementing IT systems to support new and evolving supervisory needs. The business of supervision needs to be supported by information systems that not only have the capacity to handle vast quantities of information but which incorporate real time access and powerful business intelligence tools. Very importantly, as supervisors seek to transition from traditional retrospective views to more forward looking and pro-active approaches and supervisory actions, IT infrastructure must be capable of supporting modeling and forecasting techniques for projecting bank and banking system performance in the context of macro and micro-economic developments and financial system progression. Such systems need also to be secure, adjustable and sufficiently flexible to allow for the incorporation of new data and processing needs and capable of integration with other databases some of which may be of external origin to the organization. Such IT architectures are costly and we sometimes tend to be deterred by the prospect of the significant financial investment required. It is an investment that is, however, unavoidable when viewed against the landscape of the growing number of cross border financial conglomerates with which supervisors are now confronted, the imminent introduction of a menu of Basel II capital methodologies, and supervisory responsibilities relating to the monitoring of AML/CFT frameworks and practices, to name but a few of our major challenges. The need for robust IT systems is further intensified against the background of the adoption of International Financial Reporting Standards (IFRS) by a growing number of jurisdictions. This may give rise in some countries, to a regime of a dual monitoring of accounting measurement and recognition techniques as a result of areas of critical divergence between IFRS and prudential supervisory principles, particularly in the area of revenue recognition on impaired assets. Against this background, bank supervisors need to be engaged in fruitful exchanges on the IT technologies employed in their jurisdictions and their relative strengths, weaknesses, successes and failures and creatively explore the possibilities of collaboration on IT projects to reduce costs. I would also wish to suggest that multilateral aid agencies give greater consideration to technical assistance in the form of advice on, and development of IT frameworks to underpin enhancement in supervisory practices which may be necessary to achieve full compliance with certain Basel Core Principles. As an association with a mission statement that speaks to the support of “the development of banking supervision expertise and resources in the Americas, through the effective provision of training and technical cooperation services...” ASBA members with successful system implementation might also be encouraged to share expertise with members embarking on IT development projects. A tangential issue that has been the subject of closer supervisory scrutiny in recent years has been operational risk in financial institutions. Basel II for the first time introduces a prudential capital requirement against operational risk. There is however an aspect of operational risk which warrants heightened attention, but for which it might not be practicable to legislate capital provisions. This type of operational risk is one requiring a unique supervisory response which is flexible and readily implementable whenever the risk crystallizes. The risk of business interruption arising from natural disasters is one that has risen in recent years and which has been forcefully borne out in 2004 and 2005. At the time of writing, for the first in several years, we are at the letter “T” for the naming of Atlantic storms/hurricanes, with Tropical Storm Tammy threatening the eastern coast of the USA. ASBA countries have suffered from the force of Hurricanes Dennis, Emily, Stan and others, with the most devastating being the impact of Hurricanes Katrina and Rita in the USA. Many of us are for the first time facing the experience of dealing with the aftermath of such catastrophic events and many important lessons are now being learnt. It is not sufficient for us to only consider how well our organizations are prepared, or how well our banks are prepared, but it is imperative that we have clearly documented guidelines for appropriate supervisory responses to facilitate financial sector and wider economic and social recovery in our respective jurisdictions. In terms of business continuity, as supervisors we have intuitively placed emphasis on the review of disaster recovery management as a part of the operational risk assessment of licensees and ensuring that institutions have in place the necessary business continuity plans, inclusive of off-site back up facilities. This for a number of the smaller island members could mean off-shore locations, which will facilitate the restart of services in a timely manner, with minimal disruption to customers. We must also be mindful of the fact that serious natural disaster affects not only the physical operational processes but critically, the balance sheets of financial institutions, as the primary asset – loans – will likely be severely impacted due to the inability of borrowers to service their credit obligations in the immediate aftermath of disasters. It is also reasonable to assume that customers will have to make significant deposit withdrawals or require working capital advances to effect necessary repairs to buildings and machinery, if only on an interim basis until insurance claims are settled. Supervisors need therefore to consider in their disaster recovery planning, the possibility of extending limited and carefully managed supervisory forbearance on matters such as loan classification, liquidity minimums, and capital thresholds. However, they must also be absolutely clear on the boundaries that can be prudentially tolerated. In conclusion, I have been pleased to observe the notable advancement in the international profile of our organization since its inception. I believe it is now fitting for ASBA to take advantage of its heightened profile and collective voice to speak out on supervisory issues of concern to us. As we did in relation to the New Capital Accord and its potentially adverse impact for emerging economies, ASBA must speak out on other issues of significance such as International Financial Reporting Standards (IFRS). In such important matters which seek to change the essential way in which entities are managed, there is an absolute need for new standards to recognize and take account of the unique character of deposit-taking institutions and so avoid the potentially negative implications that IFRS as currently structured can have for prudent capital and income recognition. With a membership of thirty-four jurisdictions, ASBA can leverage its position to command the attention of international bodies, in a way that smaller regional groupings or individual jurisdictions cannot. As I demit office as Vice Chair of the Association, I wish to convey my pleasure in having served this body at this level. I wish for the new Board success and urge the continued commitment of the membership to the work of the organization.
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Audrey E. Anderson