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Yes
Document Type
Article
Source Publication
BIS Review
Keywords
State bank of Pakistan, SBP, Regulatory regime, Regulatory strategy, Pakistan
Disciplines
Business
Abstract
Address delivered by Mr Ishrat Husain, Governor of the State Bank of Pakistan, at the 18th Annual General Conference on Pakistan Society of Development Economics held at Islamabad on 15 January 2003.
The two major determinants of functional efficiency of financial system are market structure and the regulatory framework and the challenge for any Central Bank is to strike a right balance between the two. Over regulation can stifle financial innovation while an imperfect market structure can impair the efficiency of the system and penalize the consumer interests. Market structure consists of the degree of competition, and interlocking control between financial institutions and business enterprises as well as the degree of specialization within the financial sector. It is influenced by the internal organization and management of financial intermediation. These in turn, are affected by the degree of government ownership and control. The regulatory framework includes regulations imposed both for monetary policy as well as prudential purposes. An adequate framework can help ensure financial stability by reducing the probability of bank failures and the costs of those that do occur. Regulation is about changing the behavior of regulated institutions because unconstrained market behavior tends to produce socially sub-optimum outcomes. The regulator therefore has the responsibility to move the system towards a socially optimum outcome. The strategy followed by the State Bank of Pakistan aims at improving the market structure and competition on one hand and optimizing the overall regulatory regime on the other. The steps taken to stimulate completion and improve the market structure consist of lowering entry barriers, abolishing interest rate ceilings, privatizating government owned banks, promoting mergers and consolidation of financial institutions, enlarging the economies of scope for banks, liberalizing bank branching policy, and removing directed credit regulations. The so called dichotomy between regulation and market mechanism is in practice a false one. There needs to be appropriate internal incentives for management to behave in appropriate ways and the regulator has a role in ensuring that internal incentives are compatible with the regulatory objectives. Market imperfections and failures, information asymmetries, externalities and moral hazards associated with safety net arrangements make it difficult in developing countries for incentive structures within financial institutions to be aligned with regulatory objectives.
Recommended Citation
Husain, I. (2003). Regulatory strategy of the State Bank of Pakistan. BIS Review, 3, 1-3. Retrieved from https://ir.iba.edu.pk/faculty-research-articles/235
