Banking amendments good, but still a long way to go

Contrary to market speculations prompted by certain quarters, the recent amendments in Banking Companies Ordinance 1962 are not a response to MCB Banks petition in the court against their regulatory row pertaining to sponsor shares.
And this is neither a crash course re-drafting of the law to meet one of the conditionalities imposed by the IMF when Pakistan sought its stand-by facility in 2008.
Although, in addition to the conditionally of central banks autonomy, the IMF had asked for the amendments under discussion, work on this assignment was initiated almost a decade ago when a banking commission was formed under the Justice Haider Pirzada during Musharrafs regime.
Essentially, this bill passed by the national assembly earlier this week is to strengthen the central banks control mechanism to regulate the commercial lenders.
The SBP had already been empowered to control commercial banks earlier to mitigate the depositors woes and check systemic risk. But unlike the previous regulations, which were more generic, the said changes are more specific in nature. The spectrum of amendments is to safeguard depositors money from potentially excessive risk taking by the management of commercial banks.
Knowing that the SBP has previously been bailing out or controlling banks to ensure the safety of depositors money, especially small and medium size savers, one may wonder about the value addition of these amendments.
The answer to that is, stringency, because now the central bank can impose losses on shareholders, by writing down their capital, in case it comes to supporting a bank.
For instance, earlier if a banks management was supported by additional capital or concessional loans by the SBP, to help avoid the banks failure due to its inefficient management or excessive risk taking behavior, the benefit of this support could have been enjoyed by both the shareholders and the management.
But now, with the central banks power to impose losses on banks capital, the benefit will be restricted only to depositors while letting the management and shareholders feel the heat of their bad decisions. Yes, it is something similar to the global debate on bankers bonuses being cut in the aftermath of state-sponsored bailout packages.
In addition, now the State Bank, based on its own analysis and judgment, can adjust the capital requirement for a bank on its risk behavior. For example, the central bank (based on its own analysis including CAMELS) can impose a higher capital adequacy requirement on any bank if it has excessive exposure in a segment of advances.
This bill also empowers SBPs central board to deal privately with its management regarding a decision on certain conditions for a bank. This will create an internal check in the system and make the central banks decision making more transparent, while allowing commercial banks to appeal against the decision without hurting their goodwill.
In a nutshell, these changes will go a long way for the development of financial systems in Pakistan with an improved risk management system. Yet, a lot more is required to be done.
There is a strong need to make the central bank more autonomous with virtually no direct or indirect influence of lobbies, other regulators and the government, as envisaged by the IMF.
There is also a need for collective efforts on the part of the regulators including SBP and SECP, and legislators to plug the loopholes in the company and banking ordinances as regarding the crossholding structure.
In a dominated family owned business structure in Pakistan with closely held shareholding structure, like the case in Japan and Germany, there is an absence of laws to deal with crossholding pyramiding shareholding in Pakistan.
As of today, any group with a bank, insurance company and many other businesses can potentially play on depositors money and minority shareholders interests for its own interests by excessive risk taking. Hopefully, the mandarins will come up with a solution to resolve this soon.