Modernisation And Convergence Of Regulatory Frameworks

The consolidation occurring in the banking and financial sectors is a worldwide trend that has gathered momentum in recent years. Initially largely a banking sector phenomenon, consolidation has increasingly also affected the nonbank financial sector and has resulted in the establishment of large and complex financial institutions. In recent years, the trend has begun to gather pace in emerging market financial systems, including those in Asian countries. In addition to the main factors that are driving consolidation in mature markets are improvements in information technology, the progressive deregulation of the financial sector and competitive pressures that have come about as a result of reduced margins in traditional banking business the need to restructure banking systems in the wake of a financial crisis has been an additional factor in emerging markets. Some Asian financial crisis countries appear to be entering a second round of banking and financial sector restructuring where further consolidation and the formation of financial holding companies will play a major role. But the process is driven also by the contestability of financial transactions among financial centres, which risk losing business when antiquated regulatory frameworks raise operation costs. Convergence is also evident in the development of common legal forms for particular financial instruments that are traded in national markets (e.g., swaps), disclosure standards, and accounting standards. At the same time, the potential for systemic instability and contagion across national boundaries creates an incentive to adopt best practices in regulatory frameworks. The recognition of the importance of implementing best practices underlies the Financial Sector Assessment Program (FSAP) by the IMF and the World Bank, which seeks inter alia to assess countries‘ observance of key regulatory standards such as the Basel Core Principles for Effective Banking Supervision, the IOSCO (International Organization of Securities Commissions) and the IAIS (International Association of Insurance Supervisors) principles for the securities and insurance industries, and the core principles for systemically important payments systems. Foreign penetration of domestic financial systems places a substantial premium on cooperation among national supervisors.