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The modernization of bank supervision

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Author: Larraín P., Christian UN symbol.: LC/G.1845-P p. 97-109 December 1994

Description

This article analyses the main challenges involved in modernizing bank supervision in the light of recent banking crises and the changes currently taking place in the financial system at the international level. Within a highly dynamic environment -rapid technological development in the field of informatics, stiff competition within the capital market as a result of liberalization, the increasingly prominent roles being assumed by financial conglomerates in an effort to achieve economies of scope, and the high degree of volatility of the main economic variables, which sharply increases the level of financial risk- the supervision of the banking system needs to be flexible in order to permit financial institutions to take advantage of opportunities for increasing their profitability and efficiency. At the same time, however, it must be geared to the achievement of its strategic objectives, which are to give the system stability, ensure its transparency and safeguard the government guarantees that have been extended. Within this context, the major issues involved in the supervision of banks in Latin America are the following: capital solvency standards and their role in supervision; mechanisms for appraising the book or market value of a bank's economic capital; supervisory methods for improving the coverage of financial risk; means of incorporating the regulation of financial conglomerates, and the importance of taking an integral approach to supervision of the banking system, with emphasis on the quality of management.