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The Bank of Jamaica building, Nethersole Place in Kingston. Governor Derick Latibeaudiere believes the institution should have sole supervisory authority over the financial sector.

Derick Latibeaudiere, Contributor

One of the major lessons of the ten years since the start of these assemblies has been th recognition of just how important it is for us to maintain a healthy banking and financial system. A strong and healthy financial system is critical for the growth and development of any country.

Throughout the long history of financial markets, there have been a number of banking and financial crises that have severely disrupted economies. There is no reason for us to believe that there will be an end to these disruptions in an era of continuing technological change and innovation.

What is, therefore, important is that we continually seek to prevent and mitigate future crises. This we can do with a blend of sharp analysis, keen judgement, practical experience and a rigorous understanding of the workings of financial markets in both normal and abnormal times. I believe that this is what defines effective banking supervision. It is also this rigorous understanding of the operations of financial markets that is of critical importance to the development of macroeconomic policy, inclusive of monetary policy.

Over two and a half centuries ago, in the 18th century to be exact, Adam Smith wrote of the free-market system as the "invisible" hand that guides the market to achieve the public good. While that concept has today still not lost its resonance, the increase in the complexity of economic and financial affairs and the potential for instability that this has fostered, has placed us in a new arena - an arena, whose sphere of influence is constantly changing and one that, therefore, requires close and integrated monitoring in order for us to understand and manage the risks that abound.

Devastating repercussions

The banking crises of the last quarter of a century, and particularly those of the last ten years, have had a damaging impact on economic activity and the repercussions have been devastating for a number of economies. There is, therefore, no room for countries in our region to be less than aggressive in ensuring a more careful, integrated and direct oversight of the financial system to complement at least, that 'invisible hand' of which Adam Smith wrote. This is of course, what the Association of Banking Supervisors of the Americas is trying to achieve.

I use the word integrated because in some of our jurisdictions, Jamaica for example, supervision is divided among institutions. In the Jamaican case, we have, over the years reduced the number of supervisory authorities in the financial sector to two. This has achieved positive results in terms of the efficiency of supervision. It is my view that we could achieve an even greater level of effectiveness by going one step further with the establishment of a single supervisory authority for the financial system as a whole.

I also believe that there are significant advantages to be derived from the integrated interplay between the roles of supervision and the effort to achieve financial and macro-economic stability. I believe that the benefits from this interplay are best realised when the supervisory functions are integrated and placed in one umbrella organisation such as the central bank - the most logical location, bearing in mind the synergies that I mentioned.

In other words, in the Jamaican context, my preference is for an integrated and autonomous supervisory authority within the central bank.

The main objective

Traditionally, the central bank's main objective is the achievement of monetary and financial stability as a means to enhancing macro-economic stability, growth and development. Financial stability has always, therefore, been an important aspect of central banking. In pursuit of its twin functions, the central bank closely monitors developments in the financial market, interacts regularly with its primary dealers and other market players, and analyses the risks to the financial system.

Over the last ten years, the central bank's emphasis on financial stability has increased because of the increased potential for systemic risk. The transfor-mation in the structure of financial markets and the continuing increase in volumes and products, have contributed to increasing the potential for risk, and fuelled the need for a greater degree of interdependence in the pursuit of macroeconomic and financial stability.

We have seen the challenges that recent developments in financial markets have posed for central banks both here and abroad. Indeed, these developments point to the dynamic and intricate links between central banks and financial markets. The Northern Rock case certainly reinforces the importance of these links and points to the need for a more integrated approach to the analysis and management of financial-market activities, both from a central banking and supervisory point of view. This is especially important in an environment of continuing change and particularly relevant to emerging and vulnerable market economies such as Jamaica.

There is no doubt that the achievement of a strong and resilient financial system is enhanced by the continuous improvement in the analysis and management of risk. Indeed, that is the subject of the Base 11 framework. But the achievement of a strong and resilient financial system is also augmented by sound and sustainable monetary and fiscal policies. The linkages are, therefore, critical.

Furthermore, and speaking from the perspective of the Bank of Jamaica, the ability to act effectively in a financial crisis is enhanced by the fact that the supervision of commercial banks resides in the central bank. Indeed, the bank's current supervisory function helps the central bank to obtain timely and reliable information regarding conditions in the banking sector and the payments system.

Regulatory authority

But over the years, the changing financial landscape has spawned a variety of institutions other than the traditional commercial banks. The Bank of Jamaica has no regulatory authority over these other institutions, which makes it difficult to quickly gather and evaluate the necessary information to facilitate sound policy responses or avert crises.

I believe that our central-banking activities, coupled with the access to information from an integrated supervisory authority under the umbrella of the Bank of Jamaica, would enhance the effectiveness of the central bank's ability to manage crises. At the same time, the supervision of the financial sector as a whole would benefit from the results of central-banking activities in the financial markets. The bank's technical expertise in monitoring financial-market developments would also be on hand to add value to prudential risk evaluation.

The Bank of Jamaica is very pleased that the Government has indicated its commitment to an independent central bank. We will be working towards this and in this context, we will pursue the matter of an umbrella supervisory authority under the central bank. There are good reasons to believe that such an arrangement would significantly benefit the financial system as a whole. After all, price stability and financial stability go hand in hand, and prudence is as intrinsic to central banking as it is to financial stability and supervision.

Excerpts from the opening address by Derick Latibeaudiere, Governor of the Bank of Jamaica, at the 10th annual assembly of the Association of Banking Supervisors of the Americas, in Montego Bay on October 10.