Financial Sector Development in Africa: Opportunities ... - World Bank

The Reform Agenda for Financial Regulation and Supervision in Africa 173
alike. Prompt and effective responses to potential financial distress are
important to avoid poor ad hoc decisions and to minimize the costs of
banking failures to the financial system and ultimately the taxpayer.
Though the number of systemic banking crises has declined sharply in
Africa, the recent Nigerian experiences in responding to bank failures and
several self-assessments by other African countries have highlighted the
need for establishing and rehearsing effective crisis response mechanisms
and bank resolution procedures before the actual events occur. Bank
depositors in Africa have, to a large extent, relied on the implicit guarantee
of the authorities that, as recently seen in Western markets, bank
depositors would not be exposed to the failings of bank risk management.
What is more, given the comparatively small size of the financial sectors
in Sub-Saharan Africa, many banks are of systemic importance on a
national scale and the too-big-to-fail problem is ubiquitous.
The continent’s overall record of resolving failing banks in the form of
ad hoc interventions is mixed. If it was successful, it often depended on
the de facto power and capacity of the executive branch to impose bank
resolutions on shareholders, as well as the limited practical ability of
shareholders to challenge government interventions.
Since only a few countries on the continent have established formal
crisis response mechanisms, authorities tend to be inadequately prepared
to deal with potential crises. Proper procedures need to be established to
define efficient information sharing, analysis, decision making, and internal
and external communications, as well as appropriate contingency
plans for funding the resolution of banks where necessary. Without an
appropriate legal framework in place, supervisors lack the required legal
powers and independence in their decision making to intervene in a
timely and forceful way. As banking systems grow, it will be increasingly
important for supervisors to be able to take prompt corrective actions,
and, as the need arises, resolve insolvent banks in an orderly way.
Developing Country-Specific Roadmaps for the
Regulatory and Supervisory Reform Agenda
Focus group discussions with African supervisors have found that they
are pursuing a vast reform agenda that goes far beyond the implementation
of the BCPs and the Basel capital frameworks. 3 Besides introducing
risk-based supervision and effective consolidated supervision, issues such
as introducing deposit insurance, promoting financial inclusion and consumer
protection, regulating electronic money, adopting International