Effective regulatory regimes: a comparative analysis of GCC financial regulators

Author:Mohamed Aly Ramady
Position:Department of Finance and Economics, King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia
Pages:2-17
SUMMARY

Purpose - The purpose of this study is to investigate the effects of the global financial crisis on Gulf Cooperation Council (GCC) bank regulation and the impact on the region and the policies adopted by the regulators to avoid financial panic and contagion. Design/methodology/approach - The author examines GCC countries’ financial... (see full summary)

 
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Effective regulatory regimes:
a comparative analysis of GCC
nancial regulators
Mohamed Aly Ramady
Department of Finance and Economics,
King Fahd University of Petroleum and Minerals,
Dhahran, Saudi Arabia
Abstract
Purpose – The purpose of this study is to investigate the effects of the global nancial crisis on Gulf
Cooperation Council (GCC) bank regulation and the impact on the region and the policies adopted by the
regulators to avoid nancial panic and contagion.
Design/methodology/approach The author examines GCC countries’ nancial soundness
indicators in terms of capital adequacy, non-performing loans and provisioning rates, including central
bank liquidity support, deposit guarantees, capital injections and monetary easing and policies to
mitigate risk assessment, and the monitoring and elimination of practices promoting excessive risk.
GCC compliance regimes through multinational organizations and the exposure of the region to
cross-border nancial linkages to test for nancial soundness are assessed.
Findings – Overall, results indicate that comprehensive regulatory oversight exists in the GCC in
conformity with international standards, and Basel capital adequacy requirements, and that the GCC
regulators have acted prudently to establish high coverage in all measures but that gaps exit concerning
cross-border surveillance and a need for imposition of capital surcharges on banks deemed high
systemic risk. The supervision of Islamic nancial institutions and a lack of inter-GCC liquidity support
mechanism for this segment are highlighted.
Practical implications – The paper shows that the GCC regulators need to address cross-border
surveillance, as local banks branch internationally and foreign banks operate in the region.
Originality/value The author is not aware of any similar work that compares the regulatory
policies of the GCC.
Keywords Supervision, GCC, Compliance, Policy oversight, Islamic, Regulators
Paper type Research paper
1. Introduction
The global nancial crisis of 2008/2009 and its continuing legacy, especially in the
Eurozone countries, has brought to the attention of policy-makers a host of gaps and
shortcomings in existing nancial regulatory systems. Systemic risk or macro-prudential
regulation became important for both developed and emerging market economies, as the
global nancial crisis brought into sharp focus the inter-dependency of the world’s nancial
markets and the fear of spillover contagion. Effective regulations are those that aim to
monitor sources of systemic risk and to alleviate any excessive building of such risk in the
The author wishes to acknowledge the support granted by King Fahd University of Petroleum
and Minerals Deanship of Scientic Research under project number IN 121032 in the preparation
of this research.
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
JFRC
23,1
2
Journalof Financial Regulation
andCompliance
Vol.23 No. 1, 2015
pp.2-17
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-09-2013-0032
system before it gets out of control. Another area of concern arising out of the current
nancial crisis is cross-border bank regulations. Large international banks whose activities
cross borders were not sufciently regulated or supervised by their home country regulators
and pose a threat to national banking systems. De-regulation and globalization in the late
1980s and 1990s has seen banking become international. This raises other supervisory
issues due to various regulatory standards and accounting rules that apply in different
countries, making it difcult and sometimes impossible to correctly assess the risk exposure
of “global” banks.
The use of off-balance sheet and other nancial instruments, such as derivatives
which are often over-the-counter and are not traded on organized exchanges, cause yet
another layer of regulatory problems. Those responsible for policy and oversight are
often not aware of the size and conditions of these markets, which makes it sometimes
impossible to ascertain their liquidity and ability to withstand a shock.
The global nancial crisis had its clear impact on the Gulf Cooperation Council (GCC)
countries, affecting the nancial sector and banks to different degrees, depending on the
level of regulatory controls in place. This has prompted Gulf policy-makers and
regulators to re-examine their regulatory tools and to re-shape how nance and banks
are regulated. This paper attempts to examine and contrast the major regulatory
frameworks that have been implemented by the six countries of the GCC to avoid bank
failures, institute better risk management, introduce international best practices and
examine any shortfalls and challenges faced.
2. Literature review
The need for a robust regulatory and supervisory regime over nancial institutions is
not a recent phenomena, but one that regulators have been grappling with for many
years (Hoening, 1997;Friedman, 1999;Corrigan, 1986;Stigler, 1971). Given the
importance of the nancial sector to the economic well-being of nations, maintaining
public condence in the system is a key objective of nancial regulation to reduce the
risk of failure, contagion and systemic risk in the nancial system (Rose, 1999;OECD,
2009a,2009,2010).
In an era of globalization, nancial contagion and cross-border policy tools become
even more of a problem to regulators. This affects developing countries with less
advanced regulatory frameworks (Knight, 1998), often leading to unilateral capital
controls (Edwards, 2000), which might not be effective in containing nancial panic
(Balakrishnari et al., 2009). The initial lack of a global coordinated approach to meet the
challenges of the most recent nancial crisis has brought about various national
responses to shield domestic nancial sectors (World Economic Forum, 2012). The
driving force and need for nancial regulation was that banking, by its very nature,
could be prone to market failure by assuming too much risk and had to be controlled for
the “common good”, as excessive risk-taking could impose costs on society as a whole
which could exceed direct (state ownership) or the indirect costs of regulating the
banking system (Spong, 1994;Peltzman, 1976;Hoening, 1997;World Economic Forum,
2012).
There are some who believe that regulations are welcomed by those that are being
regulated on the premise that rms in a regulated industry accrue “benets” in the form
of monopolistic rents due to the fact that regulation might block entry into that regulated
industry (Stigler, 1971). Others argue that regulations that block competition could
3
Regulatory
regimes

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