Central banks that also supervise core financial institutions would have the clear benefits of immediate access to vital information and expert assessment from supervisory staff about the health of individual institutions and their systemic implications. This could greatly help reduce the likelihood of any unnecessary delay or even misinformed decision that might hamper efforts to stem a financial crisis. For emerging market economies, the case for central banks to supervise the core financial institutions may be even stronger. This is because, financial markets in these countries are typically not well developed enough to serve as an efficient channel for the transmission of monetary policy. Market interest rates and even commercial banks’ prime rates react only sluggishly to changes in central bank’s policy rate, and often with a long time lag. In these circumstances, the traditional tool of monetary policy alone is unlikely to be enough to maintain economic and financial stability. Since in most emerging market economies, commercial banks are by far the most dominant players in the financial system, central banks with supervisory responsibilities could and should make use of targeted prudential policy to tackle financial imbalances and excessive asset price movements, both of which lie at the heart of all financial crises. This was what we did in 2003 to successfully contain incipient speculative bubbles in the property sector by imposing a ceiling on banks’ loan-to-value ratio of high-end housing loans.
Tarisa Watanagase: Aspects of optimal supervisory arrangements Remarks by Dr Tarisa Watanagase, Governor of the Bank of Thailand, at the SEACEN Governors’ Conference, Kuala Lumpur, 6 February 2009. *  *  *  Bank Negara Malaysia’s background paper provides a good summary of issues related to the choice of optimal supervisory arrangements. It is generally accepted that integrated model of supervision may have inherent synergies, economy of scale and scope, very little or no regulatory arbitrage and the ability to identify problems sooner. However, its possible weaknesses are the blurring of focuses and a tendency to compromise multiple objectives. On the other hand, separate supervisors have been credited with being more focused on their mandates, but of course the biggest concern is about supervisory coordination, the lack of which can lead to regulatory arbitrage, making supervision ineffective. It is also generally accepted that no one model is better or more optimal than the other. It all depends on the context of each country, including its supervisory capacity and resources, and details in operational arrangements. Thailand can certainly agree to such a conclusion. In our case, the Bank of Thailand (BOT) supervises the banking sector, which is the core of the financial sector. The Securities and Exchange Commission (SEC) supervises market conduct, the Insurance Commission supervises the insurance companies. This model has worked well so far. By law, the BOT chairs the Financial Institutions Policy Committee, whose members include the Secretary General of the SEC and the Insurance Commissioner, that meets on a monthly basis.