Distinguished delegates, part of the reason for the resilience of Zambia’s financial sector were the comprehensive financial sector reforms that have been systematically undertaken after the banking sector collapse in the second half of the 1990s. These reforms were promulgated under a Financial Sector Development Plan (FSDP) that was implemented to address weaknesses in the financial sector, identified in a Financial Sector Assessment Programme (FSAP) conducted by the International Monetary Fund (IMF) and the World Bank in 2002. Zambia’s reforms included the following: the increase in capital requirements for banks; consolidation of the supervision of bank and non-bank financial institutions under the Bank of  BIS Review 63/2010  1  Zambia; legislative reform that gave the Bank of Zambia powers to deal with failing institutions; and the promulgation of corporate governance guidelines including the conduct of outreach programmes on good corporate governance practices for the financial sector and the introduction of credit reference services. The Bank of Zambia is continuing with its work to improve the financial sector and enhance the role of the financial sector in the development of the country through the implementation of the second phase of the Financial sector Development Plan, FSDP II. The FSDP II will focus more narrowly on issues of competition within the financial sector and extending financial inclusion.
However, any theory of optimal capital level will have to strike a balance between the increased cost of financial intermediation which result from higher capital requirements and the benefits of the decreased probability of bank failure and economic harm which will be achieved. Recent developments have established a prima facie case for higher minimum capital requirements. The challenge will be for supervisors to manage the transition to higher capital requirements in a phased approach and take into account the need to avoid procyclical pressure on bank capital adequacy under conditions of economic downturn. Zambia has adopted Basel II for implementation although work is still on-going in this area. The enhanced approaches to capital that I have just described have the potential to significantly minimize the probability of bank failure. They may also assist in reducing the extent to which strains on bank capital and liquidity result in an impaired ability to extend credit to the real economy. But the probability of bank failure cannot be reduced to zero. The system of bank regulation and supervision therefore needs to be buttressed by arrangements for deposit insurance (for protecting depositors in the event of default) and for bank resolution (to ensure orderly wind up and avoid knock-on effects to the rest of the banking system). In this regard, an effective deposit protection scheme becomes an important aspect of the financial safety net especially in crisis times.