And this positive impact is such that it, in turn, boosts credit demand and banks’ income, which ultimately translates into higher solvency levels. In any event, it is important to note that it may be difficult for banks to use buffers if they fear they may be penalised by the financial markets for reaching certain capital ratios, which would increase their funding costs and could, therefore, affect their solvency levels. This  3  market stigma effect could lead banks to avoid using capital buffers, which in accordance with the above analysis would have a negative impact on the economy.1 In addition, the use of these capital buffers may be more difficult if there are doubts about how they will be rebuilt post-crisis. The difficulty would be if banks were obliged to rebuild the buffers at a time when their capacity to generate profit was only modest or when the market might not be very receptive. In this setting, clear communication by the macroprudential and microprudential authorities on the capacity to make use of these buffers and on the flexibility as to how they are subsequently rebuilt is essential. In this respect, the authorities have made it very clear that banks will have sufficient time to resume compliance with the capital requirements, and that the rebuilding process will not in any event begin until the main effects of the pandemic have been dispelled.
Distinguished delegates, previously, supervision of cross-border banks placed significant reliance on the ultimate home country supervisor to ensure the soundness of the overall institution. This implied that other regulatory authorities could only provide input to the supervisory process in the home country. Hence, it was considered appropriate for global firms to gain the benefits of global approaches to the management of their business and had significant flexibility in the use of legal entities to book transactions and to manage liquidity globally. Therefore, the global inter-connectedness made it very difficult for individual national entities to survive group failure even though they are subsidiaries, given the huge importance of confidence factors in funding markets. The challenge is how to develop regulatory and supervisory approaches which will minimize the likelihood of cross-border failures and to reduce the severity of that impact in the event of a failure materializing. It would appear that an appropriate response would have to combine both greater coordination among supervisors and actions aimed at specifically addressing national concerns. On its part, the Bank of Zambia is currently settling Memoranda of Understanding with various central banks for effective supervision of entities with cross-border operations. This is also necessary for enhancing cooperation among the various regulatory authorities in the financial system in Zambia such as the Pensions and Insurance Authority and the Securities and Exchange Commission. Chairperson, in the wake of the financial crisis, there has been renewed interest in macroprudential supervision.