In addition to offsite and onsite, modern supervision includes closer, more frequent and less formal contacts between supervisors and banks. These contacts take place on different levels – on the top level of Boards and managements but also on various mid-levels and staff levels. Sometimes also the owners are contacted. The aim of the contacts is to “know your banks” meaning that the supervisors should assess how the banks operate, and if the bank managements and owners are competent and honest. Contacts, onsite and offsite supervision should  6  BIS Review 104/2006  be integrated so that the onsite supervisor benefits from the knowledge gained from the offsite monitoring, the contacts and vice versa. A good way to achieve this is to establish bank-specific groups of supervisors composed of offsite as well as onsite staff who are responsible for the supervision of a specific banking group. There is a strong development towards what is known as risk-based supervision although a globally agreed definition of this concept is still lacking. Under risk-based supervision the supervisory authority uses its main resources on the major risks. With this approach, the focus is on larger banks but also on banks with more risky activities and on banks which have shown to be weaker or more vulnerable than the others. A risk-based approach also means that the supervisor focuses on collecting information from banks about those activities or operations where there might be material risks.
There is a natural demand for good banking services in all countries and if you, the authorities and policy-makers, set up a reasonable framework for banking, I am convinced that you will soon see applications for new banks or for existing banks to change their structures, activities or mode of operations. In achieving an efficient banking system, the authorities are faced by a number of questions: What is the optimal number of banks? In modernising a banking system you would like to have a “reasonable number” of banks – not too few but not too many. In many countries the lifting of the old and restrictive regulations leads to an influx of a large number of mostly small “family-owned” banks but many of these tend to have overoptimistic plans for their activities and are closed rather soon leading to consolidation of the banking sector. Some depositors and other counterparties could suffer losses from dealing with these banks. Are such events necessary steps in the development or could they be avoided? In my experience, some countries after scrapping their old regulations became ultraliberals and provided licenses for banking on too lenient grounds. They did not properly evaluate the prospects for the banks to conduct profitable business in a competitive environment and they set the requirement for basic minimum capital far too low. But having said that I would warn against doing the opposite – to let the authorities decide how many banks there ought to be and then distribute a fixed number of licenses.