Africa Region Working Paper Series No. 53

Evaluating Banking Supervision in Africa

Abstract

This paper develops a framework for evaluating the effectiveness of banking supervision in Africa. Assessing and strengthening banking supervision is important given the important role of supervision in promoting financial stability and minimizing the costs of banking crises, including disruptions to economic activity and the financial burden of failure resolution on tax payers. In addition, strong banking supervision enhances the relevance of the banking system to the economy at large as only a stable and robust banking system will be capable of contributing maximally to economic growth and poverty alleviation.

The paper uses a case study of a fictional African country named Sahara Republic to provide a practical illustration of the most important aspects of evaluating the effectiveness of banking supervision in African countries. The proposed evaluation framework does not involve ratings and is designed as a diagnostic tool for Task Managers who need to conduct an evaluation of banking supervision without the luxury of a full Basle Core Principles (BCP) Assessment. Given the fact that the Bank and the Fund normally perform the BCP compliance assessment exclusively under the Financial Sector Assessment Program (FSAP) or the Off- Shore Financial Center Program, this framework could be particularly useful in conducting stand-alone assessments of banking supervision in African countries where no FSAP/OFC is planned (or relevant) in the near future or where time and budget do not permit a full independent BCP assessment.

The framework outlined here also complements a regular Basle Core Principles (BCP) assessment by providing explicit coverage of issues such as: i) the implications of the macroeconomic environment and financial sector infrastructure for banks and supervisors; ii) contingency planning, crisis management and failure resolution; iii) supervisory independence and governance; and iv) the effectiveness of safety nets.

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