Below is some interesting data extracted from the World Bank survey 2008 which can give us an indication on how local Maltese banks are regulated and supervised when compared to U.S. banks. (An exhaustive list can be found on the World Bank’s web site.) Bank Regulation and Supervision (Updated June 2008) | Malta | United States | Capital | What is the minimum capital to asset ratio requirement? | 0.08 | 0.08 | Is this ratio risk weighted in line with the 1988 Basel guidelines? | Yes | Yes | What is the actual risk-adjusted capital ratio in banks as of yearend 2005, using the 1988 Basel Accord definitions? | 0.206 | 0.1233 | External Auditing requirements | Is an external audit a compulsory obligation for banks? | Yes | Yes | Are auditing practices for banks in accordance with international auditing standards? | Yes | No | Is it required by the regulators that bank audits be publicly disclosed? | Yes | No | Do supervisors get a copy of the auditor's report? | Yes | No | Does the supervisory agency have the right to meet with external auditors to discuss their report without the approval of the bank? | Yes | Yes | Are auditors required by law to communicate directly to the supervisory agency any presumed involvement of bank directors or senior managers in illicit activities, fraud, or insider abuse? | Yes | No | Are external auditors legally required to report to the supervisory agency any other information discovered in an audit that could jeopardize the health of a bank? | Yes | No | Can supervisors take legal action against external auditors for negligence? | Yes | Yes | Internal Management/ Organizational Requirements | Can the supervisory authority force a bank to change its internal organizational structure? | Yes | Yes | Has this power been utilized in the last 5 years? | No | Yes | Liquidity & Diversification Requirements | Are banks limited in their lending to single or related borrowers? | Yes | Yes | What is the limit? | 25% bank's own funds | 0.15 | Depositor (Savings) Protection Schemes | Is there an explicit deposit insurance protection system? | Yes | Yes | Are interbank deposits covered? | No | Not Available | Provisioning Requirements | What is the ratio of nonperforming loans to total assets as of year-end 2005? | 0.029 | 0.004 | Supervision | To whom are the supervisory bodies responsible or accountable? | | | (a) the Prime Minister | Yes | No | (b) a legislative body | No | Yes | Is your country planning on adopting Basel II | Yes | Yes |
(The World Bank, 2008) Basel II The rules under Basel II - Pillar 2 create a new Supervisory Review Process. This requires financial institutions to have their own internal processes to assess their capital needs and appoint supervisors to evaluate an institutions’ overall risk profile, to ensure that they hold adequate capital. The supervisory review process of the Framework is intended not only to ensure that banks have adequate capital to support all the risks in their business, but also to encourage banks to develop and use better risk management techniques in monitoring and managing their risks. The 4 key principles of supervisory review: Principle 1: Banks should have a process for assessing their overall capital adequacy in relation to their risk profile and a strategy for maintaining their capital levels. Principle 2: Supervisors should review and evaluate banks’ internal capital adequacy assessments and strategies, as well as their ability to monitor and ensure their compliance with regulatory capital ratios. Supervisors should take appropriate supervisory action if they are not satisfied with the result of this process. Principle 3: Supervisors should expect banks to operate above the minimum regulatory capital ratios and should have the ability to require banks to hold capital in excess of the minimum. Principle 4: Supervisors should seek to intervene at an early stage to prevent capital from falling below the minimum levels required to support the risk characteristics of a particular bank and should require rapid remedial action if capital is not maintained or restored. (Basel II, 2004)
The supervisory review process provides supervisors with additional tools to assess banks' risk management and internal capital management processes. Supervisors now have the obligation and the responsibility to monitor, control and intervene at an early stage if they feel that a bank may be faced with some sort of capital risk beyond the normal acceptable parameters. Consequences of lack of Supervision Lack of control and supervision may lead to adverse consequences. It is not enough to have a regulator and a set of banking regulations in place, but these have to be abided with and supervised. As a consequence of lack of control over speculative transactions banks such as Societe Generale lost money putting the whole organisation at risk. Due to lack of supervision and control Societe Generale lost more than 9 billion Dollars and was at risk of losing an additional 75 billion Dollars if no immediate corrective action was taken at the nick of time. The bank admitted that it had ignored about 74 internal alarms generated by their internal surveillance system and a single dealer was in a position to carry out various deals leading to loss of money and endangering the organisation. Should diligent supervision be in place, this scenario would have been avoided. (BlogSpot.com, 2008) Another recent example in the UK is Northern Rock which clearly shows that it lacked of supervision. UK Financial Services Authority admitted its failures in its supervision of Northern Rock. The FSA said there was "a lack of adequate oversight and review" by the agency of the troubled bank (BBC News, 2008), stating that few regulators were assigned to monitor such a large organisation. The Commons Treasury Committee accused the Financial Services Authority of being guilty of a "systematic failure of duty" over the Northern Rock crisis (BBC News, 2008) and as a consequence this crisis could hurt the UK's financial services sector if it leads to any new rushed government regulations. Similar failures of internal controls have occurred in banks across the globe and will continue to occur unless the regulators enforce their supervision over Financial Institutions. Considerations Bank regulations and policies are a form of governmental regulations and serve the purpose to safeguard Financial Institutions, its customers and ultimately the country’s economy. As everything in life finding a balance is very important, the government’s task is to find a balance between having too much bureaucracy thus interfering in banking operations and having too little regulations which may compromise the soundness of Financial Institutions. Internal and external supervision ensures accountability and transparency of operations thus instigating customer confidence in Financial Institutions. Basel II also highlights the importance of supervision and emphasise the preconditions for: effective banking supervision, the methods for progressive banking supervision, the formal powers of supervisors.
The turbulence that Financial Institutions faced during the last few years witnessed the need of effective supervision by governing and regulatory bodies by implementing and enforcing rules, policies and regulations which are essential tools for the success of Financial Institutions. | 
