ARTICLE (February 12 2010): Doesn't it sound strange that even after State Bank of Pakistan gets new powers

through the adoption of Banking Companies (Amendment) Bill 2009 by the National Assembly the Securities and Exchange Commission of Pakistan (SECP) continues to remain a sole supervisory body for the Non-Bank Financial Institutions (NBFIs)? In 2008, Dr Shamshad Akhtar, the then Governor SBP, came up with a draft to strengthen the supervision and monitoring capability of the central bank. She felt it necessary because Dr Salman Shah, who was chairing the committee of SECP at that time, wanted the supervision of Pakistan's central bank. After the introduction of the amendment bill 2009, to alter changes in law, the SBP Act and the Banking Companies Ordinance need to be suitably amended, which may not be an easy task. Globally, different countries have different modules. For example, in USA, Federal Reserve Board (Fed) is not the supervisory body as Securities Exchange Commission (SEC) is solely responsible to manage banks and financial institutions. Recent events in the USA's financial market have put a question mark on SEC's role. Similarly, in UK, there are three active bodies in the financial market. They are Bank of England (BoE), Securities Exchange Commission (SEC) and Financial Services Authority (FSA), which is responsible for financial market activity in the UK. FSA got exposed after the collapse of Northern Rock that triggered collapse of quite a few banks. To avoid such incidents in future, the UK financial market is trying to develop a mechanism to provide appropriate deposit insurance and co-ordinate with the three institutions to bring financial stability. After the financial crisis that started in August 2007, Europe was forced to introduce more financial reforms. On the macro-prudential side, European Systemic Risk Board (ESRB) came into existence. Do we really need an independent central bank? Will it be sustainable? It's a huge responsibility for SBP. Recently, the SBP submitted a summary to the Supreme Court and informed it that Rs 256.66 billion of loans were given to 669,819 borrowers that were written off in the last 38 years (1971 to 2009). But it were the nationalised banks that sanctioned the major portion of these loans. Central banks have explicit mandate for price stability. But the question is whether the SBP policymaking will succeed in impacting the fiscal stability after this major development. More central bank independence means more accountability and more transparency. Hence, the demand for transparency would substantially increase. It requires political transparency, which means good co-ordination and relationship between the Executive and central bank. Economic transparency is another added responsibility for the SBP, which requires sharing of all important information with general public. Operational transparency is considered an important tool to enhance credibility of the central bank. It will be required to make corrective announcements of errors or mistakes that could otherwise cause discrepancy or economic shock. Regular and frequent announcements about internal decision-making help improve its image among banks. This is known as Policy or Procedural transparency.

The amended law has imposed a huge responsibility on SBP, as it will be now required to focus on financial regulations, supervision and strict compliance. Regulation is all about making laws while supervision is all about monitoring of such laws. The criteria in relation to the appointment of the SBP Governor and supervisory functions of such institutions will have to be made more transparent. The SBP will be responsible for its decisions and actions and expected to explain them when it is asked by the Parliament or Senate's committees. Besides, it has to go along with the provision that such positions are confirmed with public review through parliament. The process involved in chairman FED Ben Bernanke's reappointment is a good example. The SBP will be required to become an institution of transparent honesty