FINANCIAL STABILITY AND BANKING SUPERVISION WITHIN ECOWAS December 2009
Financial instability has become a source of major concern globally. The main reasons for this concern are the proliferation of financial crises from the late ’80s to date, especially the successive crises inAsia, Latin America and the world today, and the financial and socio-economic costs they generate.
The increasing interconnection of various components of the financial system and the increasing financial innovation which fits the current trend towards globalization has increased the risks and the extent of their impact. Indeed, credit institutions are more exposed to contagion risks because of the increasing linkage between institutions on the one hand and the financial markets on the other. In this regard, the global crises over the last year has brought together the financial community, the central banks and the public and private sectors around prevention and crisis management mechanisms.
Beyond their impact, the succession of more and more severe crises, raises first, the issue of institutional arrangements or bodies responsible for maintaining the financial system’s stability and, secondly, the methods to be used to assess its strength and that of its main components (financial institutions, capital markets, payment systems and legal and regulatory framework for activities).
Although the need to ensure financial stability has been the subject of scholarly debate in the economic literature, there are still controversies, particularly, with regard to which institution (s) should undertake this mission, but also how to achieve it. In fact, modern financial systems are composed of several segments (banks, insurance companies, stock exchanges) and each of them, traditionally, has a specific supervisory and regulatory regime. Given the growing interdependence and interconnection of these various segments, the question of the appropriateness of such a
structure is clearly stated as part of the problem of the global financial system’s stability.
All of these issues facing the key players internationally should also be a concern for the ECOWAS member states, for which financial stability remains a key issue for their economic and monetary integration. They must, therefore, adopt appropriate approaches, taking into account their specificities, in assessing the soundness of their financial system. Given the embryonic state of most financial systems in ECOWAS member states, issues relating to financial stability are rarely discussed although financial stability is an important component of the ECOWAS Monetary Cooperation Program (EMCP). However, things have evolved considerably since the outbreak of the global financial crisis. Therefore, it would be useful to identify the best strategy to preserve financial stability in the sub
region. That is the aim of this paper which starts by recalling key concepts before looking at the impact of the global financial crisis on the economies of the sub-region and the status of banking supervision in order to draw conclusions and make necessary recommendations.