Improving Banking Supervisory Mechanisms
In the OIC Member Countries
46
of OIC countries which is higher than the EU-27 average of 69%. Basel III will remove Tier 3
capital and countries with a composition of capital relying on Tier 3 may need to adjust their
capital regulations which will probably the case for OIC countries.
Figure 36: Legally Allowed Regulatory Capital
Source: World Bank, Bank Regulation and Supervision Survey
4.2.3 Official Supervisory Power
The power of the supervisory authority in implementing and monitoring the regulations is one
of the most important criteria for an effective supervision scheme. These issues are
consolidated in the first category of the core principles. Supervisory power of the regulatory
authority is measured as the ability to gather information from banks and the ability to induce
banks to pursue certain actions.
The index variable measuring the supervisory power is constructed based on the answers of
the following questions: (1) Does the supervisory agency have the right to meet with external
auditors about banks? (2) Are auditors required to communicate directly to the supervisory
agency about elicit activities, fraud, or insider abuse? (3) Can supervisors take legal action
against external auditors for negligence? (4) Can the supervisory authority force a bank to
change its internal organizational structure? (5) Are off-balance sheet items disclosed to
supervisors? (6) Can the supervisory agency order the bank’s directors or management to
constitute provisions to cover actual or potential losses? (7) Can the supervisory agency
suspend the directors’ decision to distribute (a) dividends, (b) bonuses, and (c) management
fees? (8) Can the supervisory agency supersede the rights of bank shareholders and declare a
bank insolvent? (9) Can the supervisory agency suspend some or all ownership rights? (10)
Can the supervisory agency (a) supersede shareholder rights, (b) remove and replace
management, and (c) remove and replace directors? Index values ranges between 0 and 14
where higher values indicate greater power of the supervisory authority.
0%
20%
40%
60%
80%
100%
120%
Which of the following are legally allowed in regulatory capital and which
are the minimum (or maximum) percentages? (percantage of yes)
Tier 1 Tier 2 Tier 3