Improving Banking Supervisory Mechanisms
In the OIC Member Countries
50
Supervision authorities should also have a certain level of independence from the banks
operating in the banking sector. Third question aims at evaluating supervision authorities
according to this criterion. The selected OIC member countries possess a perfect independence
of supervisory authorities from the banks, with an average value of 1 which is equal to US and
higher than EU-27. It mainly measures the degree to which the supervisory authority is
independent within the government from political influence and important for an effective
supervision.
Fourth question measures the ability of the supervisory authority to make decisions
independent of political considerations. For this measure, Indonesia, Turkey, Kazakhstan,
Malaysia and Nigeria obtain the highest score indicating significant independence from
political influence whereas for Pakistan and UAE there is a room for improvement regarding
this measure. The average value of the selected OIC member countries is slightly lower than
EU-27 average and the value for US.
Finally, the survey evaluates the general independence of the supervisory authority by
combining three measures described above, by summing the respective scores and obtaining
an index value ranging between 0-3. Indonesia, Malaysia and Turkey obtained a score of 3,
which indicates perfect autonomy of supervisory authorities followed by Nigeria and Pakistan
with values above average. UAE in this regard, has some points to improve to achieve an
independent supervisory framework. The average value for the selected OIC member
countries is higher than US, and almost equal to the EU-27 average, which suggests a level of
independence close to the developed economies.
For the banking supervision, the number of authorities, which are responsible from the
regulation activities as multiple institutions, may result in conflicts and reduces the
effectiveness of supervision. All selected OIC member countries with the exception of Nigeria
have a single authority for banking supervision, which is responsible from banking
supervision, which is the case for all EU-27 countries but not for US. For the financial sector as
a whole, however mostly there is more than one authority in the selected member countries
with the exception of Turkey.
4.2.4 Private Monitoring and External Governance
The index variable “private monitoring” measures the degree to which supervisory agencies
require banks to obtain certified audits and/or ratings from international-rating agencies.
Private monitoring increases transparency and credibility of financial institutions therefore is
usually encouraged by supervisory authorities. the private monitoring index is constructed
based on the questions (1) whether bank directors and officials are legally liable for the
accuracy of information disclosed to the public, (2) whether banks must publish consolidated
accounts, (3) whether banks must be audited by certified international auditors, (4) whether
100 percent of the largest 10 banks are rated by international rating agencies, (5) whether off-
balance sheet items are disclosed to the public, (6) whether banks must disclose their risk
management procedures to the public, (7) whether accrued, though unpaid interest/principal,
enter the income statement while the loan is still non-performing, (8) whether subordinated
debt is allowable as part of capital, and (9) whether there is no explicit deposit insurance
system and no insurance was paid the last time a bank failed. Thus, the maximum value of the
private monitoring index is 12 and the minimum value is 0, where larger values indicate
greater regulatory empowerment of the monitoring of banks by private investors.