Financial regulation in developing countries

Many LDCs have implemented reforms to strengthen the prudential regulation and supervision of their financial systems. This article examines the progr ess made by LDCs in implementing reforms, analyses the weaknesses in their prudential systems and discusses policy options for further reform. While c onsiderable improvements have been achieved, the occurrence of banking cris es during the 1990s indicates that many countries have yet to build robust prudential systems which can protect their banking systems from systemic cr ises. The weaknesses include loopholes in the prudential regulations, short ages of skilled supervisors, and regulatory forbearance. Furthermore, there are difficulties in applying the developed country model of regulation, wh ich relies heavily on accurate financial information, highly skilled techni cians and an impartial bureaucracy, in an environment characterised by weak accounting and legal frameworks, acute shortages of skilled personnel and pervasive political interference in public administration. Options for furt her reform include higher capital adequacy standards, explicit rules coveri ng intervention policy in distressed banks, restraints on competition in ba nking markets and greater use of the market for monitoring banks.