Recent massive banking failures around the world emphasise the need for effective regulatory supervision of financial institutions, the chairman of the Bermuda Monetary Authority (BMA) said yesterday.

Pointing to the lapses in supervision and control which led to such massive failures as Barings and Daiwa, BMA chairman Cheryl-Ann Lister said empowering legislation needs to be put in place so regulatory bodies can be effective in helping staunch such blow-ups.

In a speech to the Chartered Institute of Bankers, Ms Lister said Bermuda is ahead of the offshore world in complying with international financial standards.

However, more needs to be done -- as proposed in upcoming legislation regarding deposit taking institutions -- to give the BMA the independence it needs to be in compliance with international standards, she said.

As outlined by the Basle Committee, the international body for banking, supervisory institutions like the BMA need to possess operational independence from Government.

"There must be a suitable legal framework for banking supervision, including provisions relating to authorisation of banking organisations and their ongoing supervision, powers to address compliance with laws as well as safety and soundness concerns, and legal protection for supervisors,'' she said. The proposed legislation is expected to give the BMA the authority to licence financial institutions and set the criteria for granting such licences. The BMA would also have the authority to suspend or revoke licences.

All such authority currently rests with the Minister of Finance leaving the process open to political involvement.

"There is no question but that Bermuda will be taking the actions required to bring its system into full compliance,'' Ms Lister said. "Quite apart from being the right thing to do to maintain Bermuda's quality reputation, it is, on another level, absolutely a matter of self-interest for Bermuda.'' Regulations will need to be constantly updated to keep up with the changes caused by globalisation and the blurring of distinctions between banking, the securities market and insurance companies.

"Traditional tests such as that for capital adequacy will always be used, but it is expected that additional prudential tools will be utilised as the market develops,'' she said. "For example, in recent years supervisors have paid closer attention to market and interest rate risk.'' A number of proposals in a recent financial regulation checklist being circulated calls for private trusts and company management to be subject to similar supervision, she said.

Supervisory bodies also need to be given the authority to communicate in more detail with other similar organisations overseas to do their jobs properly.

Current Bermuda legislation limits what the BMA may provide to overseas supervisory authorities. Ms Lister said the regulations need to be updated.

"In order to ensure that the whole supervision arrangement both here and overseas can work in an efficient and effective manner, you can expect to see that supervisors are given power to carry out consolidated supervision, to share with other supervisors information dealing with systemic risk and to visit overseas operations of home entities for the purposes of supervisory review,'' she said.

The BMA has already conducted two reviews of Bermuda banks' overseas operations and is ahead in that area, she said.

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