The Financial Stability Institute (FSI) of the Bank for International Settlements (BIS) has authored several working papers and policy guidance on the principle of proportionality and its impact on regulation and supervision across several jurisdictions. For clarity, proportionality in the broad sense means applying global norms (e.g., rules, standards, oversight) to market actors in ways that are sensitive to their size, business mix, and complexity, or in simple terms, their risk profiles. For instance, Basel 3 mandates a minimum Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) for internationally active banks. Proportionality is where the Bank of Ghana chooses to strictly enforce those standards on, say, ABSA and Standard Chartered Bank, rather than, say, ADB Bank or OmniBSIC, because of their different risk profiles. Evidence from cross-country studies has revealed that sound proportionality regimes are characterized by two factors: (a) a clearly delineated scope of exemptions from standards, and (b) a consistent and robust methodology for identifying and categorizing Regulated Financial Institutions (RFIs) that are exempt from strict compliance with those standards.
Proportionality in and of itself is not a bad policy decision if well implemented. For instance, Bank of Ghana’s tiered stratification of the Non-Bank Financial Institution sector in 2011 was a clear (and successful) effort at embedding proportionality into the regulatory regime. The problem arises when proportionate regulation and supervision pose a risk to financial stability due to implementation bottlenecks. It raises policy cost far above its benefits. We believe this to be the case in some instances within Ghana’s non-bank financial sector.