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One result of the globalization and growing complexity of the financial services industry has been a worldwide shortage of qualified regulators of financial institutions, just as the supervision and regulation of the industry has become increasingly complex. The skills required to regulate financial institutions operating in dozens of foreign nations and in different lines of business (insurance, securities, derivatives) are vastly different from those of just a decade ago. Financial regulatory agencies in South Africa, Australia, South Korea, the new member states of the European Union, the United Kingdom and the United States have all experienced significant shortages of skilled personnel during the past five years. International Monetary Fund staff in recent reports has commented on the lack of sufficient numbers of qualified bank supervisors, particularly in the developing world. The relatively low salaries in government regulatory agencies has hindered the recruitment of qualified personnel. The U.S. Securities and Exchange Commission from 1998 to 2000 lost one-third of its staff; former employees cited low salaries as the primary reason for leaving the agency. In 2002, Congress gave the SEC greater flexibility in hiring and compensating SEC employees similar to that granted to bank regulatory agencies of the federal government. That is a step in the right direction, but more needs to be done. Volcker report Paul Volcker, former chairman of the Federal Reserve Board, in a 2003 report on the organization and personnel policies of the U.S. government, “Urgent Business for America,” criticized the compensation and hiring practices of the U.S. government, noting that the compensation system does not reward high achievers. Few financial regulatory agencies here or abroad pay salaries that approach the private sector. Hong Kong and Singapore are notable exceptions. Developing nations compensate their supervisors at much lower levels. Retaining qualified personnel once hired is becoming more of an issue. After the issuance of the Basel II minimum bank capital standards in June 2004 and its implementation by banks in 2006, bank regulators with Basel II experience and knowledge are becoming increasingly sought after. Bank supervisors do not become sufficiently competent to conduct an examination independently until they have five years of experience. Large commercial banks have been hiring former bank supervisors at an increasing rate; they can nearly double their government salary by moving to the private sector. The developing world has an even greater problem in recruiting and retaining qualified financial regulators. Their regulatory agencies often do not have the history and experience of those in the developed world and their educational systems have not produced as many qualified trainees. What can governments do? While large salary increases for bank supervisors are unlikely, greater flexibility in the hiring and compensation of supervisors is warranted. The Volcker Commission’s call for improving human resource practices in the United States government is apt. Other nations may want to emulate the United States’ practice of exempting the salaries and employment practices of its financial regulatory agencies from the regulations and restrictions applied to its government generally. With the increasing complexity of financial regulation both at the national and international level, extensive training programs must be implemented and continually improved. A long-term effort to train regulatory personnel is required to alleviate the current shortage of financial supervisors. International organizations are meeting this need to a certain extent. The Financial Stability Institute housed at the Bank for International Settlements in Basel, Switzerland, provides training to financial supervisors around the world. The Joint Vienna Institute originally organized as a short-term venture to train bankers and supervisors from Eastern European nations is now a permanent organization. These and other training efforts must continue and be expanded, particularly for officials from developing nations. The complexity and sophistication of financial markets requires that financial supervisors receive a solid university education even before they can be trained in financial-supervision techniques. Programs to encourage qualified graduates to seek careers in financial regulation and supervision are needed. Just as some law schools provide forgivable loans to students who take positions in government or nonprofit organizations after graduation and the U.S. Department of Education forgives federal student loans of graduates who choose teaching careers in certain geographic areas, the development of similar programs could be targeted to recent graduates seeking positions as financial regulators. Such incentives could alleviate the shortage to a certain extent. The stability of the international financial system is a complex issue. An adequate supply of trained, qualified personnel in financial regulatory agencies is just one of the foundational elements needed to minimize financial crises that occur in our global system. All the efforts focused on the creation of sound international financial policy will be wasted if the officials charged with implementation of that policy are overworked or unqualified. Duncan Alford is the head of reference at the Georgetown University Law Center. This is adapted from a forthcoming law review article on the implementation of the core principles for effective banking supervision, to be published in the Summer 2005 issue of the Boston College International and Comparative Law Review.

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