Financial stability means the smooth functioning of financial intermediation under both normal and unexpectedly adverse circumstances. The Solomon Islands financial system consists of financial intermediaries including banks and non-bank financial institutions and one of the principal objectives of the Central Bank of Solomon Islands has been to maintain the stability of the financial system. During these years CBSI’s role has been to ensure the overall system is safe and secure and that potential threats or risks to the overall system are detected and reduced.
Countries operating in a market based economy regulate their financial sector on the basis of a regulatory framework for financial institutions which includes legal rules and a system of agreed prudential standards. Furthermore, the banking supervisory authorities of such countries expect the financial institutions to self-regulate themselves to a large extent. A key role of banking supervision is to monitor the application of the agreed prudential standards to limit risk. These standards should be reviewed periodically to allow for changing circumstances.
Although a great number of countries have adopted such a framework, to be effective, the framework must reflect the legal, commercial and cultural traditions of the nation – there is no one “best practice” supervisory framework that can be applied to all countries.
A supervisory and examination system is a key component of a financial institution regulatory framework. It ensures that financial institutions comply with the regulatory framework. It assesses whether financial institutions are able to meet their obligations as they fall due. It also gathers information to assist CBSI in further developing and improving its regulatory framework.
The Regulatory Framework in the Solomon Islands
The framework for regulating the financial sector in Solomon Islands consists of legislation (largely the CBSI Act and FIA) and the facility under FIA for a system of agreed prudential standards.
Prudential Supervision Policies
The following are the Prudential Guidelines issued by the Central Bank of Solomon Islands in September 2009.