The Power of Institutional Memory

December 19, 2023 by Vladimir Turcanu

Why do the institutional memory persons play a key role in the regulatory activity of a supervisory authority?

We all live in a very complex and rapidly changing world. It brings us multiple opportunities, but also a multitude of risks. Capitalism and the open market are by far the best, if not the only feasible ways to ensure a thriving human society, nevertheless, history has proven that the “laissez faire” principle does not always work. The markets are not capable of regulating themselves in a smooth, or even sustainable manner, especially the financial markets.

Just remember the spikes of the prices in the energy markets in the begging of 2022 and the 2008 Global Financial Crisis. Technically speaking, the whole history of the financial market regulation, at the national level first, and afterwards internationally, is a documentation of the experience of how to deal with crises, or at least with the bankruptcy of one or several significant financial institutions. In other words, how to deal with relatively rare and high impact events, almost perfectly fitting the definition of the famous “Black Swan”. At the same time, it is not possible to eliminate all the risks, no matter if by prohibitions or somehow involving a sort of full coverage. The economic activities, by definition, are risk bearing and the only feasible solution is to put robust enough arrangements in place, in order to ensure “the perpetuation of the species, although some individual organisms would not survive”. It may seem like a kind of Darwinism approach, but, in fact, the regulatory responses represent complex and equilibrated arrangements established to avoid such events in the future.

Although sometimes the lessons learnt are forgotten, or other reasons prevail, just remember the history of the Glass-Steagall’s act, and identical or similar situations happening again, those cannot be avoided because of the continuous evolution of the economy, which permanently changes the realm. Nowadays, our world is very nuanced and evermore advancing. Because of the emerging networking possibilities, the public and the institutions have now shifted to globalized thinking and strategizing. The arrangements also became global, just considering the establishment and the evolution of the Basel framework (and especially at the volume and complexity) of it’s I, II, III, and forthcoming – IV, versions.

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It is quite easy to notice that every step in the development of new regulations represents, in fact, a link of the chain of repeating quite similar events which echo at an increasingly bigger scale. Of course, the financial industry has progressed significantly, since the modern world is a global one with a multitude of interconnections and interdependences, often concealed. In these circumstances, the transfer of competences and the “know-how”, are crucial to deal with the establishment of appropriate regulatory framework of developing countries. In this case the key role is played by the regulator’s staff, both the experts who transfer the knowledge and competences and those who receive it. At the same time, we must keep in mind that besides the “know-how”, the “know-how not” is also important, because there always are nuances and subtilities which may not be evident but are crucial and must be taken into consideration. This can only be ensured by the people who have a significant and extended knowledge of the local peculiarities, of the current situation in the industry and its progress over time. People like this exist in every regulation institution (authority), but they usually are not many. We call them “institutional memory” persons, it is being crucial to use and transfer their knowledge and experience to other colleagues. How can it be done? I think that it depends on the climate and the interpersonal relations in the institution, but probably even more - on the formal and informal way of organizing the processes and information flows in the institution. If people are feeling involved and they see that their knowledge and experience is needed, they will deliver their best, this being a win-win approach.

I have noticed that effect many times in my carrier, in the commercial banks first, and in the regulatory authority afterwards. I joined the National Bank of Moldova in quite some difficult times, but this approach and the high level of competence and corporative culture of the NBM allowed the identification and resolving of the main structural issues in the Moldovan banking sector (in fact in the financial sector, because the experience has been replicated with some adjustments in the insurance sector as well) – the ownership transparency and related parties’ transactions. As result the NBM had developed and implemented a regulatory framework which allowed it to ensure a significant improvement in the ownership transparency of the banking sector after a rather short period of time. Those provisions were combined with, and incorporated in, the Basel III framework while its implementation in Moldova. The results were recognized by the international partners, and, even more important, by the industry, since the ownership of the Moldovan banking sector has changed significantly, the major banks being taken over by the reputable international investors, including regional banking groups.

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