Developments in the Organizational Structures of Banking and Financial Market Supervision

- an introductory presentation -

Čedo Maletić CROATIAN NATIONAL BANK

Outline

 Arguments for integration  Arguments against integration  International structures and trends  Survey results  Conclusion

Arguments FOR integrated supervision

    Integrated supervision is more effective in dealing with financial conglomerates It allows use of economies of scale (esp. important relevance for small countries) It exploits economies of scope (in a single database, consolidated set of rules and guidance, ….) Integrated supervisory agency could allocate resources between competiting supervisory priorities better than separate agency

Arguments FOR integrated supervision – cont.

 It would be better at resolving conflicts between regulatory goals and legislation  Creation of a large unified agency might increase the political weight and standing of the supervisors  It can lead to better supervisory accountability by avoid blame and buck passing among multiple agencies

Arguments AGAINST integrated supervision

 It has a multiple and therefore unclear goals  Economies of scope will be hard to achieve as long as banking, securities and insurance supervision are subject to different regulation  Different cultures of regulation  Expectations that “safety net” will be aplied to all financial services and firms equally.

Arguments AGAINST integrated supervision – cont.

     The change process of uniting miltiple agencies is very complex and full of pitfalls Conflicts between supervisors may serve to generate useful public debate An integrated agency may be overly powerful, particulary if oversight maechanisms are poorly developed If organization is based on sectors (banking, insurance, securities) it is almost “confederation” of independent supervisors Loss of key staff during transition

International structures - survey results -

1 Single Supervisor 2 Two Supervisors

Banks, securities firms and insurers Banks + securities firms Insurers

% of countries* 29% 8% 3 Two Supervisors

Banks + insurers Securities firms

13% 4 Two Supervisors

Securities firms + insurers Banks

9% 5 Three or more Supervisors

Banks Insurers Securities firms

38%

*Based on a sample of 77 countries, survey results – Luna-Martinez and Rose

International structures - survey results –

cont.



Fully integrated supervision agencies

:

 As of 2002, there are now 22 fully integrated single supervisory agencies in the world: Austria, Bahrain, Bermuda, Cayman Islands, Denmark, Estonia, Germany, Gibraltar, Hungary, Iceland, Ireland Japan, Latvia, Maldives, Malta, Nicaragua, Norway, Singapore, South Korea, Sweden, UAE, UK.

International structures - survey results –

cont.



Partially integrated supervision agencies:



Banking and Insurance

: Besides, there are 11 agencies which combine banking and insurance supervision: Australia, Belgium, Canada, Colombia, Ecuador, El Salvador, Guatemala, Kazakhstan, Malaysia, Peru, Venezuela.



Banking and Securities

banking and securities firms are supervised by the same agency:

:

There are 6 countries where Dominican Republic, Finland, Luxembourg, Mexico, Switzerland,Uruguay

International structures - survey results –

cont.

 

Securities Firms and Insurance

combined securities and insurance supervision under one entity:

:

8 countries have Bolivia, Chile, Jamaica, Mauritius, Slovakia, South Africa, Ukraine

Countries with Multiple Supervision Agencies (NO Integrated Supervision):

These include the remaining 31 countries with multiple agencies out of the 77countries: Argentina, Bahamas, Barbados, Botswana, Brazil, Bulgaria China, Cyprus, Egypt, France, Greece, Hong Kong, India, Indonesia, Israel, Italy Jordan, Lithuania, Netherlands, New Zealand, Panama, Philippines, Poland, Portugal, Russia, Slovenia, Sri Lanka, Spain, Thailand, Turkey, USA

 1.

2.

Survey results of integr. supervision - sample 15 countries -

Five interesting findings: The need to supervise financial conglomerates plus economies of scale are the two key reasons for integration Not homogenous group – high and limited powers plus ministries of finance and central banks are playing a key role in some aspects (regulation, rules, licensing)

3.

4.

5.

Survey results of integr. supervision - sample 15 countries -

Only few countries designed a single supervisory framework to harmonize regulations and supervisory approaches Higher degree of consistency between banks and security companies than between banks and insurance firms The most countries confronted practical problems in establishment and operation

Typical problems in establishing integrated supervisory agency

Problem

1. Legal constraints (need to amend a number of pieces of financial sector legislation) 2. Departure of experienced personnel

No. of agencies

10 9

As % of total agencies

67% 60% 3. Delays to integrate IT systems and infrastructure of merged agencies 4. Demoralization of staff of the merged entities 5. Lack of mission and clarity in the newly merged institution 6. Budgetary problems (insufficient funds to complete the integration of agencies) 8 8 2 2 53% 53% 13% 13%

Time required to carry out key integration activities

Main Tasks Average No. of Years Required

2.0

1. Set the definitive organizational structure of the new merged entity 2. Set the strategic (business) plan of the new entity describing its objectives, strategies and actions needed to achieve them 3. Set in the legal framework the scope of legal powers, responsibilities and goals of the new regulatory agency 4. Integrate the IT system of the merged entities 1.4

1.3

1.1

5. Reallocate personnel and define new roles 6. Integrate budgetary processes 7. Appoint (confirm) the heads of the new departments of the merged entity 1.0

0.8

0.7

Conclusion

 The list of arguments in favour of integration is almost as long as the list of arguments against of integration  Each country should adopt its financial supervisory organizational structures to its own particular conditions and needs

References

         Abrams, Richard i Michael Taylor:"Issues in the Unification of Financial Sector Supervision," IMF Working Paper WP/00/213, Monetary and Exchange Affairs Department, 2000.

Briault, Clive:"The rationale for a single national financial services regulator", Finançial Services Authority Occasional Paper, Series 2., 1999.

European Central Bank: "The role of central banks in prudential supervision", ECB, Frankfurt, march 2001.

European Central Bank: "Developments in National Supervisory Structures", ECB, Frankfurt, july 2003.

Goodhart, Charles i Dirk Schoenmaker:"Should the Functions of Monetary Policy and Banking Supervision be Separated?," Oxford Economic Papers, 47.(4.), 539.-560., 1995.

Goodhart, Charles, Philipp Hartmann, David Llewellyn, Liliana Rojas-Suarez and Steven Weisbrod: "Financial Regulation: Why, how and where now?", London, Routledge, 1998.

Goodhart, Charles: “The Organisational Structure of Banking Supervision" Financial Stability Institute Occasional Papers 1., 2000.

Luna Martinez, Jose i Thomas A. Rose: "International Survey of Integrated Financial Sector Supervision", World Bank Policy Research Working Paper 3096, july 2003.

Taylor, Michael i Alex Fleming:"Integrated Financial Supervision: Lessons of Northern European Experience" World Bank Policy Research Paper 2223 , november 1999.