Transcript IMF/Bank of Israel Financial Sector Conference

IMF/Bank of Israel
Financial Sector Conference
ISRAEL’S CAPITAL MARKET REFORMS:
SUPERVISORY APPROACHES AND MANAGING CHANGE
Presentation on Approaches in:
Canada, Singapore & Australia
By John Palmer
Chairman of the Toronto International Leadership Centre for Financial
Sector Supervision
Supervisory Approaches in
Canada, Singapore & Australia
Issues to explore:
• How financial supervision has been
integrated
• Relationship with Central Bank
Advantages of Integrated
Financial Supervision
• Better overview/understanding of financial
system and system-wide risks
• Cross-fertilization of knowledge
• More efficient use of scarce functional
specialist resources/technical experts
Advantages of Integrated
Financial Supervision (2)
• Economies of scale in:
– Training
– Research
– Technology
– Methodological development
– Corporate services
• Greater critical mass and authority
Disadvantages of Integrated
Financial Supervision
• Potential down-grading of industry
expertise
• Tendency for banking supervisors to
dominate
• May become too powerful (a bully)
• May affect quality of cooperation with solo
regulators
Separating Integrated Supervisor
from Central Bank
• Most integrated supervisors have been
separated from central bank
• Reason is to separate
regulation/supervision from financial
support and avoid moral hazard
• Danger is that it may weaken ability of
central bank to maintain financial stability
Separating Integrated Supervisor
from Central Bank (2)
• If separated from Central Bank,
surveillance of financial sector could
weaken
• Jury still out on effectiveness of Integrated
Regulator/Central Bank informationsharing mechanisms
Models of Integrated Financial
Supervision: OSFI
• OSFI separate from Central Bank
• Coordination mechanism (FISC)
• Supports Bank’s macro-economic
surveillance
• Responsible for prudential
supervision/regulation
• Market conduct supervision a provincial
responsibility
Models of Integrated Financial
Supervision: OSFI (2)
Supervises:
• All Banks
• National (federal) deposit-taking institutions
• National Insurance companies (life and general)
• National private pension funds
Does not supervise:
• Securities firms
• Financial markets
• Financial intermediaries
• Provincial entities
Evaluation of the OSFI Model
Advantages
• Gained most of the advantages of
integration (scale, understanding,
specialisation, cross-fertilisation)
• Avoided conflicts between prudential and
market conduct supervision (transparency
issue)
• Mechanism for ensuring coordination with
Central Bank works well
Evaluation of the OSFI Model (2)
Disadvantages/Caveats
• Most disadvantages avoided because
integration has not been excessive
(industry expertise retained)
• Balkanised securities supervision a major
problem in Canada, but a larger issue
• Success of Central Bank coordination
mechanism partially dependent on
relationships
Models of Integrated Financial
Supervision: MAS
• Supervision part of Central Bank
• Participates in macro-economic
surveillance
• Responsible for prudential and market
conduct regulation
Models of Integrated Financial
Supervision: MAS (2)
Supervises:
• Banks and finance companies
• Insurance companies
• Securities firms
• Financial markets
• Financial intermediaries
Evaluation of the MAS Model
Advantages
• Gained most of the advantages of integration
(scale, understanding, specialisation)
• Found some synergies between prudential and
market conduct supervision
• Also some synergies between Central Bank’s
presence in the market and supervision
• Integrated approach to macro-prudential
surveillance works reasonably well
Evaluation of the MAS Model (2)
Disadvantages
• Most disadvantages avoided because
integration has been cautious (industry expertise
retained)
• Potential conflict between prudential and market
conduct regulation has created some tensions
but manageable
• Potential moral hazard issue between prudential
supervision and Central Bank LOLR function has
not been a problem but not tested
Models of Integrated Financial
Supervision: APRA
Supervision in Australia
divided on functional lines:
• Prudential supervision
• Market conduct regulation
Models of Integrated Financial
Supervision: APRA (2)
APRA responsible for prudential supervision;
includes:
• Banks and deposit-taking institutions
• Insurance Companies
• Superannuation (pension) funds
Models of Integrated Financial
Supervision: APRA (3)
ASIC responsible for market conduct
regulation; includes:
• Securities firms
• Markets
• Financial advisors
• Unit trusts
• Market conduct issues affecting all
institutions
Models of Integrated Financial
Supervision: APRA (4)
• Both regulators (APRA & ASIC) separate
from Central Bank
• Mechanisms in place to ensure
information-sharing/cooperation:
- RBA Governor sits on both boards
- APRA & ASIC have reciprocal board
representation
Evaluation of the APRA Model
Advantages
• Gained many of the benefits of integration
(scale, specialisation, understanding)
• Lack of full independence from Treasury
has limited benefits (salaries, supervisory
action)
• Separation of securities supervision has
avoided conflicts but created tensions
Evaluation of the APRA Model (2)
Disadvantages:
• Some down-grading of industry expertise
due to ambitious integration approach
• Effectiveness of Central Bank informationsharing mechanisms still untested
Integrating Supervisory
Functions: Thoughts on Process
Based on Experiences of Canada,
Singapore and Australia
• Create a new organisation
• Keep your eye on the ball (supervision)
• Move quickly but not too quickly
• Be careful of how far you integrate
(functional vs industry structures)
Some Tentative Conclusions,
Based on OSFI, MAS & APRA
• Integrated regulation has worked well in
Singapore and Canada (but note different
approaches)
• Some transitional issues in Australia
• No model is ideal; each has strengths and
weaknesses
• In small countries, integrated financial
supervision merits attention (resources issue)
• Central bank linkage an unresolved issue