Transcript Document 7263917

Implications of Financial Convergence
for Regulatory and Supervisory
Regimes for Financial Services
OECD/INPRS/World Bank Contractual Savings
Conference
Washington, DC April 29- May 3, 2002
Stephen A. Lumpkin
OECD
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Financial Convergence
Definition of terms:
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Consolidation--combinations of financial service
providers within the same institutional sector
Convergence--various types of interfaces between
different categories of financial service providers
Regulation--the establishment of specific rules of
behaviour
Supervision--the more general oversight of
institutions’ behaviour
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Financial Convergence
Types of convergence interfaces:
 cross-investment
 cross-distribution (e.g. bancassurance, assurbanque,
assurfinance, allfinanz)
 cross-production
 tie-in sales
 provision of integrated services, e.g. “one-stop
shopping”
 cross-sector risk transfers
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Formal structures for providing integrated
financial services
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Fully integrated financial services provider:
production and distribution of all financial products
and services in a single corporate entity, with all
activities supported by a single pool of capital
Universal bank: commercial banking and investment
banking activities in one corporate entity, with other
financial services, especially insurance, carried out in
wholly owned but separately capitalised subsidiaries
Single bank or insurance parent: conducts other
financial service activities in separately capitalised
subsidiaries
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Financial holding company: single holding company
holds most or all of the shares of separately
incorporated and capitalised subsidiaries
Joint ventures
Cross-shareholdings
Distribution alliances
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Implications of corporate structure for risk
management and oversight
An institution’s formal structure must comply with legal
and regulatory requirements, but might not be fully
reflective of a group’s operational structure or risk
appetite or risk management
 risks can exist at the group level that do not appear at
the level of individual entities
 individual entities can look risky while the entire
organisation can be well-diversified or hedged
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Potential risks associated with integrated
financial services groups
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Lack of transparency stemming from complex intragroup exposures
risk of contagion due to non-existent or ineffective
firewalls
risk of multiple gearing
problems arising from unregulated group members
potential for regulatory arbitrage
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Implications of convergence for
supervision
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The potential for intra-group exposures within
integrated financial services groups complicates the
task of supervision.
It increases the need for information sharing, coordination and co-operation among authorities (both
domestic and international) with responsibility for
different institutional components of a financial group
to ensure that a group-wide risk assessment and
oversight is achieved.
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Approaches to financial supervision
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across countries, the rules that are applied to
different types of financial service providers regarding
their solvency, the types of assets they manage, and
the management of their liabilities vary
Some would argue that these differences are
warranted by corresponding differences in the core
business activities, time horizons and risk exposures
of these institutions.
accordingly, supervision in many countries (especially
prudential oversight) varies according to the
particular characteristics of each sector
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Methods of Supervising financial groups
“Solo” or “solo plus” approach--protect the customers
and creditors of the regulated entity from monetary
losses and delays were the institution to fail
 “Consolidated” approach--supervision is directed at
the top tier of the group, covering all members that
provide financial services
Integrated regulation is generally accompanied by
consolidated supervision, but sectoral regulation
might or might not be accompanied by consolidated
supervision.
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Organisational structures for financial
supervision
What are the implications, if any, of financial
convergence for the structure of financial supervisory
agencies?
Convergence intensifies the need for information
sharing, co-ordination and consistency across
specialist regulatory bodies. How can this increased
information flow best be achieved?
Should the institutional structure of financial supervision
reflect the structure of the financial services industry
it covers?
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Disaggregated Structure of Financial Supervision
by Sector
Banks
Insurance companies
Securities firms
Financial infrastructure overseer
Financial infrastructure overseer
Financial infrastructure overseer
payments activities
clearing/settlement
payments activities,
clearing/settlement
payments activities,
clearing/settlement
Prudential supervisor
Prudential supervisor
Prudential supervisor
prudential supvervision
prudential supvervision
prudential supvervision
Conduct of business supervisor
Conduct of business supervisor
Conduct of business supervisor
market conduct,
consumer protection,
investor protection
market conduct,
consumer protection,
investor protection
market conduct,
consumer protection,
investor protection
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Model of Financial Services Supervision by
Objectives
Financial infrastructure overseer
Prudential supervisory agency
Market conduct supervisory agency
payment system oversight
clearing/settlement,
etc.
prudential oversight
conduct of business,
consumer protection
commercial banks
commercial banks
commercial banks
insurance companies
insurance companies
insurance companies
securities firms
securities firms
securities firms
pension funds
pension funds
pension funds
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Model of Financial Services Supervision by
Supervisory Function
financial infrastructure oversight
licensing
consumer protection
conduct of business
commercial banks
commercial banks
commercial banks
commercial banks
insurance companies
insurance companies
insurance companies
insurance companies
securities firms
securities firms
securities firms
securities firms
pension funds
pension funds
pension funds
pension funds
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Model of Supervision of Financial Services
by Sector
Bank Supervisor
Insurance Supervisor
Securities Supervisor
systemic stability
market conduct
systemic stability
market conduct
systemic stability
market conduct
prudential oversight
consumer protection
prudential oversight
consumer protection
prudential oversight
consumer protection
banks
insurance companies
securities firms
deposit taking,
insurance activities
securities activities
deposit taking,
insurance activities
securities activities
deposit taking,
insurance activities
securities activities
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Model of Functional Supervision of Financial
Services
Central bank
Bank supervisor
Insurance supervisor
Securities supervisor
payment system activities
clearing/settlement,
etc.
deposit taking, etc.
insurance activities
securities activities
banks
securities firms
insurance companies
pension funds
banks
banks
banks
securities firms
securities firms
securities firms
insurance companies
insurance companies
insurance companies
pension funds
pension funds
pension funds
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Model of Functional Supervision of Financial
Services with Strict Firewalls
Central bank
Bank supervisor
Insurance supervisor
Securities supervisor
payment system activities
clearing/settlement,
etc.
deposit taking, etc.
insurance activities
securities activities
banks
insurance companies
securities firms
banks
securities firms
insurance companies
pension funds
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“Dual-Agency” Structure of Financial
Supervision
Financial supervisor
Prudential oversight
Financial infrastructure overseer
conduct of business
payments system activities,
clearing/settlement systems,
etc.
banks
banks
banks
securities firms
securities firms
securities firms
insurance companies
insurance companies
insurance companies
pension funds
pension funds
pension funds
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Model of Integrated Supervisory Agency
Integrated financial supervisory agency
Financial infrastructure oversight
Prudential oversight
Conduct of business
banks
banks
banks
securities firms
securities firms
securities firms
insurance companies
insurance companies
insurance companies
pension funds
pension funds
pension funds
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