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Regulation of the Capital Market * Avi Ben-Bassat, Sharon Blei, and Asher Blass * The full report in Hebrew, including a detailed abstract in English,

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Presentation on theme: "Regulation of the Capital Market * Avi Ben-Bassat, Sharon Blei, and Asher Blass * The full report in Hebrew, including a detailed abstract in English,"— Presentation transcript:

1 Regulation of the Capital Market * Avi Ben-Bassat, Sharon Blei, and Asher Blass * The full report in Hebrew, including a detailed abstract in English, is available at

2 The Criterions The Criterions The goals. The authorities and independence needed. For and against locating supervision of banks in the central bank. Conflicts of interest in the activity of regulators under the MOF. The global trend. Israels financial market structure. The goals. The authorities and independence needed. For and against locating supervision of banks in the central bank. Conflicts of interest in the activity of regulators under the MOF. The global trend. Israels financial market structure.

3 The 5 Supervisors and the supervised bodies Anti-Trust Authority Banking Department Capital Market, Insurance & Savings Division Savings Insurance Providence Funds Insurance Companies Pension Funds Insurance agents Money Changers Banking Institutions Securities Authority Listed Companies Stock Exchange Underwriters Mutual Funds Investment Advisors & Portfolio Managers Competition in the various markets

4 The Goals of Regulation & Supervision Protection of consumers interests Intermediate Goals: 1.Financial stability 2.Market efficiency 3.Competition 4.Reducing conflicts of interest Protection of consumers interests Intermediate Goals: 1.Financial stability 2.Market efficiency 3.Competition 4.Reducing conflicts of interest

5 Regulators Independence Index, 2005 % Banks Securities Capital Market & Savings Division Anti- Trust Capital Insurance 1. Source of Authority Managerial Independence Licensing and Regulation Enforcement: a. Information b. Feedback Punishment Power Average Grade

6 Banking Department Securities Authority Capital Market & Savings Division Anti-Trust Authority Supervisors Budget (in Million NIS) Employees supervised (in thousands) Assets supervised (in Billion NIS) Inputs and output, 2003

7 Capital Market & Savings Division Banking Department Securities Authority Supervisors/Assets supervised Supervisors/Employees supervised Labor Input/Assets supervised Labor Input/Employees supervised Budget/Assets supervised Budget/Employees supervised Input-Output Ratios, 2003

8 The Benefits of Locating the Bank Supervision in the Central Bank May benefit from the prestige and reputation of the CB. May solve financial crises faster, since the CB is the lender of last resort. Both monetary policy and banks supervision may benefit from exchange of information. May benefit from the prestige and reputation of the CB. May solve financial crises faster, since the CB is the lender of last resort. Both monetary policy and banks supervision may benefit from exchange of information.

9 Separating the Bank Supervision Department from the BOI Conflicts of interest between the banks stability and competition. It also impairs the transmission mechanism of the monetary policy, and therefore its effectiveness. The Bank Supervision Department hasnt benefited from being located in the BOI in managing financial crises. Israel belongs to the developed countries. Most of them have separated the banks supervision from the central bank. Conflicts of interest between the banks stability and competition. It also impairs the transmission mechanism of the monetary policy, and therefore its effectiveness. The Bank Supervision Department hasnt benefited from being located in the BOI in managing financial crises. Israel belongs to the developed countries. Most of them have separated the banks supervision from the central bank.

10 The location of Banks supervision (70 countries, 2004) Per Capita Income ($, PPP) Only in the CB Outside the CB Only in the Monetary Institution Outside the Monetary Institution +30, ,900 – 20, ,400 – 10, ,200 – 6, ,700 – 5, Total

11 Conflicts of interest between economic policy and financial supervision in the MOF The stability of pension funds versus labor market policy. The stability of insurance companies versus cross subsidization policy. The stability of financial institutions versus the price of financing government debt. The stability of pension funds versus labor market policy. The stability of insurance companies versus cross subsidization policy. The stability of financial institutions versus the price of financing government debt.

12 The share of independent authorities 2004 vs (percent)

13 Alternative Regulatory Structures Multiple authorities by industry: Banks ; Securities ; Insurance Multiple authorities by function: 1.Prudential supervision 2.Conduct of business A single regulatory authority Multiple authorities by industry: Banks ; Securities ; Insurance Multiple authorities by function: 1.Prudential supervision 2.Conduct of business A single regulatory authority

14 The Advantages of a Multiple Authority Greater specialization Competition among supervisors Prevention of excess power Avoidance of risk inherent in the reform process Greater specialization Competition among supervisors Prevention of excess power Avoidance of risk inherent in the reform process

15 The Advantages of the Unified Authority A comprehensive view of the regulated institution. Equality in the regulation & supervision of similar activities. Flexibility in regulation and ease of coordination. Economics of scale and efficiency. Focusing of responsibility and accountability. A comprehensive view of the regulated institution. Equality in the regulation & supervision of similar activities. Flexibility in regulation and ease of coordination. Economics of scale and efficiency. Focusing of responsibility and accountability.

16 30 Countries has reduced the number of authorities From 3 to 2 From 2 to 1 From 3 to 1 Australia Bulgaria Canada Luxemburg Mauritius Mexico Netherlands Austria Belgium Bermuda Denmark Gibraltar Ireland Iceland Sweden Malta Norway Poland Singapore Slovakia South Korea Taiwan Czech Rep. England Estonia Germany Hungary Kazakhstan Latvia Liechtenstein 7815

17 Several Regulatory authorities Two regulatory authorities Single regulatory authority Securities & Insurance Banks & Insurance Banks & Securities * 530 Current Situation Before the reform Source: Courtis (2004) and the Israel Democracy Institute. Regulatory Structure in 79 Countries Pre and Post Reform *The Netherland is classified by prudential and conduct of business supervision.

18 The Main problems in Israels Structure Considerable variance in regulatory and supervisory authorities. Significant differences in managerial independence. Marked differences between regulators resources. Potential conflicts of interest between monetary policy as well as competition and bank supervision. Potential conflicts of interest between MOF policy and the activity of the regulator located in the MOF. Similarity of financial institutions and scale of activities increased after Bachars reform. Considerable variance in regulatory and supervisory authorities. Significant differences in managerial independence. Marked differences between regulators resources. Potential conflicts of interest between monetary policy as well as competition and bank supervision. Potential conflicts of interest between MOF policy and the activity of the regulator located in the MOF. Similarity of financial institutions and scale of activities increased after Bachars reform.

19 Financial Services Authority The BOI shall be responsible for the stability of the financial markets. The BOI shall be responsible for the stability of the financial markets. Insurance Unit Securities Unit Banking Unit Chairman

20 Unification Alternatives A federative authority composed of 3 industries departments. A single authority like the FSA in GB. Twin Peaks Model: 1.Prudential supervision department 2.Conduct of business department A federative authority composed of 3 industries departments. A single authority like the FSA in GB. Twin Peaks Model: 1.Prudential supervision department 2.Conduct of business department

21 Thank you! * The full report in Hebrew, including a detailed abstract in English, is available at


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