Presentation on theme: "SCA Annual Conference - January 25th, 2011"— Presentation transcript:
1 SCA Annual Conference - January 25th, 2011 Models of financial supervision in light of the current financial crisisSCA Annual Conference - January 25th, 2011
2 International trend towards supervision 19711985198719881992199920002002200320042006NorwayDenmarkAustriaGermanyEstoniaAustraliaIcelandIrelandCzech R.SlovakiaCanadaBelgiumNetherlandsAFM: CONDUCTDNB: PRUDENTIALSingaporeUKJapanHungarySweden
3 Key approaches to supervision DefinedInstitutionalChina, Hong Kong,and MexicoApproach in which a firm’s legal status (for example, a bank, broker-dealer, or insurance company) determines which regulator is tasked with overseeing its activity from both a safety and soundness and a business conduct perspective.FunctionalBrazil, France, Italy, and SpainApproach is one in which supervisory oversight is determined by the business that is being transacted by the entity, without regard to its legal status. Each type of business may have its own functional regulator.IntegratedSingapore, and SwitzerlandApproach is one in which a single universal regulator conducts both safety and soundness oversight and conduct-of-business regulation or all the sectors of financial services business.Twin PeaksNetherlands, and Australiaa form of regulation by objective, is one in which there is a separation of regulatory functions between two regulators: one that performs the safety and soundness supervision function and the other that focuses on conduct-of-business regulation.UniqueUSAFunctional and institutional mixture
4 Global supervisory regimes - Before & After CountryBefore current crisisMoving towards ……..USAFunctional/InstitutionalTwin Peaks/ Integrated mixUKIntegrated tripartiteTwin PeaksHollandNo changeItalyFunctionalSpainTwin PeakFranceCanadaIntegrated/Twin PeaksSingaporeIntegrated
5 Prudential & Conduct of Business supervision integrated? Integrated withCentral Bank?yesno“One Peak”Singapore,Switzerland“FSA”UK, Japan, CanadaScandinavia,Belgium and more“Three Peaks”AustraliaGermany, Austria“Twin Peaks”The NetherlandsInstitutional Functional?
6 Moving towards a Twin Peaks Model Conduct supervisionPrudential supervisionLender Of Last ResortSystemic StabilityPrudential SupervisionMarket Conduct SupervisionConduct-of-Business SupervisionBankingSecuritiesInsurance
7 Group of Thirty, Washington, DC 2008 The structure of Financial Supervision Approaches and Challenges in a Global Marketplace:
8 USA – Functional & Institutional model The US financial and regulatory system is the global exception to the rule.It does not fall within any specific structure but is a combination of functional and institutional models.The key bodies are the FRB, SEC, CFTC, OCC, FDIC, OTS, NCUA, FHLBB, FINRA, FFIEC, state regulators…..CHANGES: Dodd-Frank Act of July, 2010 creates an improved framework for identifying and mitigating systemic riskIncludes a more effective approach to prudential regulations as well as consumer protection
9 USA – Functional & Institutional cont’d The Act creates new systemic risk regulation rules:Financial Stability Oversight Council (FSOC)Investor protection & new regulation of securities rulesBureau of Consumer Financial Protection (BCFP).New orderly liquidation authority rulesFederal Deposit Insurance Corporation (FDIC)New Bankruptcy and Insolvency CodesThe Volcker RulesBy prohibiting proprietary trading by banks and financial institutionsRe-regulation of derivatives marketsMinimum leverage & risk-based capital requirements
10 UK – Integrated modelTraditionally the FSA has had all-encompassing powers to oversee the conduct of business and microprudential regulation with the BOE having macroprudential regulatory authority.CHANGES: The regulatory framework will move towards a twin peak like model. The FSA will cease to exist in its current form. In its place, the government intends to establish the following new entities between now and the end of 2012:Prudential Regulation Authority (PRA)— will be responsible for the prudential regulation of financial firms.Consumer Protection and Markets Authority (CPMA)— will regulate firms providing financial services to consumers.Financial Policy Committee (FPC)— will have responsibility for macro issues potentially affecting economic and financial stability.Economic Crime Agency (ECA)—will prosecute economic and financial crimes.
12 Holland – Twin Peak model The Central Bank of Netherlands (DNB) was responsible for Macroprudential (systemic stability). Microprudential and conduct of business were under a few other regulatory bodies.CHANGES: The Twin Peaks approach was developed in and was improved after the crisis by the DNB initiating key structural changes:Improved financial institutions risk analysis to help identify key risksOpen and communicative strategy with the government and with the AFM.The Council for Financial Supervisors (RFT) has also been created in order to ensure the seamless exchange of information between regulatory stakeholders.
14 Australia – Three Peaks model A strict”twin peaks” like approach has been followed where supervision is organized along the following tracks:Prudential supervision for all firms (banks, investment firms, insurance, and pension funds) is exercised by APRA, the Australian Prudential Regulation Authority.Market supervision aimed at market integrity and consumer protection is in the hands of ASIC, the Australian Securities and InvestmentsReserve Bank of Australia (RBA) oversees systemic stability, predominantly through its influence over monetary policy,The Australian Competition and Consumer Commission (ACCC) regulates anti-competitive behavior.
15 France – Functional model Functional approach with some elements of a twin peaks model although it is still greatly fractured with far too many regulatory bodies.Regulation and surveillance of the French financial markets are exercised by two authorities: the Banque de France and the Autorité des Marchés Financiers (Financial Markets Authority) with several other sub-authorities. Insurance activities in France are supervised by a separate insurance regulator, the Insurance and Mutual Societies Supervisory Authority (ACAM)CHANGE: A new Banking & Financial Regulation Law has been passed to strengthen the French capital markets.
16 France – Twin Peaks like model The Financial and Banking Regulation Law (Loi de Régulation Bancaire et Financière) of October 22, 2010 contains six main measures:(1) creation of the Council of Financial Regulation and Systemic Risk (Conseil de Régulation Financière et du Risque Systémique—the "Council");(2) enhancement of the powers of the Financial Markets Authority - the "AMF”- to include conduct of business and consumer protection authorities,(3) The Law ratifies the creation of the Prudential Control Authority, in January 2010 of the French entity called Autorité de Controle Prudentiel and makes some changes to its system;(4) regulation of derivative instruments and short sales;(5) regulation of credit rating agencies; and(6) reinforcement of the regulation of providers of financial products and services.
17 Singapore - Integrated Singapore has an integrated financial regulatory structureThe Monetary Authority of Singapore (MAS) has the authority to regulate the banking, securities, futures, and insurance industries in the nation-state.CHANGE: The Securities and Futures (Amendment) Act was passed to amend the Securities and Futures ActMAS issued a consultation paper in 2010 to propose amendments to the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations ("SFR").Other than that, currently, there is no significant debate on regulatory structure.
18 Key benefits of Twin Peak model Regulation by ObjectiveOne agency’s regulatory objective is (Macro + Micro) prudential supervision with the primary goal of safety and soundness andThe second agency’s goal is to focus primarily on business conduct and consumer protection issues.
19 Benefits, according to the G30 Report the prudential supervisor may give precedence to safety and soundness, over CoB and Consumer protection. TP will help prevent that.Twin Peaks may also be the optimal means of ensuring that issues of transparency, market integrity, and consumer protection receive sufficient priority.a means of achieving the benefits of the Integrated Approach with the added distinct emphasis on consumer protection issues, particularly for retail customers.each regulator can hire employees with appropriate expertise for their specific functions. Prudential regulators employ business & economic expertise while business conduct regulators focus on hiring enforcement oriented staffs.Having the functions in separate entities can minimize the conflicts between the dissimilar disciplines.It is the new direction of many world economies as a response to the current crisis. Australia and the Netherlands before and US, UK, Spain, Italy and France to name a few.
20 According to the IMF report on The Netherlands released 12/14/2010. Netherlands has over the past decade introduced a financial sector supervisory model that is being studied closely in many countries.The “twin peaks” model of supervision provided additional strengths, perhaps not foreseen at the outset, but have become evident, DNB has the ability to take a systemic view across the financial sector as a whole, and the ability to react quickly and decisively.The credibility of the prudential authorities has been tested. The allocation of the prudential function to DNB was important to restore credibility. The supervision of Netherlands banks by DNB has achieved a high level of compliance.AFM uses onsite-supervision, complemented with an institution-based program of both off-site and on-site supervision of high-impact firms.The coordinated response of the Ministry of Finance , DNB, and AFM during the crisis proved effective in handling an unprecedented situation.Overall the Netherlands has developed a robust supervisory framework that exhibits high levels of implementation of the IOSCO Principles.
21 The way forwardNeed for change – increasing demand on supervisors effectiveness and accountabilityInterwoven regulatory financial supervision with no clear boundaries is a major concernSeparation of prudential/systemic from Conduct-of- business and consumer protection is called forIndependence of supervisors is recognized to be an essential element for effective supervision.provide regulators with legal protection for their official actions as institutions.Checks and balances can be achieved by having each of the two regulators (peaks) report to two different ministries.
22 Proposed supervisory model Minister of FinanceMinister of EconomyPrudential & SystemicCentral BankConduct of businessConsumer protectionSecurities RegulatorsIndependent under 2 separate roofs – checks and balancesPrudential & systemic regulation under the Central BankRegulation of the securities markets, COB and consumer protection under the Securities regulatorDevelopment of a detailed execution plan including milestonesTime and care given to implementation of the plan
23 Possible time-line for execution Jun2013phase 16 monthsDec 2011Jun2011phase 212 monthsDec.2012phase 36 monthsphase 412 monthsStrategy:Planning:ImplementationCompletion:Formulate strategy and logicIdentify synergy targetsDetermine main new modes of operationDevelop criteria for the implementation processDevelop new main organisational modelDevelop detailed structure of organisational modelStrategy and Operational plans, Laws and regulationsMonitoring parameters and processesImplement organizational structure and processesMonitor synergies and cost savingsRecruitment of speciliezed personnel and training of existing cadreDevelop plan of action for phase 4Implement organizational structure, processes, stratigies, laws and regulationsMonitor synergies and use replacement policyResolve outstanding issues