Aligning Supervisory Structure with Country Needs - Issues in Unification of Supervisory Agencies Stefan Ingves Director Monetary & Financial Systems Department International Monetary Fund

Contents Forces Encouraging Unification Different Approaches Key Considerations Managerial Challenges The Swedish Experience IMF Staff Advice

Forces Encouraging Unification - Emergence of conglomerates..and cross-sector products - Converging techniques..and changing skill sets. - Changing environment - Aftermath of crises - Often a herd instinct...

Different Approaches Full integration in one agency.... –choices to be made about (i) location vis-a vis the central bank and (ii) relation between prudential and ‘conduct of business’ supervision Partial integration.... Pseudo integration... –through oversight boards –through physical proximity and shared resources

Key Considerations Size (and circumstances) of financial sector Relative size of sectors Segmentation of markets Availability of resources Concentration of power Independence... hence funding

Managerial Challenges Integrating different approaches (i) Central bankers vs. bank supervisors... (ii) Insurance and bank supervision vs. securties supervision Integrating different career paths Managing the change process is crucial Change can be very expensive....give rise to misleading expectations... and lead to capture by special interests

Managerial Challenges Change should not be for change’s sake in some cases it may be better to (i) focus on fine tuning existing structure to best assess risks.. (ii) improve framework for coordination (iii) work towards consistency and convergence in regulation across sectors

Case Study – The Swedish Experience Sweden among first countries to unify. Unification preceded the crisis... –not propelled by financial sector crisis, though events unfolded in parallel Unification based on –forward looking assessment which anticipated modernization of the system –desire to address managerial challenges in insurance supervision

Case Study – The Swedish Experience Institutional Arrangements –FI unified regulator and supervisor for banks, securities & insurance, Riksbank responsible for monetary policy and payment systems. –Authority and responsibility of each clearly defined in law. Independence –FI independent and reports to Ministry of Finance –law prohibits interference by Government.

Case Study – The Swedish Experience The financial system today –Dominated by four major financial groups (FMFGs) which have 4/5ths of financial sector assets; 2/3 rd of bank deposits and mutual fund assets. In addition, each group owns an insurance co. and is active both cross border and cross sector In retrospect, unified supervision appropriate structure for the system as it has evolved.

Case Study – The Swedish Experience Key risks for FMFGs –Cross border propagation of shocks from foreign operations –Interbank contagion from common large exposures –Contagion from life insurance companies facing demographic changes –Operational risks inherent in large and complex institutions

Case Study – The Swedish Experience Major challenges faced by supervisors –Lack of resources, skilled and experienced staff –Lack of legal authority to take corrective action and enforcement measures –FMFGs “too big to fail” and “too big to rescue”; hopefully, not “too big to supervise” or “too big to manage” !

Case Study – The Swedish Experience Unified structure aids in consolidated cross sector, cross border supervision –J oint cross border supervisory group for the largest FMFG with FI as lead supervisor –risk-focused approach to systemically important institutions Issues to be addressed –Orderly winding up of large and complex financial institutions -...but, how would cross border resolution issued be handled ?

IMF Staff Advice No single optimal structure. Do what works best for consolidated supervision ‘Talk and share’..... helps if the public sector has a culture of cooperation.....and build such channels across borders, too. Keep supervision where it will not be starved of resources

IMF Staff Advice Finally, if unifying after a crisis: –Keep restructuring agency separate from the supervising agency – Don’t use central bank funds to nationalize weak institutions. –Get the timing right Legislative support easier to obtain during crisis, but can distract from tasks in hand.

Thank You.