The following will be discussed in this chapter: Review of international experience; perspectives of institutional structure of regulator / supervisor; regulation, financial system and the economy; over-regulation; universal functions; role of the central bank; no universal model; two questions of institutional structures and a possible dilemma.
Session: ELEVEN MBF-705 LEGAL AND REGULATORY ASPECTS OF BANKING SUPERVISION OSMAN BIN SAIF Summary of previous session • The four Approaches to Financial supervision – The Functional Approach • – The integrated Approach • – CASE Example UNITED KINGDOM The Twin peaks Approach • • CASE Example FRANCE CASE Example AUSTRALIA Why institutional / regulatory structure is Agenda of this Session • • Review of International Experience Perspectives of Institutional Structure of Regulator / Supervisor – Regulation, Financial system and the economy – Over-Regulation – Universal Functions – Role of the Central Bank – No universal model Agenda of this Session (Contd.) • Use of resources • Skills and Remuneration • Corporate Governance • Political Independence Review of International Experience • • A review of international experience indicates a wide variety of institutional structures Some countries have created a single agency for prudential supervision, while others have opted for multiple agencies Some have also created unified agencies Review of International Experience (Contd.) • There is a spectrum of alternatives rather than an either/or choice, and there is considerable variety within the spectrum and even within the same basic model Review of International Experience (Contd.) • National differences reflect a multitude of factors: – historical evolution, – the structure of the financial system, – political structures and traditions, and – the size of the country and financial sector Review of International Experience (Contd.) • Although there is no universal common pattern, there is a general trend towards reducing the number of separate agencies, a move towards integrated prudential supervisory arrangements, reducing the role of the central bank in prudential oversight of financial institutions, increasing emphasis to the central bank in its systemic stability role and, if a unified agency is created, for this Perspectives of Institutional Structure of Regulator / Supervisor Regulation, Financial system and the Economy • A stable and efficient financial system has a potentially powerful influence on a country's economic development not the least because it may have an impact on the level of capital formation, efficiency in the allocation of capital between competing claims, and also the confidence that end-users (consumers) have in the integrity of the financial system 10 Use of resources (Contd.) • This has induced some regulatory agencies (notably the FSA in the UK) to focus on risk-based supervision whereby its resources are applied disproportionately to those firms considered to be most at risk whether that be in terms of solvency or conduct of business with consumers 33 Use of resources (Contd.) • • This also has the effect of creating incentives for regulated firms to be compliant as it lowers their own costs of supervision as they are treated more flexibly than are more risky firms Institutional structure of regulatory and supervisory arrangements may have an impact on the efficiency with which scare supervisory skills and resources are used 34 Skills and remuneration • • Linked to this is the issue of the skills of the regulatory agencies and how they are to be remunerated In many cases regulatory agencies are at a competitive disadvantage when bidding in the market for the necessary skills because those same skills are also demanded by regulated firms which are usually in a position to offer considerably more attractive remuneration packages for 35 Skills and remuneration (Contd.) • • • Effective regulation cannot be secured on the cheap as the necessary skills are very demanding This means that agencies must be adequately resourced if they are to be able to match the skills of those they are regulating This in turn means that regulatory and supervisory personnel need to be adequately remunerated even if 36this Skills and remuneration (Contd.) • • To attempt to cut costs by underresourcing regulatory agencies and not paying market-related salaries is likely to prove to be a false economy Money will be saved, but at the expense of ineffective and inefficient regulation and supervision 37 Corporate Governance • • A major issue to consider is the set of corporate governance arrangements with respect to regulatory and supervisory agencies and the extent to which sound governance arrangements can enhance the effectiveness, reputation and credibility of an agency Unlike other goods and services, regulatory services are not provided through market mechanisms 38 Corporate Governance (Contd.) • In addition, the regulator acts as a monopolist This means that the discipline of the market is not present to constrain the regulator as it is with most other goods and services 39 Corporate Governance (Contd.) • • There is, therefore, a need to establish proper accountability mechanisms for regulatory agencies The three key issues are: to whom, in what way, and when are regulatory agencies to be accountable? 40 Political independence • It is also important that supervisory agencies are politically independent and not subject to political interference 41 Political independence (Contd.) • There are several reasons for this: – it is important for agencies to be seen to be politically independent; such independence is essential for consumer and industry credibility; political authorities may wish to influence a regulatory agency for nonregulatory purposes (e.g favoring certain types of lending), 42 Political independence (Contd.) – political authorities may seek to influence the agency for short-term political advantage, and it is important for regulatory agencies to behave consistently over time and between institutions 43 Political independence (Contd.) • This means that a careful balance needs to be struck between the legitimate demands for regulatory agencies to be accountable, and the need for them also to be independent of political influence 44 Summary of this Session • • Review of International Experience Perspectives of Institutional Structure of Regulator / Supervisor – Regulation, Financial system and the economy – Over-Regulation – Universal Functions – Role of the Central Bank – No universal model 45 Summary of this Session (Contd.) • Use of resources • Skills and Remuneration • Corporate Governance • Political Independence 46 THANK YOU 47 ... Perspectives of Institutional Structure of Regulator / Supervisor – Regulation, Financial system and the economy – Over-Regulation – Universal Functions – Role of the Central Bank – No universal... responsible for – the stability of the payments system, – liquidity assistance to markets and – solvent institutions, and 21 Role of the central bank (Contd.) • One dimension of the debate about... system and the economy – Over-Regulation – Universal Functions – Role of the Central Bank – No universal model Agenda of this Session (Contd.) • Use of resources • Skills and Remuneration • Corporate