Developments in the Developments in the Organizational Organizational

Structures of Banking Structures of Banking and Financial Market and Financial Market

SupervisionSupervision- an introductory presentation - - an introductory presentation -

Čedo MaletićČedo Maletić

CROATIAN NATIONAL BANKCROATIAN NATIONAL BANK

OutlineOutline

Arguments Arguments forfor integration integration Arguments against integrationArguments against integration International structures and trends International structures and trends Survey resultsSurvey results ConclusionConclusion

Arguments FOR Arguments FOR integrated supervisionintegrated supervision

Integrated supervision is more effective in Integrated supervision is more effective in dealing with financial conglomeratesdealing with financial conglomerates

It allows use of economies of scale (esp. It allows use of economies of scale (esp. important relevance for small countries)important relevance for small countries)

It exploits economies of scope (in a single It exploits economies of scope (in a single database, consolidated set of rules and database, consolidated set of rules and guidance, ….)guidance, ….)

Integrated supervisory agency could allocate Integrated supervisory agency could allocate resources between competiting supervisory resources between competiting supervisory priorities better than separate agencypriorities better than separate agency

Arguments FOR Arguments FOR integrated supervision – integrated supervision –

cont.cont. It would be better at resolving It would be better at resolving

conflicts between regulatory goals conflicts between regulatory goals and legislationand legislation

Creation of a large unified agency Creation of a large unified agency might increase the political weight might increase the political weight and standing of the supervisorsand standing of the supervisors

It can lead to better supervisory It can lead to better supervisory accountability by avoid blame and accountability by avoid blame and buck passing among multiple agenciesbuck passing among multiple agencies

Arguments AGAINST Arguments AGAINST integrated supervisionintegrated supervision

It has a multiple and therefore unclear It has a multiple and therefore unclear goalsgoals

Economies of scope will be hard to Economies of scope will be hard to achieve as long as banking, securities and achieve as long as banking, securities and insurance supervision are subject to insurance supervision are subject to different regulationdifferent regulation

Different cultures of regulationDifferent cultures of regulation Expectations that “safety net” will be Expectations that “safety net” will be

aplied to all financial services and firms aplied to all financial services and firms equally.equally.

Arguments AGAINST Arguments AGAINST integrated supervision – integrated supervision –

cont.cont. The change process of uniting miltiple The change process of uniting miltiple

agencies is very complex and full of pitfallsagencies is very complex and full of pitfalls Conflicts between supervisors may serve Conflicts between supervisors may serve

to generate useful public debateto generate useful public debate An integrated agency may be overly An integrated agency may be overly

powerful, particulary if oversight powerful, particulary if oversight maechanisms are poorly developedmaechanisms are poorly developed

If organization is based on sectors If organization is based on sectors (banking, insurance, securities) it is almost (banking, insurance, securities) it is almost “confederation” of independent “confederation” of independent supervisorssupervisors

Loss of key staff during transition Loss of key staff during transition

International structures International structures - survey results -- survey results -

11

22

33

44

SingleSingleSupervisorSupervisor

Two Two SupervisorsSupervisors

TwoTwoSupervisorsSupervisors

Three or moreThree or moreSupervisorsSupervisors

% of countries% of countries**

*Based on a sample of 77 countries, survey results – Luna-Martinez and Rose

Banks, securities firms and insurersBanks, securities firms and insurers

Banks + securities firms Banks + securities firms

BanksBanks

Banks + insurersBanks + insurers SecuritiesSecuritiesfirmsfirms

InsurersInsurers

InsurersInsurers SecuritiesSecuritiesfirmsfirms

29%29%

8%8%

13%13%

38%38%55

TwoTwoSupervisorsSupervisors

Securities firmsSecurities firms + insurers + insurers BanksBanks 9%9%

International structures International structures - survey results – - survey results – cont.cont.

Fully Fully iintegrated ntegrated ssupervision upervision aagenciesgencies:: As of 2002, there are now 22 fully As of 2002, there are now 22 fully

integrated single supervisory agencies in integrated single supervisory agencies in the world: the world:

Austria,Austria, Bahrain, Bermuda, Cayman Bahrain, Bermuda, Cayman Islands,Islands, Denmark, Estonia, Germany,Denmark, Estonia, Germany, Gibraltar, Hungary, Iceland, Ireland Gibraltar, Hungary, Iceland, Ireland Japan, Latvia, Maldives, Malta, Japan, Latvia, Maldives, Malta, Nicaragua, Norway, Singapore, South Nicaragua, Norway, Singapore, South Korea,Korea, Sweden, UAE, UK. Sweden, UAE, UK.

International structures International structures - survey results – - survey results – cont.cont.

PaPartially rtially iintegrated ntegrated ssupervision upervision aagencies:gencies: Banking Banking andand Insurance Insurance: : Besides, there are 11 Besides, there are 11

agencies which combine bankagencies which combine bankiing and insurance ng and insurance supervision: supervision: Australia, Belgium, Canada, Australia, Belgium, Canada, Colombia, Ecuador, El Salvador, Guatemala,Colombia, Ecuador, El Salvador, Guatemala, Kazakhstan, Malaysia, Peru, Venezuela.Kazakhstan, Malaysia, Peru, Venezuela.

Banking and SecuritiesBanking and Securities:: There are There are 66 countries countries where banking and securities firms are supervised where banking and securities firms are supervised by the same agency: by the same agency:

Dominican Republic, Finland, Luxembourg, Dominican Republic, Finland, Luxembourg, Mexico,Mexico, Switzerland,UruguaySwitzerland,Uruguay

International structures International structures - survey results – - survey results – cont.cont.

Securities Firms and InsuranceSecurities Firms and Insurance:: 88 countries have countries have combined securities and insurance supervision under combined securities and insurance supervision under one entity: one entity: Bolivia, Chile, Jamaica, Mauritius, Slovakia, South Bolivia, Chile, Jamaica, Mauritius, Slovakia, South Africa, UkraineAfrica, Ukraine

Countries with Multiple Supervision Agencies Countries with Multiple Supervision Agencies (NO Integrated Supervision):(NO Integrated Supervision): These include the These include the remaining 31 countries with multiple agencies out of remaining 31 countries with multiple agencies out of the 77countriesthe 77countries:: Argentina, Bahamas, Barbados, Botswana, Brazil, Argentina, Bahamas, Barbados, Botswana, Brazil, Bulgaria China, Cyprus, Egypt, France, Greece, Hong Bulgaria China, Cyprus, Egypt, France, Greece, Hong Kong, India, Indonesia, Israel, Italy Jordan, Lithuania, Kong, India, Indonesia, Israel, Italy Jordan, Lithuania, Netherlands, New Zealand, Panama, Philippines, Netherlands, New Zealand, Panama, Philippines, Poland, Portugal, Russia, Slovenia, Sri Lanka, Spain, Poland, Portugal, Russia, Slovenia, Sri Lanka, Spain, Thailand, Turkey, USAThailand, Turkey, USA

Survey results of integr. Survey results of integr. supervisionsupervision

- sample 15 countries -- sample 15 countries - Five interesting findings:Five interesting findings:1.1. The need to supervise financial The need to supervise financial

conglomerates plus economies of conglomerates plus economies of scale are the two key reasons for scale are the two key reasons for integrationintegration

2.2. Not homogenous group – high and Not homogenous group – high and limited powers limited powers plus ministries of finance and central plus ministries of finance and central banks are playing a key role in some banks are playing a key role in some aspects (regulation, rules, licensing)aspects (regulation, rules, licensing)

Survey results of integr. Survey results of integr. supervisionsupervision

- sample 15 countries -- sample 15 countries -3.3. Only few countries designed a single Only few countries designed a single

supervisory framework to harmonize supervisory framework to harmonize regulations and supervisory approachesregulations and supervisory approaches

4.4. Higher degree of consistency between Higher degree of consistency between banks and security companies than banks and security companies than between banks and insurance firmsbetween banks and insurance firms

5.5. The most countries confronted practical The most countries confronted practical problems in establishment and problems in establishment and operationoperation

Typical problems in Typical problems in establishing integrated establishing integrated

supervisory agencysupervisory agencyProblemProblem No. of No. of

agencieagenciess

As % of As % of total total

agenciesagencies

1. Legal constraints (need to amend 1. Legal constraints (need to amend a number of pieces of financial a number of pieces of financial sector legislation)sector legislation)

1010 67%67%

2. Departure of experienced 2. Departure of experienced personnelpersonnel

99 60%60%

3. Delays to integrate IT systems 3. Delays to integrate IT systems and infrastructure of merged and infrastructure of merged agenciesagencies

88 53%53%

4. Demoralization of staff of the 4. Demoralization of staff of the merged entitiesmerged entities

88 53%53%

5. Lack of mission and clarity in the 5. Lack of mission and clarity in the newly merged institutionnewly merged institution

22 13%13%

6. Budgetary problems (insufficient 6. Budgetary problems (insufficient funds to complete the integration funds to complete the integration of agencies)of agencies)

22 13%13%

Time required to carry out Time required to carry out key integration activitieskey integration activities

Main TasksMain TasksAverage No. of Average No. of

Years Years RequiredRequired

1. Set the definitive organizational 1. Set the definitive organizational structure of the new merged entitystructure of the new merged entity

2.02.0

2. Set the strategic (business) plan of 2. Set the strategic (business) plan of the new entity describing its objectives, the new entity describing its objectives, strategies and actions needed to achieve strategies and actions needed to achieve themthem

1.41.4

3. Set in the legal framework the scope 3. Set in the legal framework the scope of legal powers, responsibilities and of legal powers, responsibilities and goals of the new regulatory agencygoals of the new regulatory agency

1.31.3

4. Integrate the IT system of the merged 4. Integrate the IT system of the merged entitiesentities

1.11.1

5. Reallocate personnel and define new 5. Reallocate personnel and define new rolesroles

1.01.0

6. Integrate budgetary processes6. Integrate budgetary processes 0.80.8

7. Appoint (confirm) the heads of the 7. Appoint (confirm) the heads of the new departments of the merged entitynew departments of the merged entity

0.70.7

ConclusionConclusion

The list of arguments in favour of The list of arguments in favour of integration is almost as long as the integration is almost as long as the list of arguments against of list of arguments against of integrationintegration

Each country should adopt its Each country should adopt its financial supervisory organizational financial supervisory organizational structures to its own particular structures to its own particular conditions and needsconditions and needs

ReferencesReferences Abrams, Richard i Michael Taylor:"Issues in the Unification of Financial Sector Abrams, Richard i Michael Taylor:"Issues in the Unification of Financial Sector

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Luna Martinez, Jose i Thomas A. Rose: "International Survey of Integrated Luna Martinez, Jose i Thomas A. Rose: "International Survey of Integrated Financial Sector Supervision", Financial Sector Supervision", World Bank Policy Research Working PaperWorld Bank Policy Research Working Paper 303096, 96, julyjuly 2003. 2003.

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