The Single Supervisor, the Hungarian Case

The Single Supervisor,The Single Supervisor,the Hungarian Casethe Hungarian Case

László Balogh,

Hungarian Financial Supervisory Authority

Conference at the World Bank, Washington D.C,

December 4-5, 2003

5 December, 2003 Washington D.C.

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AgendaAgenda

IntroductionSpecificities of HungaryAims of Supervisory IntegrationSteps takenResults - Unresolved itemsPractical challengesConclusions


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IntroductionIntroduction There is no optimal and

exclusive structure

A single structure is not an aim itself, rather a tool to achieve effective consolidated supervision

While harmonizing supervision, sectoral specificities should be treated

Clear strategy and good managerial skills are important to handle the transition

Legal, cultural, and historical environment should not be disregarded


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Features of the Sector in Features of the Sector in HungaryHungary

Open financial markets Substantial foreign participation

70% foreign capital in banking sector 80% in the insurance sector less than 15% public sector participation

Universal banking, since 1999 Dominance of financial groups (cca. 80%) Expansion of cross-sectoral products


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Historical BackgroundHistorical Background in Hungary in Hungary No long lasting supervisory history, starting the late 1980’s Central Bank has never had a banking supervisory function 3 predecessor institutions since 1990’s:

– Banking and Capital Market Supervision - through the merger of (1996):

Banking Supervision Securities and Exchange Supervision

– Insurance Supervision – Pension Fund Supervision


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Features of Supervision before Features of Supervision before 19991999

Fragmented supervisory structures Diverging level of operative independence Different approach and regulatory background to off-site

and on-site examinations Poor and slow supervisory co-operation among institutions Low impact on regulation – MoF responsibility Low international profile – low level of co-operation Supervision remained on solo basis untill the end of the

1990’s


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Aims of Supervisory Integration

KEY OBJECTIVE: TO PROMOTE EFFICIENT CONSOLIDATED SUPERVISION

Conditions thereof:

good and rapid information exchange, good co-operation among supervisors, approximating supervisory approach, appropriate legal background improved operative independence


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Aims of supervisory integration (2)

Channelling all available information into one supervisory body

Grouping all supervisory knowledge at one place

Making benefit of synergiesConsolidated supervision of groupsFollowing evolving market structureExpected economies of scale


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Aims of supervisory integration(3)

Strengthening the operative independence of all three former supervisory structures

More in line with relevant international standards and tendencies

Prepare the supervision for the EU roleTo avoid market captures


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Setting up the Single SupervisorSetting up the Single Supervisor

Policy decision in September 1999Government decision in October 1999Relevant law adopted in December 1999Interim management of the transitionEstablishment of the merged supervisory

authority in April 2000


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Functional set-upFunctional set-up

S ectoral Chief A dvisers

banking, insurance,

pension f unds, secur it ies

Consumer Pr ot ect ion S er vice

S uper visor y D ir ect or at e

(O ff - s it e and on- s it e)

L ic ens ing and E nf or c ement M et hod ology, A nalys is and I nt ' l A ff air s I T

P resid en t S uper visor y Counc il

A d visor y r ole


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International road mapInternational road map

Permanent International Monitoring/ Compliance Permanent International Monitoring/ Compliance with standardswith standards– IMF-World Bank FSAP: pilot project (2000 and 2002)– Basle Core Principles: self-assessment exercise– IAIS: self-assessment exercise– IOSCO: self-assessment exercise– OECD:Regulatory Reform Project (2000)

Country Review, Structural Chapter (2001)– EU: Peer Review (2001 and 2003)


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IssuesIssues

Financial groups, consolidated supervision Improving effective supervision Harmonizing supervisory approach Improve regulatory responsivness Upgrading supervision vs.industry groups – to

avoid industry capture Better cost efficiency Independent regulatory agency – new type of entity EU perspectives


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New place for the supervisory New place for the supervisory institutioninstitution

INSTITUTIONAL AUTONOMYINSTITUTIONAL AUTONOMY

Growing level of overall independence– President elected by the parliament for fixed six

year term (nomination) - renewable– Supervisory decisions are final, they cannot be

appealed at higher administrative body– Right of appeal with the court only


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New place for the supervisory New place for the supervisory institution 2institution 2

INSTITUTIONAL AUTONOMYINSTITUTIONAL AUTONOMY – HFSA cannot be instructed, it should only act

under rules and regulations– Ring-fencing of daily supervisory

responsabilities vis-avis the possible political influence

– Internal operational rules are not approved any longer by the Minister of Finance


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BUDGETARY AUTONOMY – Key issueBUDGETARY AUTONOMY – Key issue– No contribution from Governement Budget– Self financing authority - fees paid by the industry

BUT: Fines cannot be used for covering operational costs!

– Fees to be paid by the sector: established by law– The HFSA’s budget: part of the public finances– HoweverHowever: autonomy in deciding the allocations of

expenses according to needs– The budget cannot be centralised by the Ministry of

Finance


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ADMINISTRATIVE AUTONOMYADMINISTRATIVE AUTONOMY– Supervisors are civil servants– Supervisory liability is with the President of the

Authority– Income level of the staff is over civil servants’ but

much lower than the market level – limits the power of the HFSA to obtain the best experts on the market!

– New stepNew step: getting closer to the market in income level, some exemptions from civil service payment scheme


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REGULATORY AUTONOMYREGULATORY AUTONOMY– Individual supervisory decisions are enforceable– Sanctioning power is ensured– Secondary regulations issued by the Government or

the Minister of Finance in the form of decrees– Active involvment of the HFSA– Process is slow, rigid, burdensome– Supervisory Guidelines are issued -legally not

binding, but followed by the industry– UnresolvedUnresolved: Power for the Supervision to regulate!


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ACCOUNTACCOUNTAABILITYBILITY AND TRANSPARENCY AND TRANSPARENCY– Accountability to the Government– Controll by the State Audit Office– Regular reporting to the Government– New New Step:Step: Regular reporting to the competent

parliamentary commission– Establishment of the Supervisory Council –

Advisory body for the President


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ACCOUNTABILITY AND TRANSPARENCY

– Accountability to the industry – dialogue!– Individual supervisory resolutions are made

public – matter of policy– Reporting back to the industry- market analysis

reports etc.– Supervisory recommendations for the industry– Predictability- sanctioning policy is published


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Practical ChallengesPractical Challenges

Managerial skills for transitionIdentification of the new institution

– Mission statement – Elaborated widely within the institution

Positioning within the public institutionsCommunication to market participants

about renewed supervisory policy


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Practical Challenges 2Practical Challenges 2

Financing the supervisory institution – from the market

Retaining experienced staffSalary levels – close to market levelsDilemma:

– Strict prudential rules versus – International competitivness

Co-operation with the Central Bank - systemic stability


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Practical Challenges 3Practical Challenges 3

Raising public awarnessTransposition of int’l supervisory standardsBuilding international networkUnification of IT systemsFinding a single headquarterRevision and redefinition of supervisory policyRevision of sectoral regulatory framework


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ExperienceExperienceBetter overview of the industryBetter overview of regulatory deficiencies and

inconsistenciesBetter positioned to initiate legislative

modificationsBetter level of consolidated supervisionMore interaction between sectoral expertsBetter understanding of cross sectoral market

attitude and risksOver time: in function of results improving

investment climate


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ConclusionsConclusions Well prepared decision is needed Once decision is made, quick implementation Appropriate time needed, not an overnight Determined, devoted and skillful managment

of transition Timing is key – a relatively stable period Sequencing of steps


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Conclusions 2Conclusions 2 Clear, upgraded, convincing objectives

– For the staff– For the market– For the public, for the politicians

Public communication and awareness raising No perfect, predefined development track Need of flexibility, reevaluation during the process Learning by doing Cross fertilization of divergent supervisory

experience


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Conclusions 3Conclusions 3

IT system integration – good opportunity to reassess overall data quality and data need

International experience sharing– Bilateral– „Clearing houses”

Effective implementetion builds up credibility internally and internationally

Contributes to good investment climate


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Possible ConflictsPossible Conflicts

– Larger independence, butIndependence is not automatic!One has to live with and protect it!„De jure” and „de facto” independenceIndependence and accountability hand in

hand!

– Overdominance of banking, to counterbalance!


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Possible Conflicts 2Possible Conflicts 2

Eventual overlooking of sectoral aspectsLack of regulatory power

– Continueos professional debates with the MoF– Rigid, time consuming, inefficient regulatory

responsesHarmonising data provision Focusing data provision Streamlining data provision


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Instead of a Happy End…Instead of a Happy End…After 4 years: reassassment of the HFSA by policy

makers – new restrictive legislation is underway

Independence substantially cut back Accountability to be replaced by direct ministerial controll Early removal of top management in the middle of their tenure Non observance of:

– internationally recognized supervisory standards – World Bank - IMF FSAP recommendations

Salary scales to be pushed back to civil service level Consequences…..?

The Single Supervisor, the Hungarian Case

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