Developing Supervisory System of Thai Financial Institutions

1
Developing Supervisory System of Thai Financial
Institutions

• Chodechai Suwanaporn
• August 25, 2004

2
Why interest on overhauling financial supervision

• Severe magnitude of 1997 economic crisis and
  financial meltdown
• Doubts on Effectiveness and Efficiency of current
  regulatory and supervisory system
• Slow development in financial sector especially
  banking industry
• Threats from financial liberalization and
  increasing foreign competition
• A number of countries have changed their
  supervisory system and structure from multiple to
  single supervisor and no role for central bank,
  e.g. several European, Scandinavian, Latin
  American and Asian countries

3
Does supervisory system matter? Lack of Evidence?

• Much Theory about the importance of Supervisory
  system and effect on financial sector performance
• Need for systematic study on Thai supervisory
  system and its structure and impact on banking
  sector performance
• Lack of Empirical evidence on strengths and
  weaknesses of Thai supervisory system.

4
Objectives

• To review current supervisory system and
  establish evidence and impacts
• To conduct systematic study of pro and con of the
  current system
• To debate and challenge old regulatory regimes
• To draw experiences of supervisory system from
  other countries
• To propose new supervisory system

5
Contents of Presentation

• Theoretical background
• Empirical evidence
• Description of Supervision Structure
• Analysis of Thai structure
• Opinion Survey results
• Proposal and Recommendation

6
Theoretical background

• Development of Financial sector
• Fast changing and complicated conduct of business
• Financial crisis much more often in last two
  decades
• Occasional setbacks but serious losses in Thai
  crisis
• Need for fair play and consumer protection
• Much attention on two questions
• Should Central bank be involved ? Will banking
  supervision be better without central bank
  involvement?
• Single and unified supervisor VS multiple and
  separated supervisors? (Is integrated supervision
  power better?)

7
Arguments for Central bank involvement

• Supervision power help central bank gain access
  to information of financial institutions which
  may be useful for conducting monetary policy
• Central bank is more equipped with personnel and
  other resources to supervise financial
  institutions
• Central bank does this supervision job better
  than others
• Central bank has done this before If it aint
  broke, why fix it

8
Arguments against Central bank involvement

• Conflicts of interest
• Accountability Problem
• Moral hazard problem
• Independence at risk
• Reputation and credibility at risk
• Different skills sets required of two different
  function dual responsibility does not help
  foster specialization of skills
• Diversion of Regulatory resources- turf fights
  creating wrong focus of who should regulate
  rather than how a product and market should be
  regulated
• Excess cost- regulatory cost in US are 15 times
  higher than in the UK
• Impracticality-inhibiting innovation-potentially
  create unlevel playing field where functionally
  equivalent products are subject to differing
  regulatory requirements.

9
Arguments for single (system) supervisor

• Deal more effectively with interconnected,
  intertwining and overlapping financial services
• Better Coordination and utilization of
  supervisory resources
• Achieve economics of scale and scope of
  supervision
• Fewer burdens for financial institutions to
  comply
• Eliminate problems of regulatory arbitrage
• Better international cooperation
• Fast countermeasure to problems in financial
  sector

10
Arguments for multiple (system) supervisors

• Single supervisor can be very large,
  bureaucratic, inefficient and too powerful
• Single regulator does not foster competition
  among supervisor and impede innovation in legal
  rules
• Combining supervisors may create problems from
  different organization culture
• It could be costly to change from multiple
  supervisors approach into a single supervisor
  system

11
Country example and types of supervision

• Estonia- Financial Supervision Authority
• China- China Banking Regulatory Commission
• Ireland- Single Regulatory Authority-report to
  Minister of Finance
• Austria- Independent supervisory authority
  outside central bank
• Finland- Single agency with supervisory
  responsibility over all financial institutions
• United Kingdom- Financial Services authority
• Australia- Australian Prudential Regulation
  Authority
• Canada- Office of Superintendent of Financial
  Institutions
• Japan- Financial Supervisory Agency
• Korea- Financial Supervisory Commission

12
Examples

• Germany- Bundesaufsichtsamt fuer das Kreditwesen
• Sweden- Financial Supervisory Authority
  (Finansinspektionen)
• Norway-Banking Insurance and Securities
  Commission (Kredittilsynet)
• Demark- Fianancial Supervisory Authority
  (Finanstilysynet)
• Turkey-
• Hungary-Financial Supervisory Authority
• Iceland- Fjarmalaeftirlitio
• Indonesia, Venezuela, Bolivia, Chile, El
  Salvador, Guatemala, Mexico, Peru

13
Empirical evidence

• Still lacking
• Financial crisis or big scandal cause changes
• Inflation evidence
• Effectiveness of supervision evidence
• Exchange of information

14
Description of Supervision Structure

• ??????????????????????????????????????????????????
  ????????????????????????????????????
• ??????????????????????????????????????????????????
  
• ??????????????????????????????????????????????????
  ?????????????????????????????????????????
• ??????????????????????????????????????????????????
  
• ????????????????????????????????????????????????
• ??????????????????????????????????????????????????
  ?
• ??????????????????????????????????????????????????
  ??????

15
(No Transcript)
16
(No Transcript)
17
????????????????????????????????????????????????
????????????? ??????????????????????????
????????????????????????????????????????? (Model
of Supervision of Financial Services with Strict
Firewalls)
18
(No Transcript)
19
(No Transcript)
20
(No Transcript)
21
(No Transcript)
22
Analysis of Thai structure

• Track record of financial crisis
• Highly regulated and scope rigidly confined
• Retarded progress and limited innovation
• Poor consumer protection and education
• Scattered and fragmented supervisory power
• Lack of timely and effective coordinated efforts
• Overall slow development in the financial sector

23
Opinion survey results

• 200 survey samples
• Distributed evenly to all types of supervisors
  and financial institutions
• 83 percent of respondents disagree with the
  present multi supervisors structure
• 60 percent of respondents think there will be
  conflict of interest if monetary policy and
  financial supervision functions are in the same
  organization
• 70 percent think there should be a new
  organization separated from the central bank to
  be in charge of financial supervision

24
Opinion survey results

• Overall results indicate desires to see the
  separation of financial supervision from monetary
  policy function and set up a new integrated
  supervisory organization
• Reasons cited are
• Conflict of interest 64 percent
• Accountability 85 percent
• Economics of scale and scope 71 percent
• Policy effectiveness and efficiency 75 percent
• Better resource allocation 74 percent
• Better international cooperation 70 percent
• Avoid regulatory arbitrage 80 percent

25
Recommendation

• In favor of Institutional separation between
  Supervisory and Monetary agencies i.e. central
  bank should not supervise financial institutions
• In favor of single supervisor approach i.e. to
  integrate and consolidate all supervisory bodies
• Enact a law to redefine the clear role, objective
  and accountability of central bank which confine
  to monetary policy, payment system and economic
  stability
• Enact a law to establish an independent Financial
  Services Authority with power and responsibility
  to supervise every types of financial
  institutions

26
??????????????????????????????????????? (???????)
??????????????
???????????????????

• ??????????????????????????????????????
• ???????????????????????????????????
• ???????? ?????????????????????
• ????????????????????

• ????????????????????? ????????
• ??????????????????????????? FSC

Financial Supervisory Commission
(FSC) ??????????????????????? ?????????? Prudentia
l Regulator
???????????????????????????????????????? Conglomer
ate Supervision Policy Coordination Planning
???????????????????
???????????????
???.
???????????????????????

• ?????????????????????????????????????
• ????????????????????????????
• ??????????????????????????

• ?????????????????????
• ??????????????????????

• ????????????????????
• ????????????????
• ???????????????????

- ??????????????????????
??????????????????????????? ????????????? ????????
????????????? Micro credits ???????????????
????????????? ?????????????
???????????????? (??????????????) (????????????) (
??????????????????)
????????????????? ????????????????????
27
??????????????????????????????????????? ????? FSA
???????????????
??????????????
???????????????????
???????????????????

• ??????????????????????????????
• ??????????????????????????????????
• (Emergency liquidity support/
• lender of last resort

• ?????????????????????
• ????????????????????????????????

• ??????????????????????????????????????
• ???????????????????????????????????????????
• ?????????????????????????????????????????

???????? ?
Financial Supervisory Agency (FSA) ???????????????
?????????????????? ?????????? Prudential Regulator
???????????????????????
Conglomerate Supervision Policy Coordination
Planning Office
?????????? ???. ???. ??????????????? ???.
??????????????????? ?????????
?????????????? ????????????????????
Banking Supervisory Board
Securities Supervisory Board
Insurance Supervisory Board
Non-Bank Supervisory Board
SFI Supervisory Board
?????????? ???. ??? ???. Office or Bureau of
SFI Supervision
?????????????????? ???????????????? ???. Office
or Bureau of Bank Supervision
?????????? ???. Office or Bureau of Securities
Supervision
?????????????????????? Office or Bureau of
Insurance Supervision
?????????? ???. Office of Bureau of
Non-Bank Supervision
????????????? ?????????????
???????????????? (??????????????) (??????????????)
(??????????????)
????????????????? ?????????
??????????????????? ????????????????????? Micro
credits ???????????????
???????????? (GSB) ???. (BAAC)
???.(GHB) ???.(Exim Bank) ???. (SME Bank)
???.(SICGC) ???.(SMC) ?????? (IFCT)