Aligning Supervisory Structure with Country Needs - Issues in Unification of Supervisory Agencies

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Aligning Supervisory Structure with Country Needs
- Issues in Unification of Supervisory Agencies

• Stefan Ingves
• Director
• Monetary Financial Systems Department
• International Monetary Fund

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Contents

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

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Forces EncouragingUnification

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

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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

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Key Considerations

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

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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

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Managerial Challenges

• Change should not be for changes 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

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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

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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.

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Case Study The Swedish Experience

• The financial system today
• Dominated by four major financial groups (FMFGs)
  which have
• 4/5ths of financial sector assets
• 2/3rd 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.

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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

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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 !

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Case Study The Swedish Experience

• Unified structure aids in consolidated cross
  sector, cross border supervision
• Joint 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 ?

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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

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IMF Staff Advice

• Finally, if unifying after a crisis
• Keep restructuring agency separate from the
  supervising agency
• Dont 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.

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• Thank You.
• SIngves_at_IMF.Org