IMF/Bank of IsraelFinancial Sector Conference

ISRAEL’S CAPITAL MARKET REFORMS:SUPERVISORY APPROACHES AND MANAGING CHANGE

Presentation on Approaches in:Canada, Singapore & Australia

By John PalmerChairman of the Toronto International Leadership Centre for Financial

Sector Supervision

Supervisory Approaches in Canada, Singapore & Australia

Issues to explore:

• How financial supervision has been integrated

• Relationship with Central Bank

Advantages of Integrated Financial Supervision

• Better overview/understanding of financial system and system-wide risks

• Cross-fertilization of knowledge

• More efficient use of scarce functional specialist resources/technical experts

Advantages of Integrated Financial Supervision (2)

• Economies of scale in:– Training– Research– Technology– Methodological development– Corporate services

• Greater critical mass and authority

Disadvantages of Integrated Financial Supervision

• Potential down-grading of industry expertise

• Tendency for banking supervisors to dominate

• May become too powerful (a bully)

• May affect quality of cooperation with solo regulators

Separating Integrated Supervisor from Central Bank

• Most integrated supervisors have been separated from central bank

• Reason is to separate regulation/supervision from financial support and avoid moral hazard

• Danger is that it may weaken ability of central bank to maintain financial stability

Separating Integrated Supervisor from Central Bank (2)

• If separated from Central Bank, surveillance of financial sector could weaken

• Jury still out on effectiveness of Integrated Regulator/Central Bank information-sharing mechanisms

Models of Integrated Financial Supervision: OSFI

• OSFI separate from Central Bank

• Coordination mechanism (FISC)

• Supports Bank’s macro-economic surveillance

• Responsible for prudential supervision/regulation

• Market conduct supervision a provincial responsibility

Models of Integrated Financial Supervision: OSFI (2)

Supervises:• All Banks • National (federal) deposit-taking institutions• National Insurance companies (life and general)• National private pension funds

Does not supervise:• Securities firms• Financial markets• Financial intermediaries• Provincial entities

Evaluation of the OSFI Model

Advantages• Gained most of the advantages of

integration (scale, understanding, specialisation, cross-fertilisation)

• Avoided conflicts between prudential and market conduct supervision (transparency issue)

• Mechanism for ensuring coordination with Central Bank works well

Evaluation of the OSFI Model (2)

Disadvantages/Caveats• Most disadvantages avoided because

integration has not been excessive (industry expertise retained)

• Balkanised securities supervision a major problem in Canada, but a larger issue

• Success of Central Bank coordination mechanism partially dependent on relationships

Models of Integrated Financial Supervision: MAS

• Supervision part of Central Bank

• Participates in macro-economic surveillance

• Responsible for prudential and market conduct regulation

Models of Integrated FinancialSupervision: MAS (2)

Supervises:

• Banks and finance companies

• Insurance companies

• Securities firms

• Financial markets

• Financial intermediaries

Evaluation of the MAS Model

Advantages• Gained most of the advantages of integration

(scale, understanding, specialisation)• Found some synergies between prudential and

market conduct supervision• Also some synergies between Central Bank’s

presence in the market and supervision• Integrated approach to macro-prudential

surveillance works reasonably well

Evaluation of the MAS Model (2)

Disadvantages• Most disadvantages avoided because

integration has been cautious (industry expertise retained)

• Potential conflict between prudential and market conduct regulation has created some tensions but manageable

• Potential moral hazard issue between prudential supervision and Central Bank LOLR function has not been a problem but not tested

Models of Integrated Financial Supervision: APRA

Supervision in Australia

divided on functional lines:

• Prudential supervision

• Market conduct regulation

Models of Integrated Financial Supervision: APRA (2)

APRA responsible for prudential supervision; includes:

• Banks and deposit-taking institutions

• Insurance Companies

• Superannuation (pension) funds

Models of Integrated Financial Supervision: APRA (3)

ASIC responsible for market conduct regulation; includes:

• Securities firms

• Markets

• Financial advisors

• Unit trusts

• Market conduct issues affecting all institutions

Models of Integrated Financial Supervision: APRA (4)

• Both regulators (APRA & ASIC) separate from Central Bank

• Mechanisms in place to ensure information-sharing/cooperation:

- RBA Governor sits on both boards

- APRA & ASIC have reciprocal board representation

Evaluation of the APRA Model

Advantages

• Gained many of the benefits of integration (scale, specialisation, understanding)

• Lack of full independence from Treasury

has limited benefits (salaries, supervisory action)

• Separation of securities supervision has avoided conflicts but created tensions

Evaluation of the APRA Model (2)

Disadvantages:

• Some down-grading of industry expertise due to ambitious integration approach

• Effectiveness of Central Bank information-sharing mechanisms still untested

Integrating Supervisory Functions: Thoughts on Process

Based on Experiences of Canada, Singapore and Australia

• Create a new organisation

• Keep your eye on the ball (supervision)

• Move quickly but not too quickly

• Be careful of how far you integrate (functional vs industry structures)

Some Tentative Conclusions, Based on OSFI, MAS & APRA

• Integrated regulation has worked well in Singapore and Canada (but note different approaches)

• Some transitional issues in Australia• No model is ideal; each has strengths and

weaknesses • In small countries, integrated financial

supervision merits attention (resources issue)• Central bank linkage an unresolved issue