Institutional Models for Financial Regulationg

Katharine SealInternational Monetary Fund

Financial Sector StabilityFinancial Sector Stability, Vietnam, October 29-30, 2015

Outline

International Best Practices with Pros and Cons

Building Blocks & DesignsBuilding Blocks & Designs

Impact of Global Crisis

A preferred model?

2

Design options

Integrated

Sectoral

Integrated

Twin Peaks

B kBanksSecuritiesInsuranceMarkets

3

United Kingdom

Banking Act 1987 Financial Services &Banking Act 1987Financial Services

Act 1986

Financial Services & Markets Act 2000

Financial Services Act 2012

InsuranceInsurance Companies Act 1982

FB k

S

BanksSecuritiesInsuranceMarkets

AS A

4

BofE HMT

Growth of integrated supervisory authorities

2010

50

1990

25

Clarity of Mandates

Primary Safety and soundness Banks Banking

System

Acceptable Depositor protection

Financial stability

Consumer protection

Financial inclusionprotection stability protection inclusion

NOT Prevent all Promote NOT failures Competition

Ensure clarityAddress tensions and conflictsAddress tensions and conflicts

6

Case for a single national financial services authority

• Market developments blur the financial boundaries• Market developments blur the financial boundaries

• Economies of scope and scale• Economies of scope and scale

Cl d h bj iCl d h bj i• Clear and coherent objectives• Clear and coherent objectives

• Accountability• Accountability

7

Integrated model – ideal vs reality?

8

Central Bank as a supervisor

Independence – institutionally often strongerstronger

Monetary Policy – proximity to supervision

K l d f th k tKnowledge of the market

Financial stability perspective

9

Financial Crisis

10

Crisis provoked reflection and changes

Crisis Fault Lines Gaps Winning

ModelLines Model

11

Crisis Coordination

ance

is

try

ntra

l an

k

rvis

ory

rity(

ies)

Fina

Min Ce

n Ba

Supe

rAu

thor

12

Missing Link

Banks

Insurance

Systemic Risk

Overview

ISecurities

Insurance

Markets

13

Considerations for a post crisis architecture

Fi l M t

Macro-

Fiscal Policy

Monetary Policy

Macroprudential

Crisis M

Micro-d i l Managementprudential

14

Macro-Micro CohabitationPrudential tensions

Contribution of Contribution of Risk from the

FirmRisk from the

Firm Risk to the FirmRisk to the Firm

15

Cohabitation – Scope

Highly concentrated systems

•When the firm is the system•When the firm is the system

Individual instruments

•When the instrument deals with t f idi ti d t i

•When the instrument deals with t f idi ti d t iaspects of idiosyncratic and systemic

riskaspects of idiosyncratic and systemic risk

16

Cohabitation- assignment

Macroprudential Microprudential

Instrument

17

Architectural issues for macroprudential mandate

•Single body or diffuse responsibilities

•Central Bank

Mi i t f Fi•Ministry of Finance

•Microprudential supervisors

18

Mandates for financial system stability must be allocated clearly

Mandates may not exist in all casesMandates may not exist in all cases

Mandates may be poorly articulatedMandates may be poorly articulated

Tools to execute the mandates may b il bl

Tools to execute the mandates may b il blnot be availablenot be available

Mandate may not be sufficient – is Mandate may not be sufficient – is there a will to act?there a will to act?

19

What institutional models have developed

Singapore Malaysia, UK Australia

•Central Bank

•Committee in Central

•Committee outside

Bank Central Bank

20

Willingness to Act

Mandate Accountability

Governance

21

Ability to Act

Powers Resources

22

Institutional Planning

Mandate

Powers

Coordination Framework

Data

23

Why change the model:Trigger event, Opportunity, Need?

Reputation - Financial CrisisReputation - Financial CrisisCrisisCrisis

S d fl ibiliS d fl ibiliSynergy and flexibility –Conglomerates Synergy and flexibility –Conglomerates gg

Market developmentsMarket developmentsMarket developments -funding modelMarket developments -funding model

24

Why change the model:Ancillary reasons

Efficiency and cost

Accountability

Professional staff

25

Transitional issues –Legislative basis

Accountability IndependenceAccountability Independence

Powers Legal(sanctions and appeals)

Legal protections

26

Transitional issues –Change management

Senior management

St ff

management distraction

Physical Staff disaffection

ylocation and

services

27

Effective Supervisory Function needs:

Independence

Accountability

Credibilityy

Ad t RAdequate Resource

Regulatory Capacity28

Supervisory Prerequisites – are not dependent on structure

Accountability

Powers

Funding

Independence

Objectives

29

Vary the recipe but not the ingredients

Systemic risk mandateSystemic risk mandate

Clear definition of rolesClear definition of roles and functions

Senior level coordinationSenior level coordination and communication

Information exchange – in law and in practice

30

Conclusions

Complementary objectivesj

Alignment mechanisms

Policy interaction mechanismsinteraction

31

Questions?Questions?

32