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REGULATING THE REGULATORS: THE CHANGING FACE OF FINANCIAL SUPERVISION ARCHITECTURES BEFORE AND AFTER THE CRISIS
Donato Masciandaro Department of Economics and Paolo Baffi Centre, Bocconi University, Milan
Marc Quintyn IMF Institute, International Monetary Fund, Washington
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In response to the current financial crisis, many countries are considering reforms in their supervisory regimes, while others, who went through a round of reforms before the crisis, are looking at the architecture once again. This paper, based on updated information on 102 countries for the period 1998-2009 and evaluating both the existing settings and the proposals of reform in the US and at the level of the EU, addresses two crucial questions: Which are the main features of
the reshaping of the
supervisory
architectures? Which is the role central banks are taking in the changing environment of the financial supervision?
KEY WORDS: . FINANCIAL SUPERVISION ARCHITECTURES, CENTRAL BANKING, INSTITUTIONAL REFORMS
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The views expressed in this paper are those of the author and do not necessarily represent those of the IMF or IMF policy.
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1. Introduction Until, roughly fifteen years ago, the issue of the shape of the financial supervisory architecture was considered irrelevant. The fact that only banking systems were subject to robust and systematic supervision kept several of the current issues in the sphere of irrelevance. Since then, financial market development, resulting in the growing importance of insurance, securities and pension fund sectors, has made supervision of a growing number of non-bank financial intermediaries, as well as the investor protection dimension of supervision, highly relevant. In June 1998 most of the
responsibility for banking supervision in the United Kingdom (UK) was
transferred from the Bank of England (BoE) to the newly established Financial Services Authority (FSA), which was charged with supervising all segments of the financial system. For the first time a large industrialized country – as well as one of the main international financial centres - had decided to assign the main task of supervising the entire financial system to a single authority, other than the central bank (the UK regime was labelled tripartite system, stressing the need for coordination in pursuing financial stability between the FSA, the BOE and the UK Treasury). The Scandinavian countries - Norway (1986), Iceland and Denmark (1988) and Sweden (1991) - had preceded the UK in the aftermath of a domestic financial crisis. So, the UK was even not the flag bearer of the unification trend. But it is no exaggeration to state that the establishment of the FSA really opened the gate to widespread reforms worldwide. After that symbolic date of 1998, the number of unified supervisory agencies has indeed grown rapidly. Europe has been the centre of gravity regarding this trend. In addition to the UK, four “old” European Union member states – Austria (2002), Belgium (2004), Germany (2002) and Finland (2009)
– have since
assigned the task of supervising the entire financial system to a single authority other than the central bank. In Ireland (2003) and the Czech and Slovak Republic (2006) the supervisory responsibilities were concentrated in the hands of the central bank. Five countries that are part of the EU enlargement process – Estonia (1999), Latvia (1998), Malta (2002), Hungary (2000) and Poland (2006) – also concentrated all supervisory powers in a single authority.
Outside Europe unified agencies have been established
in
Colombia, Kazakhstan, Korea, Japan, Nicaragua and Rwanda. There are signs that the reform wave will continue, whether or not stimulated by the financial crisis. Before the crisis, political authorities in Italy and Spain had expressed their intention to reorganize their supervisory architectures. In Italy, the Parliament discussed in 2005 the “hybrid” supervisory institutional setting, introduced a marginal reform of the antitrust responsibilities, reduced central bank involvement in supervision and shortened the Governor’s term of office. In Spain, the government announced in 2004 its intention to reform the architecture of financial supervision separating financial stability and business conduct supervision. The financial crisis provides evidence that the move towards more integrated and complex financial markets has exposed the system to a growing risk of costly financial turmoil. The consequent concern for the health of the banking and financial industry has caused renewed attention to the supervisory settings. Policymakers and supervisors in all the countries, shaken by the financial crisis, are wondering if they need to reshape their supervisory regimes (yet again). In general, the financial crisis seems to have challenged all the designs of the supervisory settings, whether they are unified or not. In the UK, Finance Minister Alistair Darling commissioned a report to the FSA (FSA 2009), which, among other things, discussed an alternative division of responsibilities between prudential and conduct of
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business supervision. In June 2009 the UK House of the Lords published its report on the future of EU financial supervision and regulation (House of the Lords 2009). Meanwhile, Switzerland
and Finland
adopted a unified structure between 2008 and 2009. In 2008 Austria – where the supervision is shared between the Financial Market Authority and the Austrian Central Bank - undertook a reassessment of the supervisory setting, shifting more responsibilities for on site supervision to the central bank and strengthening the coordination and cooperation between the two authorities. in July 2009 the UK Prime Minister Gordon Brown released a White Paper (Treasury 2009), which maintains the system of supervision established in 1998, while – also in July 2009 - George Osborne, the Shadow Chancellor of the Exchequer, claimed that the Conservative Party would abolish the FSA and give all the supervisory responsibilities to the Bank of England (Osborne 2009). At the European Union level, the debate about the design of a European system of supervision has come off the ground in earnest (see among others, CEPS, 2008, The de Larosière Group, 2009, Hardy, 2009, and Maciandario, Nieto and Quintyn, 2009). The de Larosiere group presented its report to the Commission in early Spring of 2009. Since then, developments at the policy level have gained momentum. In May
2009 the European Commission published its proposal for the structure of European financial
supervision (based on the de Larosiere recommendations) which was adopted by ECOFIN on June 9 and by the European Council on June 18-19, 2009 (Commission of the European Communities 2009, Council of the European Union 2009). Last but not least, most eyes have become fixated on the US. The shortcomings of the US supervisory framework were evident well before the current financial crisis (Brown 2005), but the crisis underlined the failure and the obsolescence of the traditional argument for regulatory competition, which was most often used as the rationale to justify the US supervisory structure (Coffee 1995, Scott 1997). In March 2008, US Secretary Henry N. Paulson announced that his Department would undertake a comprehensive examination of the regulatory overlaps in the US financial supervision architecture (Department of the Treasury 2008). In March 2009 the new US Secretary Timothy Geithner called on lawmakers to enact changes to the financial regulation architectures. In June 2009 President Obama released a proposal to reform the US financial supervisory structure (Department of the Treasury 2009). Thus, the financial supervision architecture remains in a state of flux (Goodhart, 2006). Many countries have profoundly reformed the shape of their financial supervision regimes during the past decade,- hile other countries refrained from drastic overhauls but nonetheless made some changes to the supervisory landscape (e.g. by merging two or three sectoral supervisors). The upshot of this wave of reforms is a much more diversified supervisory landscape than ever before in history. This paper surveys and updates the state of affairs on the topic. We define supervision as the activity that implements and enforces regulation2. In general the focus of this paper is on micro-prudential supervision and consumer protection, while
macro-prudential supervision is usually carried out by the
central bank and competition policy is in the hands of a specialized authority (Borio 2003, Kremers, Schoenmaker and Wierts 2003, Čihák and Podpiera 2007, Herrings and Carmassi 2008). Micro –prudential 2
While regulation refers to the rules that govern the conduct of the intermediaries, supervision is the monitoring practice that one or more public authorities undertake in order to ensure compliance with the regulatory framework (Barth et al. 2006). However, we use the term “regulatory” and “supervisory” authorities interchangeably, as is done in most of the literature.
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supervision is the general activity of safeguarding financial soundness at the level of individual financial firms, while macro-supervision is focused on monitoring the threats to financial stability that can arise from macro economic development and from developments within the financial system as a whole (Commission of the European Communities 2009). In particular we shed light on the reforms of the supervisory architecture. The paper is organized as follows. Section Two and Three describe the landscape of the financial supervision architecture and the corresponding role of the central bank in a cross-country perspective and before the financial crisis, drawing upon a database that includes 102 countries for the period 1998-2009. Section Four discusses the recent proposals for the structure of supervision in the European Union and in the US. Section Five concludes. 2. Before the Financial Crisis. Cross Country Comparisons of Financial Regulation Architectures after a Decade of Reforms In the past decade many countries reformed the structure of their financial regulation. Our analysis is based on a dataset consisting of a sample of 102 countries, belonging to all continents. In the eleven years since 1998, 69% of the countries included in the sample - 70 out of 102 – have chosen to reform their financial supervisory structure (Figure 1). We classified as reforms those institutional changes which involved either the establishment of a new supervisory authority and/or changes in the sectoral jurisdiction of at least one of the already existing agencies. The trend of reforms is even more evident when we add a regional and country–income perspective. In figure 2, which provides a breakdown by country groups, we observe that the European, the EU and OECD countries count for respectively of 82%, 77% and 73% of the countries that have undertaken reforms. Therefore, the shape of the supervisory regime seems to be a more relevant issue in the more advanced countries, and particularly in
Europe, inside and outside the European Union, than in other country
groupings.. How can we depict the state of affairs? We group the current supervisory regimes along the three main models that theory so far has proposed (Figure 3): (i) the vertical (or silos) model, which follows the boundaries of the financial system in different sectors of business – traditionally banking, securities and insurance sector - and where every sector is supervised by a different agency; (ii) the horizontal (or peaks) model, which follows the distinction among the public goals of regulation, and where every goal is supervised by a different authority (the “twin peaks” model, Taylor 1995); and (iii) the unified (or integrated) model, where a single authority supervises the entire financial system and all the public goals. We do not consider the model by function, which follows the functions performed by banking and financial firms, given its very limited historical use. In 36 countries - 35 per cent of our sample - the supervisory regime still follows the vertical model, with separate agencies for banking, securities, and insurance supervision. The classic silos model worked (and probably works) well in a structure of the financial industry with a relatively clear demarcation between the operations of banking, security markets and insurance companies. In the regimes consistent with this model, a monopolist supervisory agency operates in each sector. The group comprises countries such as China, Greece, India.
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As already noted, in another 28 per cent of our sample (29 countries), a new regime of supervision has been established with the introduction of a single authority, where supervision covering banking, securities and insurance markets is completely integrated. The single supervisory regime is based on just one control authority, which acts as a monopolistic agency in the overall financial system. In the small “twin peaks” group we classify the two countries - Australia and the Netherlands, 2 per cent of our sample that adopted this model, which groups supervision aimed at preserving systemic stability in one peak, and the conduct of business supervision in another. Both the unified model and the peaks model represent examples of the consolidation process that seems to dominate reforms of the supervisory architectures (innovative models). Finally, other countries adopted hybrid regimes, with some supervisors monitoring more than one segment of the market and others only one. We bring them all together in a residual class (35 countries, 34 per cent of our sample). The group comprises countries such as France, Italy and the US, where the structure of the supervision can be better explained using historical and institutional factors, rather than economic models. In general, regarding the drivers of the supervisory reform, a strand of the literature has addressed the question from a political economy perspective, focusing on the role of the political actors in the (re)design of supervisory architectures (Masciandaro 2005, 2006 and 2008, Dalla Pellegrina and Masciandaro 2008, Masciandaro and Quintyn 2008). Turning to Europe, as a result of these changes, financial supervisory architectures are now less uniform than in the past. In some countries the architecture still reflects (Spain, Italy), or closely resembles (France) the classic sectoral model. This model dominated until the end of the ’90s (Figure 3A, sectoral model in yellow). However, an increasing number of countries have shown a trend towards consolidation of the supervisory responsibilities (Figure 1B), which has resulted in the establishment of unified supervisors in a number of countries (e.g., UK and Germany) (dark green in the Figure 3B), which are different from the national central banks, while in a few cases (e.g., Czech Republic, Ireland and Slovakia) the central bank emerged as the unified supervisor (light green in the same Figure). The Netherlands stand out as the only country that adopted the so-called objectives-based (peaks) model (grey in the Figure). The current trends in the reforms of the supervisory regimes become clearer if we focus our attention on the 70 countries that implemented reforms in the period 1998-2009 (Figure 4):: the weights of the three main regimes (unified, silos and hybrid) change – respectively 35 percent (25 countries), 33 percent (23 countries) and 29 percent (20 countries) – while the peaks regime is the least common one (about 3 per cent). In other words, about the 38 percent of the sample (27 countries) adopted what we called earlier an innovative regime of supervision – unified or peaks regime – while 33 percent (23 countries) chose a “conservative” approach, i.e. maintaining the more traditional regime (silos). The hybrid model (20 countries) cannot be classified a priori as conservative or innovative. One more interesting fact can be highlighted when considering again the overall sample of 102 countries (Figure 5) : the “conservative” countries show a common feature, i.e. the central bank is the sole (or the main) banking supervisor in 86 per cent of the sample. At the same time, the adoption of an innovative model of supervision is configured on the role of the central bank in only very few cases (6 on 31 cases, 19 per cent). In other words the conservative approach seems to be more likely to occur when the central bank has traditionally been deeply involved in supervision, while the innovative approach seems to
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be more likely to occur if the main supervisor (typically the bank supervisor, was different from the central bank before the reform. Therefore, it is not surprising that the recent literature on the economics of the financial regulation architectures zooms in on this crucial trend. An increasing number of countries has shown a tendency towards a certain degree of consolidation of powers, which in several cases has resulted in the establishment of unified regulators, different from the national central banks. Various studies (Barth, Nolle, Phumiwasana and Yago 2002, Arnone and Gambini 2007, Čihák and Podpiera 2007)
claim that the key
issues for supervision are (i)) whether there should be one or multiple supervisory authorities and (ii) whether and how the central bank should be involved in supervision. More importantly, these two crucial features of a supervisory regime seem to be related. The literature tried to go in depth in the analysis of the supervisory reforms measuring these key institutional variables (Masciandaro 2004, 2006, 2007 and 2008), i.e. the degree of consolidation in the actual supervisory regimes, as well as the central bank involvement in supervision itself. 3. The Key Issues: Consolidation in Supervision and the Role of the Central Banks How can the degree of consolidation of financial supervision be analyzed and measured? This is where the financial supervision unification index (FSU Index) comes in (Masciandaro 2004, 2006, 2007 and 2008) . This index was created through an analysis of which, and how many, authorities in each of the examined countries are empowered to supervise the three traditional sectors of financial activity: banking, securities markets and insurance. To transform the qualitative information into quantitative indicators, a numerical value has been assigned to each regime, to highlight the number of the agencies involved (see Table 1). The rationale by which the values are assigned simply considers the concept of unification (consolidation) of supervisory powers: the greater the unification, the higher the index value. The distribution of the FSU Index (Figure 6) shows that, on the one hand, there are 42 countries ( 41 percent of the sample) with a low consolidation of supervision (the Index is equal to 0 or 1). On the other hand, there are 31 countries (30 percent) that established a unified supervisor or that adopted the peaks model, with a high level of supervisory consolidation (the index takes the value 6 or 7). In order to account for the role of the central bank in the various national supervisory regimes, we refer to the index of the central bank's involvement in financial supervision (Masciandaro 2004, 2006, 2007 and 2008): the Central Bank as Financial Authority Index (CBFA) (see Table 1).. The distribution of the CBFA Index (Figure 7) shows that in a majority of countries (45) the central bank is the main bank supervisor (the Index is equal to 2), while in few countries (10) the central bank is in charge of all segments of financial supervision (the Index is equal to 4). The natural next step in our analysis is to bring both indexes together. Figure 8 shows that the two most frequently adopted regimes are polarised (Figure 8): on the one hand, the Unified Supervisor regime (18 cases; on the other, the Central Bank Dominated Multiple Supervisors regime (31 cases). So there is in fact a trade off between supervisory
unification
(or consolidation) and central bank involvement,
notwithstanding eight outliers.
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The literature that pointed out this trade off (Masciandaro 2004, World Bank and IMF 2005) signalled an intriguing result: the national choices on how many agencies should be involved in regulation seems to be strictly dependent on the existing institutional position of the central bank. The degree of consolidation seems to be inversely related with the central bank’s involvement in supervision; this effect was labelled “central bank fragmentation effect” (CBFE). To explain the CBFE, a political economy approach has been adopted, (Masciandaro 2006, 2007 and 2008), based on two crucial hypotheses. First of all, gains and losses of a supervisory regime are variables computed by the incumbent policymaker, who maintains or reforms the supervisory regime, following his/her preferences. Secondly, the policymakers are politicians: politicians are held accountable at the elections for how they have pleased the voters. All politicians are career-oriented agents, motivated by the goal of pleasing the voters in order to win the elections. The main difference among the various types of politicians concerns which voters they wish to please in the first place. Then it has been claimed that the political costs of implementing an increasing level of supervisory consolidation depends on the existing institutional position of a central bank. If a high level of central bank involvement in supervision is the status quo, under specific conditions a unified supervision is more difficult to implement, and this means that the politician’s task is, ceteris paribus, more costly. In order to identify these conditions, the literature considers that a policymaker aiming to consolidate supervision faces two alternative paths: to create a monopolist central bank in supervision; or to establish a unique financial authority, different from the central bank. The creation of a monopolist central bank can be costly for different reasons. First of all, the policymaker may dislike the implementation of a monopolistic central bank if, as a consequence the often-cited moral hazard risks - which can occur when both monetary policy and supervision policy are completely delegated to the central bank - are considered greater than the potential benefits in terms of informative gains (Goodhart and Shoenmaker 1995, Llewellyn 2005) (moral hazard effect). Secondly, implementing a monopolistic central bank regime can be costly given that the policymaker delegates the conduct of business controls to the central bank, which has traditionally not sought to become involved in matters such as transparency and has more focused on stability (Goodhart 2007 and Bini Smaghi 2007) (conflict of interests effect). Thirdly, the policymaker has to take into account the risks of increasing the powers of the central bank; either because he/she fears the bureaucratic overpower (bureaucracy effect), or because he/she wishes to please one or more constituencies in designing the supervisory setting and a non accommodative central bank - this is the key hypothesis - can represent an obstacle (Dalla Pellegrina and Masciandaro 2008). But the alternative – establishing a unified supervisor outside the central bank - can also run into difficulties caused by the central bank position. In fact the policymaker may face costs in establishing a single financial authority, when reducing the central bank’s involvement in supervision, if the central bank’s reputation is high. Likewise, if the reputation of the central bank is low, or decreasing, the establishment of a single financial authority outside the central bank is more likely to occur (reputation effect). The reputation effect can work in both directions. Therefore in implementing a supervisory reform the CBFE can occur. The central bank involvement In supervision can increase the costs in implementing a financial regulation unification.
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But is the CBFE still valid in our larger sample? Looking at the data for 102 countries the answer seems to be “yes”, although it needs to be a cautious one. In fact, while it seems to be true that the more common supervisory regimes are the two polarized ones, we also need to recognize that the number of outliers – i.e. regimes where both the consolidation and the central bank involvement increase – is greater compared with the previous studies on the issue. To perform a closer inspection of the data, we compare the features of the supervisory regimes across time, maintaining the country sample constant. We consider that the existence of the CBFE has been confirmed using a sample of 88 countries, with information updated during 2006 (Masciandaro 2008). Using the same country sample, from that time to today other reforms were implemented, producing changes both in the supervision consolidation and in the central bank involvement, and consequently in the overall shape of the regimes. Figure 9 shows the average levels of the FSU index and of the CBFA index in 2006 and in 2009 : the level of consolidation is greater - from 2.88 to 3.34 - but the same is true for the degree of central bank involvement in supervision- from 1.76 to 1.84. Furthermore, we can compare (Figure 10) how many countries adopted each supervisory regimes in 2006 and in 2009, disentangling the two situations. The number of countries which adopted the unified regime outside the central bank increased – from 13 to 18 – while the number of countries with central bank dominated regime went down – from 27 to 25 – but also the number of outliers – unified regimes inside the central bank – is larger – it went from 2 to 4. These figures seem to indicate that only the consolidation process continued for sure, irrespective of the location of the unified powers. In any case we have to devote more attention to the current evolution of the CBFE. 4. Politicians, Central Banks and Financial Regulation Architectures: New Results In order to perform an updated and empirical inspection of the current evolution of the CBFE, we introduce new institutional indicators. Which are the shortcomings of the indexes which we described in the previous section? They has been designed to be consistent with the
aim – measuring the degree of
consolidation of the supervisory powers – using subjective weights in differentiating some cases – for example in giving more relevance to the supervision on both banking and securities industries – or in evaluating other situations – for example the degree of consolidation when there are at least
two
supervisors in one sector, or when a supervisor is in charge in more than one sector. So one type of improvement could be to reduce the role of the subjective weights. To do this, we propose the Financial Supervision Herfindahl Hirschman (FSHH) Index. The FSHH is a measure of the level of consolidation of the supervisory powers that we derive by applying in a novel field the classical index proposed by Herfindahl and Hirschman (Hirschman 1964). In other words, we use the FSHH index to analyse the degree of supervisory consolidation for a large sample of countries. The robustness of the application of the FSHH to analyse the degree of concentration of power in financial supervision depends on the following three crucial hypotheses. First of all, it is possible to define both the geographical and institutional dimension of each supervisory market: therefore in each country (geographical dimension) we can define different sectors to be supervised (institutional dimension). In other words in every country each financial market forms a distinct market to implement supervisory powers. So far it is still possible to identify both the geographical dimension - i.e. the
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existence of separate nations – and the institutional dimension – i.e. the existence of separate market for supervisory responsibilities – notwithstanding the fact that the blurring of the traditional boundaries between banking, securities and insurance activities and the formation of large conglomerates diluted mainly the definition of the intermediaries and the markets (Masciandaro and Quintyn 2008).Then, in each sector we can define the distribution of the supervisory powers among different authorities – if more than one agency is present – and consequently their shares without ambiguity. For each sector, the degree of supervision consolidation falls, the greater the number of authorities involved in monitoring activity. Secondly, we consider the supervision power as a whole, i.e. given different types of supervisory activity (banking supervision, securities markets supervision, insurance supervision) we assume perfect substitutability among them in terms of supervisory skills. The supervisory power is a feature of each authority as an agency, irrespective of where this supervisory power is exercised (agency dimension). Therefore, in each country and for each authority, we can sum the share of the supervisory power it enjoys in one sector with the share it owns in another one (if any). For each authority the degree of supervisory power increases, the greater the number of sectors over which that agency exercises monitoring responsibility. All three dimensions – geographical, institutional and agency
– have both legal foundations and
economic meaning. Thirdly, we prefer to adopt the HH Index rather than the classic Gini Index to emphasize that the overall number of authorities matters. In general the HH index -- rather than other indices of concentration such as the entropy index - gives more weight to the influence of unified authorities, which is – as we stressed above - the main feature of the recent evolution in the shape of the supervisory regimes. We calculate the FSHH Index by summing up the squares of the supervisory shares of all the regulators of a country. For each country the FSHH Index is equal to: n
H = ∑ s i2 i =1
Where
s i is the share of supervisory power of the authority i and N is the total number of authorities.
For each authority i , and given that in each country there are more sectors to supervise (three sectors in this paper: banking, securities and insurance) we use the following formula to calculate the shares: m
s i = ∑ s j ; and s j = j =1
1 qj
Where m is the number of sectors where the authority i is present as supervisor and q is the number of authorities involved in supervision in each sector j. In other words if in one sector there is more than one authority, the supervisory power is equally divided among the incumbent supervisors. Let us give some examples. In the case of UK, we have one authority – the Financial Services Authority – for the three sectors. Then s= 1 and H = 1.
s =1
H =1 9
In the case of Italy, we have three authorities – the Central Bank, the Securities Authority and the Insurance Authority – and two of them – the Central Bank and the Securities Authority – share supervision over two sectors (Banking market and Securities market). Therefore the three shares are respectively
s cb = 0.16 + 0.16 = 0.32 ; s s = 0.16 + 0.16 = 0.32 ; s i = 0.32 And the index HH is equal to
H = 0 .1 + 0 .1 + 0 .1 = 0 .3 In the case of Bosnia, we have five authorities, with three of them sharing supervision over the banking sector. Therefore the five shares are respectively:
s cb = 0.1 s b1 = 0.1 s b 2 = 0.1 s s = 0.3 s i = 0.3 And the index HH is equal to:
H = 0.01 + 0.01 + 0.01 + 0.09 = 0.12 Finally, in the case of the United States, we count four federal authorities – FED, FDIC, OCC and OTS – in the banking sector, two federal authorities – SEC and CRTC - in the securities markets, one federal authority in the insurance sector. Furthermore we have to take into account that for each of the three sectors we have also a state level of control (that we consider for each sector as one additional authority). Therefore the shares are:
s cb = 0.06 s b1 = 0.06 s b 2 = 0.06 s b 3 = 0.06 ; s b 4 0.06 ; s s1 = 0.11 s s 2 = 0.11 s s 3 = 0.11 s i1 = 0.16 s s 2 = 0.16 and the index H is equal to 0.09. The four cases show how the FSHH Index can be used as an indicator that is (i) consistent with the previous one (using the FSU Index we have for UK, Italy, Bosnia and US respectively 7,2.0 and 0); (ii) at the same time more precise, giving the possibility to better differentiate country by country (using the FSU Index Bosnia and US would have the same level of consolidation, (iii) more robust, given that the HH index excludes subjective weights and (iv) more easily to use and interpret, given that it applies a well-know methodology of measurement. From here on, it is easy to measure the degree of involvement of the central bank in the supervisory setting, by introducing the Central Bank Share in Supervision (CBSS) Index. For each central bank cb , and given that in each country there are more sectors to supervise (three sectors in this paper: banking, securities and insurance) we use the following formula to calculate the shares: m
s cb = ∑ s j ; and s j = j =1
1 qj
Where m is the number of sectors where the central bank cb is present as supervisor and q is the number of authorities involved in supervision in each sector j. We only have to take the share of the central bank in each country, which can go from 0 to 1. We can calculate both the FSHH Index and the CBSS Index for the 102 countries of our sample, with information updated to 2009 (Table 3), providing a new perspective on the evolution of the supervisory settings. Starting from the consolidation in supervision we analyse its trend according to country - income and regional adherence (figure 11) . This figure shows that on average the degree of consolidation is greater if
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we take the industrial countries as a whole, rather than the European region ; these two groups score best with respect to the overall sample. With respect to central bank involvement in supervision (Figure 12) , the industrial countries show on average a lower level, while the European countries demonstrate less central bank involvement in supervision than the overall sample. Bringing both indices together, we can see that the CBFE still holds, if we consider the original sample with 88 countries (Figure 13), while it seems to disappear in the larger sample with 102 countries (Figure 14). The explanation is simple: in the overall sample the number of developing countries is greater, where the need to keep the central bank involved in the supervisory setting is greater (Quintyn and Taylor 2007). Therefore the CBFE can be weaker at least for two quite different reasons. In some countries the central bank, which manages monetary policy, is deeply involved in supervision because the financial deepening is still at its early stages. In other countries the central bankers can be more involved in supervision because the monetary responsibilities are not completely in their hands. In both cases the policymakers evaluated that the benefits of having a central banker acting as supervisor are relatively greater than the costs. In any case there is a need to devote greater attention to the evolution of the CBFE effect as new reforms will be implemented.
5. In the wake of the Financial Crisis: Evaluating the Proposed Reforms in the EU and the US After the crisis, the concern for the stability of the banking and financial industry has caused renewed attention to the architectures of the supervisory regimes. Policymakers in all the countries wondered and are wondering if they need to reshape their supervisory regimes. In this section we will review the recent proposal of reforms, wondering if the trends so far evident – consolidation in micro supervision with shrinking involvement of the central bank in micro supervision – are still valid. Starting from the European Union, following years of debate and slow action on this front, European supervisory reform got the centre stage since the middle of 2008. During that year , the financial crisis hit the EU financial system (the UK was severely hit in 2007) in all its layers and lay bare the weaknesses in the regulatory and supervisory coordination framework. In response to these events, the EU Commission mandated in late 2008 a group of experts under the chairmanship of Jacques de Larosière to present an analysis of the causes of the financial crisis as well as recommendations for supervisory reform on Europe. The group presented its report in early Spring of 2009. The report proposed a strengthening of the Level 3 committees of the Lamfalussy framework in a first stage (Recommendation 20). In a second stage an integrated European System of Financial Supervision (ESFS) should be established (Recommendation 21). At a later stage, only two authorities would emerge (a peak model): one for banking and insurance supervision and any other issue relevant for financial stability, and the other for conduct of business and market issues across sectors (Recommendation 22). The proposal by the Commission (European Commission, 2009) (Table 2) in fact collapses stages 1 and 2 for micro-prudential supervision, and establishes a second pillar for macro-prudential supervision. The central body of the latter is the ESRC (European Systemic Risks Council). For micro-prudential supervision, the ESFS is a three-layered structure, with a Steering Committee, three European Supervisory Authorities (ESA) and the national supervisory agencies at the bottom layer. The three ESA emanate from the existing
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Level-3 authorities in the Lamfalussy framework. In line with the practice in this framework, they have sectoral responsibilities: the European Banking Authority (EBA), the European Insurance and Occupational Pension Authority (EIOPA), and the European Securities Authority (ESA). As a result, the lines of communication between the two pillars as well as with the national authorities and the European authorities are quite complex. The proposal of the Commission received the full support of ECOFIN on June 9 and the European leaders adopted it as the European Supervisory Framework for the future during the June 18 – 19 2009 Summit. We focus on the ESFS, the micro prudential framework. The framework, consisting of three sectoral authorities at the supranational level, belongs to the category of the traditional, or silo, approaches to supervision. The Commission (section 4.3. on page 12) recognizes in one paragraph that many member countries have different architectures, but states that at the European level, this silo-approach was the most evident one (in the name of continuity, given the Lamfalussy framework). In other words, the European policymakers chose a conservative approach instead of an innovative one. The European project is neutral with respect to the incentives towards consolidation both at the supranational and national levels. The political economy approach helps us to explain the European Commission approach: by adopting the silo approach, every existing national supervisor maintains
automatically his/her position also at
supranational level, while every kind of consolidation at European level could imply a delicate design of the governance rules of the new institutions. In other words by adopting the conservative approach the national political consensus is more likely to be achieved. In fact, the same Commission recognized that its proposal is clearly opposed to solutions such as full centralization, on which there is no consensus (section 4.3. on page 12). But the existence of a heterogeneous field of supervisory architectures could potentially have a number of implications for the efficiency and effectiveness of European supervisory processes. The lack of uniform national architectures is likely to render supervisory coordination among countries and with the three European authorities difficult. Several studies (e.g. Čihàk and Tieman, 2007 and 2008, based on FSAP results, and Seelig and Novoa, 2009 based on a worldwide survey) show that supervisory cultures and governance practices differ significantly among sectoral supervisors (with banking supervisors typically having the strictest supervisory culture and the most stringent governance arrangements). So, the wide variety of supervisory architectures, and the number of agencies on the EU territory could in the first place create hiccups in the coordination of supervisory actions and initiatives because of the multiple lines of communication. In the second place, the wide variety of architectures goes hand in hand—almost in a one-to-one relationship—with a wide variety of supervisory cultures and governance arrangements which could make coordination even more difficult. While the obstacles created by such heterogeneity are not insurmountable, they could certainly throw sand in the wheels of smooth and efficient supervisory coordination at the EU level (Masciandaro, Nieto and Quintyn, 2009). This is a reality that European policymakers did not face when setting up the ECB and the ESCB. Central banks’ cultures are less diverse than supervisory cultures. Moreover, central banks transferred their monetary policy prerogatives to the ECB, while national supervisors retain under the adopted framework their powers over the domestic financial system. So the coordination and communication issues are of a different order now.
12
Finally, one also needs to bear in mind that a number of studies (e.g., Masciandaro, 2006, Westrup, 2007, and Masciandaro and Quintyn, 2008) show that revealed preferences with respect to national supervisory architectures often stem from political considerations (such as politicians fearing that independent central banks in charge of supervision would prevent politicians from keeping or having any influence on financial sector developments). In other cases, central banks were able to throw their weight in the discussion and managed to secure (or expand) their supervisory powers. Against the background of this reform record, it now remains to be seen whether individual countries will be inclined to revisit their supervisory architectures in light of the emerging European framework. Given that the European framework can also be subject for revision, one could also imagine some emerging competition among various architectures going forward. Regarding the position of the central bank, on the one hand the European Central Bank (ECB) is formally outside the ESFS. But on the other hand the Commission invited the European Council to create the ESRC, chaired by the ECB President. The ECB will provide the Secretariat to the ESRC as well as analytical, administrative and logistic support (section 3.2 on page 7). The ESRC shall monitor and assess potential stability risks; by addressing such risks, the ESRC would be an essential building block for an integrated EU supervisory structure (section 3.2 on page 8). Furthermore, notwithstanding the Commission considered appropriate that the ESRC should be established as a body without legal personality, this choice of legal base does not prevent the conferring of responsibilities on the ECB in respect of the ESRC by means of an act adopted on the basis of Article 105 (6) of the EC Treaty ((section 3.4 on page 8). Therefore the ECB will have a relevant role in pursuing the EU macro supervision policy, and the goal of the proposal is to ensure cooperation and integration between macro and micro supervision (section 5 on page 14). If we consider the ESFS – ESRC framework as an integrated EU supervisory structure, we can say that the European Commission model is one more case of central bank fragmentation effect: a multiple authorities regime with a powerful central bank. Regarding the US, in mid – June 2009 President Barack Obama issued a White Paper, covering a wide swathe of financial regulation issues as well as a blueprint for a new architecture for financial supervision. The White Paper proposed two new authorities: the National Bank Supervisor and the Consumer Protection Agency. The National Bank Supervisor will supervise all federally chartered banks. The new agency will incorporate two existing authorities: the Office of Thrift Supervision and the Office of the Comptroller of the Currency. The Consumer Financial Protection Agency will protect consumers across the financial sector from unfair and abusive practices. Furthermore, the US government also plans to establish a body with responsibility for macro prudential supervision. The White Paper proposed to establish a Financial Oversight Council to identify systemic risks and improve the cooperation among the US regulators. Its membership will comprise the US Treasury, the heads of the Fed, the National Bank Supervisor, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission, the Consumer Protection Agency and the Federal Housing Finance Agency. Regarding the central bank, the White Paper proposed to increase the powers of the Federal Reserve. The Federal Reserve is given new responsibilities to supervise all institutions that could represent a threat to financial stability, even those that do not own banks. The Obama proposal confirmed the hybrid regime with many authorities, which has traditionally characterized the US system, with some supervisors monitoring more than one segment of the market (such
13
as the FED or the new Consumer Protection Agency) and others only one. The proposal does not follow the trend toward supervision consolidation - which we described in section three - notwithstanding the strong impression during the crisis that the fragmented supervisory setting was in fact incapable of monitoring the integrated,
interconnected and complex reality of US financial markets (Leijonhufvud 2009). The proposal
preferred to promote interagency cooperation, instead of agency consolidation. How can we explain the path dependency of the multiple authorities regime? First of all, if we focus again on the role that politicians can play in shaping the regime, in the economic literature, there are so far no theoretical studies that consider the US policymaker objective function in designing the financial supervision regime. A recent empirical paper (Dalla Pellegrina and Masciandaro 2008) highlighted a possible relationship between the choice to maintain a multiple authorities regime and bad governance practices. In terms of the relationship between bad governance and supervision, the study
interprets the latter as a
possible way of compensating lobbies (vested interests) with power, in a setup where rent seeking behaviour involves reciprocal string-pulling. Hence, the more a politician is a rent-seeking agent, the larger the pool of institutions (or alternatively, the number of leading positions) he/she will need to create in order to please all interests in terms of power and future connivance. Secondly, if we note that the reform proposal increased the role of the FED, we will have another example of central bank fragmentation effect: the degree of consolidation decreases and at the same time the central bank’s involvement in supervision increases. The proposal has been attacked in July 2009 by a coalition of investors, analysts and ex-regulators who criticized the central role of the FED in this plan, proposing an alternative institutional option: the establishment of a new Systemic Risk Oversight Regulator, with full time staff led by a chairman and four members appointed by the President and confirmed by the Senate, accountable to Congress (Financial Times, 2009). What does this evaluation of the new proposals to reform the supervisory setting in the EU and the US add to our analysis? Sections 3 and 4 highlighted that before the crisis the trend in the changes in supervisory structures seemed to be characterized by two intertwined features: consolidation of supervision goes hand in hand with the specialization of the central bank in pursuing its monetary policy mandate, and vice versa: where
several authorities are present, the central bank is likely to be deeply involved in
supervision. The new proposals seem to follow the same pattern, although in a original shape: in both cases settings with multiple authorities are proposed, with an increasing involvement of the central banks – the ECB and the FED - using the “new” territory of the macroprudential supervision. Let us qualify our assessment. First of all, the experience of recent months has stressed the importance of overseeing systemic risks in the system. In other words it is crucial to monitor and assess the threats to financial stability that can arise from macro developments within the economic as well as the financial system as a whole (macroprudential supervision). The growing emphasis on macroprudential supervision motivates the policymakers to identify specific bodies responsible for this domain. To carry out macro prudential tasks information on the economic and financial system as a whole is required. The current turmoil has stressed the role of the central banks in the prevention, management and resolution of financial crisis. Therefore the view is gaining momentum that the central banks are in the best position to collect and analyze this kind of information, given their role in managing in normal times the monetary policy and in exceptional times the lender of last resort function.
14
Therefore, from the policymakers’ point of view the involvement of the central bank
in the macro
supervision area means potential benefits in terms of information. At the same time they can postulate that the potential costs of the involvement are smaller with respect to the case of micro supervision (see section three: moral hazard risk, conflict of interest risk, powerful bureaucracy risk). In other words, the separation between micro and macro supervision can be used to reduce the arguments against the central bank involvement. The separation between macro and micro supervision can have one more effect: it is possible to have consolidation in micro supervision without any reduction of the central bank involvement in macro supervision. But this was not the case in both the EU and US proposals. The policymakers chose to maintain supervisory regimes where the authorities are mulitple: the silo regime in the EU and the hybrid regime in the US. We have already suggested a possible political economy explanation of the conservative behaviour of the politicians: notwithstanding the crisis, in both cases they evaluated the expected benefits in reducing the fragmentation to be smaller than the expected gains of political and bureaucratic consensus in maintaining the status quo. In any case, at the end of the story we observe again that a greater involvement of the central bank in the supervision goes hand in hand with a multiple authorities regime, confirming the CBFE. 6. Conclusions The worldwide wave of reforms in supervisory architectures that we have witnessed since the end of the 1990s leaves the observer with a great number of questions regarding the key features of the emerging structures. This paper has tried to provide answers, first of all by reviewing the evolution of the supervisory regimes before the financial crisis, for which we used a database of 102 countries for the period 1998-2009. Inspection of this database highlights a trend of supervisory consolidation outside the central banks, where the outliers usually are central banks without the monopoly in monetary policy responsibilities. In other words the tendency of the regulation structures to change seems to be characterized by two distinctive features: consolidation and specialization. The reforms were driven by a general trend to reduce the number of agencies, to reach the unified model – unknown before 1986 - or the vertical model. In both models the supervisors are specialized, having a well-defined mission. Recently it has been again pointed out that several countries have moved to integrate the supervision within a single agency, which is commonly not the central bank (Bank for International Settlements 2009). The trend towards specialization becomes particularly evident if we observe the route that national central banks are following. Those banks with full responsibility for monetary policy – the FED, the ECB, the Bank of England, the Bank of Japan – do not have full responsibility of supervisory policy. This does not mean that these banks are not concerned with financial stability – on the contrary, as we have observed over the last few months – but they tend to deal with it from a macroeconomic perspective, in function of their primary mission i.e. monetary policy. Among the central banks which do not have full responsibility for monetary policy, such as those of the countries belonging to the European Monetary Union, the most prudent banks chose or are about to choose the route of specialization in vigilance: we can look at the most emblematic cases of Czech Republic, Finland, Ireland, the Netherlands and the Slovak Republic. In general, it has been noted (Herrings and Carmassi 2008) that the central banks of members of the EMU have become financial stability agencies.
15
To explain this trend, a political-economic approach has been used, where the decision-making process regarding the shape of the supervisory regime seems to be related to the influence of the institutional setting of the central bank: the consolidation of supervision goes hand in hand with the specialization of the central bank in pursuing monetary policy , and vice versa: where several authorities are present, the central bank is likely to be deeply involved in supervision (central bank fragmentation effect, CBFE). However the limited number of tests and data does not allow us to make any further comments. Now, in the face of present financial turmoil, which are the lessons from the past that can be useful for the future? The events that shook the world will force the actors to reconsider the architectures of financial supervision. The starting point is to recognize that in these years financial markets have grown bigger and more complex almost everywhere. How can we best supervise the ever-changing markets, which are becoming increasingly complex and intertwined with each other? The general formula for an effective supervision is always the same: it is necessary to have exhaustive and up-to-date information. But it is the application of the classical formula that is today tricky. In markets that were fundamentally static and segmented – banks, the stock-exchange, insurance – a simple “photograph” of the situation every now and then was sufficient; the vertical model was the natural and effective answer.
Nowadays, to have an
exhaustive and up-to-date informative patrimony it is necessary to explore in depth the innovative models of supervision: the unified model and the horizontal model. However, the economic rational for modifying the supervisory settings is not always sufficient. Politics matter as well. To stress the role of politics and of politicians it is fundamental to understand where, why and how reforms about the supervisory structure can see the light of day. Why do politicians not take action? And when are they going to do it? In order to find the answer to these questions more research is still warranted. In this paper we evaluated the new proposals to reform the supervisory setting in the EU and in the US. Both proposals seem to follow the same CBFE relationship, although in a original shape: in both cases settings with multiple authorities are proposed, with an increasing involvement of the central banks – the ECB and the FED - using the “new” formula of the macro supervision.
16
7. References Abrams, R.K., Taylor, M.W., 2002. Assessing the Case for Unified Sector Supervision. FMG Special Papers n.134, Financial Markets Group, LSE, London. Alesina, A., Tabellini, G., 2003. Bureaucrats or Politicians? Part II: Multiple Policy Task. Discussion Paper n.2009, Harvard Institute of Economic Research, Harvard University, MA. Arnone, M., Gambini, A., 2007. Architecture of Supervisory Authorities and Banking Supervision. In: Masciandaro D. and Quintyn M. (Eds.), Designing Financial Supervision Institutions: Independence, Accountability and Governance, Edward Elgar, Cheltenham, 262-308. Bank for International Settlements (2009), Issue in the Governance of Central Banks, May, Basel. Bernanke B., 2007. Central Banking and Banking Supervision in the United States, Allied Social Sciences Association, Annual Meeting, Chicago, mimeo. * Barth, J.R., Nolle, D.E., Phumiwasana, T. and Yago, G. 2002. A Cross Country Analysis of the Bank Supervisory Framework and Bank Performance. Financial Markets, Institutions & Instruments, vol. 12, n.2, 67-120. Barth, J.R., Caprio G., Levine R., 2006. Rethinking Bank Regulation. Till Angels Govern. Cambridge, Cambridge University Press. * Bini Smagh,i L., 2007. Independence and Accountability in Supervision. In: Masciandaro D. and Quintyn M. (Eds.), Designing Financial Supervision Institutions: Independence, Accountability and Governance, Edward Elgar, Cheltenham, 41-62. * Borio C., 2003. Towards a Macroprudential Framework for Financial Regulation and Supervision?, BIS Working Papers, n.128, Bank of International Settlements, Geneva. Briault, C., 1999. The Rationale for a Single National Financial Services Regulator, Financial Services Authority Occasional Paper, Series 2. * Brown, E.F, 2005. E Pluribus Unum – Out of Many, One: Why the United States Need a Single Financial Services Agency, American Law and Economics Association Annual Meeting. Carmichael J., Fleming A., Llewellyn D.T.(Eds.) 2005. Aligning Financial Supervision Structures with Country Needs, World Bank Publications, Washington D.C * CEPS, 2008, “Concrete Steps towards More Integrated Financial Oversight,” CEPS Task Force Report, December. Čihák, M., Podpiera, R., 2007 Experience with Integrated Supervisors: Governance and Quality of Supervision. In: Masciandaro D. and Quintyn M. (Eds.), Designing Financial Supervision Institutions: Independence, Accountability and Governance, Edward Elgar, Cheltenham, 309-341. * Čihàk, M., and A. Tieman, 2007, Assessing Current Prudential Arrangements, pp 171 – 198 in Integrating Europe’s Financial Markets,” ed. by J. Decressin, H. Faruqee and W. Fonteyne (Washington, D.C.: International Monetary Fund). * Čihàk, M., and A. Tieman, 2008, “Quality of Financial Sector Regulation and Supervision around the World,” IMF Working Paper WP/08/190 (Washington D. C., International Monetary Fund). * Coffee, J., 1995. Competition versus Consolidation: the Significance of Organizational Structure in Financial and Securities Regulation, Business Lawyer, vol.50, … * Commission of the European Communities, 2009, “Communication from the Commission. European financial supervision,” COM (2009) 252 final, 17 pp.
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* Council of the European Union, 2009, “Council conclusions on strengthening EU financial supervision,” 2948th Economic and Financial Affairs, Luxembourg, June 9, 2009, 7 pp. * Dalla Pellegrina, L., Masciandaro, D. 2008. Politicians, Central Banks and the Shape of Financial Supervision Architectures, Journal of Financial Regulation and Compliance, (forth). * De Larosière Group, 2009, Report of the High Level Group on supervision. De Luna Martinez, J., Rose, T.A., 2003. International survey of integrated financial sector supervision. Policy Research Working Paper Series, n.3096, World Bank, Washington D.C. * Department of the Treasury, 2008. Blueprint for a Modernized Financial Regulatory Structure, Washington, D.C. * Department of the Treasury, 2009. Financial Regulatory Reform: a New Foundation, Washington, D.C. * Financial Services Authority (2009), The Turner Review, March, London. Freytag, A., Masciandaro, D. 2007. Financial Supervision Fragmentation and Central Bank Independence. In: Masciandaro D. and Quintyn M. (Eds.), Designing Financial Supervision Institutions: Independence, Accountability and Governance, Edward Elgar, Cheltenham, * Goodhart, C.A.E, Schoenmaker, D. 1995. Should the Functions of Monetary Policy and Banking Supervision be Separated? Oxford Economic Papers, vol.47, n.4, 539-560. Goodhart, C.A.E., 2000, The Organisational Structure of Banking Supervision, Financial Services Authority Occasional Paper, Series 1. * Goodhart, C.A.E., 2007. Introduction. In: Masciandaro D. and Quintyn M. (Eds.), Designing Financial Supervision Institutions: Independence, Accountability and Governance, Edward Elgar, Cheltenham, 12-26. Gugler P., 2005. The Integrated Supervision of Financial Markets: The Case of Switzerland, The Geneva Papers, vol.30, 128-143. Hermings R.J, Carmassi J., (2008). The Structure of Cross – Sector Financial Supervision, Financial Markets, Institutions and Instruments, vol.17, n.1.51-76. Hirshman, A.O. (1964), The Paternity of an Index, American Economic Review, vol.54, n.5, 761-762. Holopainen H., (2007), Integration of Financial Supervision, Discussion Papers, Bank of Finland, n.12. * House of the Lords (2009), The Future of EU of financial regulation and supervision, European Union Committee, 14th Report of Session 2008-2009, HL Paper 106-I, Authority of the House of the Lords. * Hardy, D., 2009, “A European Mandate for Financial Sector Supervisors in the EU,” IMF Working Paper WP/09/5 (Washington D. C., International Monetary Fund). * House of the Lords (2009), The Future of EU of financial regulation and supervision, European Union Committee, 14th Report of Session 2008-2009, HL Paper 106-I, Authority of the House of the Lords. Kane E.J., 1996. De Jure Interstate Banking: Why Only Now?, Journal of Money, Credit and Banking, Vol.28. Kahn, C., Santos J. (2005), Allocating Bank Regulatory Powers: Lender of Last Resort, Deposit Insurance and Supervision. European Economic Review, vol.49, 2107-2136. * Kremers J., Schoenmaker D., Wierts P., 2003. Cross – Sector Supervision: Which Model?, in R. Herrings and R. Litan (eds), Brookings Warthon Papers on Financial Service: 2003, 225-243.
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* Leijonhufvud A., 2009, Curbing Instability: policy and regulation, CEPR Policy Insight, n.36, 1-8. * Llewellyn, D.T., 2005. Institutional Structure of Financial Regulation and Supervision: the Basic Issues. In: Fleming A., Llewellyn D.T. and Carmichael J. (Eds.), Aligning Financial Supervision Structures with Country Needs, World Bank Publications, Washington D.C, 19-85. Lumpking, S., 2002. Supervision of Financial Services in OECD Area. Paris, OECD. * Masciandaro, D., 2004. Unification in Financial Sector Supervision: the Trade off between Central Bank and Single Authority. Journal of Financial Regulation and Compliance, vol. 12, n.2, 151-169. * Masciandaro, D., 2006. E Pluribus Unum? Authorities Design in Financial Supervision: Trends and Determinants. Open Economies Review, vol. 17, n.1, 73-102. * Masciandaro, D., 2007. Divide et Impera: Financial Supervision Unification and the Central Bank Fragmentation Effect, European Journal of Political Economy, 285-315. * Masciandaro, D. 2008. Politicians and Financial Supervision Unification outside the Central Bank: Why Do They Do It?. Journal of Financial Stability, forthcoming. * Masciandaro, D. , Quintyn, M., 2008. Helping Hand or Grabbing Hand? Politicians, Supervisory Regime, Financial Structure and Market View, North American Journal of Economics and Finance. 153-174. * Masciandaro, D. , Quintyn, M., 2009, Reforming Financial Supervision and the Role of the Central Banks: a Review of Global Trends, Causes and Effects (1998-2008), CEPR Policy Insight, n.30, 1-11. Masciandaro, D., Maria Nieto and Marc Quintyn, 2009, Will They sing the same tune? Convergence in the new European System of Financial Supervisors, CEPR Policy Insight, n.37.
Measuring
Quintyn, M., Ramirez S. and Taylor M.W., 2006. The Fear of Freedom. Politicians and the Independence and Accountability of Financial Supervisors. In: Masciandaro D. and Quintyn M. (Eds.), Designing Financial Supervision Institutions: Independence, Accountability and Governance, Edward Elgar, Cheltenham, …. Quintyn, M. and Taylor, M. W., 2007. Building Supervisory Structures in sub-Saharan Africa – An analytical framework. IMF Working Papers WP 07/18. * Osborne G., 2009, From Crisis to Confidence: Plan for Sound Banking, Conservative.com Padoa Schioppa, T., 2003. Financial Supervision: Inside or Outside the Central Banks?, In: Kremers J., Schoenmaker D., Wierts P., Financial Supervision in Europe, Edward Elgar, Cheltenham, 160-175. * Seelig, Steven and Alicia Novoa, 2009, “Governance Practices at Financial Regulatory and Supervisory Agencies”, IMF Working Paper. * Scott, K., 1977. The Dual Banking System: a Model of Competition in Regulation. Stanford Law Review, vol.30, Taylor, Michael, 1995, “Twin Peaks: A Regulatory Structure for the New Century” (London: Centre for the Study of Financial Innovation). Taylor, Michael and Alex Fleming, 1999, “Integrated Financial Supervision. Lessons from Northern European Experience,” Policy Research Working Paper, 2223,The World Bank. * Treasury, 2009, Reforming Financial Markets, hm-treasury.gov.uk Wall, L.D., Eisenbeis R.A., 2000. Financial Regulatory Structure and the Resolution of Conflicting Goals, Journal of Financial Services Research, vol. 17, 223-245.
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* Westrup, J. (2007). Independence and Accountability: Why Politics Matter, in Masciandaro D., & Quintyn, M., eds., Designing Financial Supervision Institutions: Independence, Accountability and Governance. Cheltenham, UK; Northampton, MA: Edward Elgar. * World Bank and IMF (2005). Financial Sector Assessment: a Handbook, Washington D.C., World Bank and IMF. Wymeersch, E. (2006). The Structure of Financial Supervision in Europe: About Single, Twin Peaks and Multiple Financial Supervisors, Financial Law Institute, Ghent University, mimeo.
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8. Tables and Figures FIGURE 1 REFORMS OF THE SUPERVISORY ARCHITECTURES PER YEAR (1998-2009) 12
NUMBER OF REFORMS
10
8
6
4
2
0 a98
a99
a00
a01
a02
a03
a04
a05
a06
a07
a08
a09
YEARS
21
FIGURE 2 REFORMS OF THE SUPERVISORY ARCHITECTURES BY COUNTRY GROUPS (% OF EACH GROUP) 0.84
0.82
0.8
PERCENT
0.78
0.76
0.74
0.72
0.7
0.68 EUROPE
EU
OCSE
COUNTRIY GROUPS
22
FIGURE 3 MODELS OF SUPERVISION ARCHITECTURES (102 COUNTRIES, % TOTAL)
SILOS MODEL UNIFIED MODEL PEAKS MODEL HYBRID MODEL
23
FIGURE 3.A
24
FIGURE 3.B
25
FIGURE 4 MODELS OF SUPERVISION REGIMES AFTER THE REFORMS (70 COUNTRIES, % TOTAL)
SILOS MODEL UNIFIED MODEL PEAKS MODEL HYBRID MODEL
26
FIGURE 5 CENTRAL BANK AS THE MAIN SUPERVISOR: CONSERVATIVE (SILOS) VS INNOVATIVE (SINGLE AND PEAK) MODELS 1 0.9 0.8 0.7
PERCENT
0.6 0.5 0.4 0.3 0.2 0.1 0 CONSERVATIVE REGIMES
INNOVATIVE REGIMES MODELS
27
Table 1. The Institutional Indicators FSU INDEX The index was built on the following scale: 7 = Single authority for all three sectors (total number of supervisors=1); 5 = Single authority for the banking sector and securities markets (total number of supervisors=2); 3 = Single authority for the insurance sector and the securities markets, or for the insurance sector and the banking sector (total number of supervisors=2); 1 = Specialized authority for each sector (total number of supervisors=3). We assigned a value of 5 to the single supervisor for the banking sector and securities markets because of the predominant importance of banking intermediation and securities markets over insurance in every national financial industry. It also interesting to note that, in the group of integrated supervisory agency countries, there seems to be a higher degree of integration between banking and securities supervision than between banking and insurance supervision ; therefore, the degree of concentration of powers, ceteris paribus, is greater. These observations do not, however, weigh another qualitative characteristic: There are countries in which one sector is supervised by more than one authority. It is likely that the degree of concentration rises when there are two authorities in a given sector, one of which has other powers in a second sector. On the other hand, the degree of concentration falls when there are two authorities in a given sector, neither of which has other powers in a second sector. It would therefore seem advisable to include these aspects in evaluating the various national supervisory structures by modifying the index as follows: adding 1 if there is at least one sector in the country with two authorities, and one of these authorities is also responsible for at least one other sector; subtracting 1 if there is at least one sector in the country with two authorities assigned to supervision, but neither of these authorities has responsibility for another sector; 0 elsewhere.
CBFA INDEX For each country, and given the three traditional financial sectors (banking, securities and insurance), the CBFA index is equal to: 1 if the central bank is not assigned the main responsibility for banking supervision; 2 if the central bank has the main (or sole) responsibility for banking supervision; 3 if the central bank has responsibility in any two sectors; 4 if the central bank has responsibility in all three sectors (In evaluating the role of the central bank in banking supervision, we considered the fact that, whatever the supervision regime, the central bank has responsibility in pursuing macro financial stability. Note that the countries of the Euro area are not monetary authorities. Therefore, we chose the relative role of the central bank as a rule of thumb: we assigned a greater value (2 instead of 1) if the central bank is the sole or the main authority responsible for banking supervision. Source: Masciandaro 2007.
28
FIGURE 6 THE FINANCIAL SUPERVISION UNIFICATION INDEX 40
35
NUMBER OF COUNTRIES
30
25
20
15
10
5
0 FSU0
FSU1
FSU2
FSU3
FSU4
FSU5
FSU6
FSU7
INDEX
29
FIGURE 7 THE CENTRAL BANK AS FINANCIAL SUPERVISOR INDEX 50 45 40
NUMBER OF COUNTRIES
35 30 25 20 15 10 5 0 CBFA1
CBFA2
CBFA3
CBFA4
INDEX
30
FIGURE 8 FINANCIAL SUPERVISION REGIMES 9 8 7 6
FSU INDEX
5 4 3 2 1 0 0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
-1 -2 CBFA INDEX
31
FIGURE 9 FSU&CBFA: 2006 VS 2009 4
3.5
3
2.5
2
1.5
1
0.5
0 FSU2009
FSU2006
CBFA2009
CBFA2006
I N D EX ES
32
FIGURE 10 SUPERVISION REGIMES: 2009 VS 2006 30
NUMBER OF COUNTRIES
25 CENTRAL BANK DOMINATED MULTIPLE SUPERVISORS REGIMES
20 UNIFED REGIMES OUTSIDE CBs 15
10 UNIFED REGIMES iNSIDE CBs 5
0 R1-7 R 1-6 R1-5
R1-3
R1-2
R1-1
R2-4
R2-3
R2-2
R2-1
R2-0
R3-5
R3-3
R3-2
R3-1
R3-0
R4-7
R4-6
R4-2
REGIMES
33
Table 2. The European Framework for Safeguarding Financial Stability
34
Table 1 Supervisory Architectures in 102 countries: FSHH Index and CBSS Index (year: 2009) Countries
FSHHI
CBSSI
Albania
0.53
.33
Algeria
0.31
.16
Argentina
0.30
.33
Australia
0.5
0
Austria
0.68
.16
Bahamas
0.30
.33
Bahrain
1
1
Belarus
0.30
.33
Belgium
1
0
Bolivia
0.45
0
Bosnia
0.18
.16
Botswana
0.53
.33
Brazil
0.36
.49
Bulgaria
0.53
.33
Cameroon
0.30
0
Canada
0.48
0
Chile
0.36
.33
China
0.30
0
Colombia
1
0
Costa Rica
0.30
0
Croatia
0.53
.33
Cyprus
0.30
.33
1
1
Czech Republic Denmark
1
0
Ecuador
0.53
0
Egypt
0.30
.33
El Salvador Estonia
0.53 1
0 0
Finland
1
0
France
0.20
.27
Georgia
1
0
Germany
0.68
.16
Ghana
0.30
.33
Greece
0.30
.33
Guatemala Haiti
0.53 0.50
0 .5
Hungary
1
0
Iceland
1
0
India
0.30
.33
Iran
0.30
.33
Ireland
1
1
Israel
0.36
.33
Italy
0.30
.33
Jamaica
0.53
.33
Japan
0.68
.16
Jordan
0.30
.33
Kazakhstan Kenya
0.68 0.30
.16 .33
Korea
1
0
Kyrgyzstan
0.30
.33
Latvia
1
0
Lebanon
0.30
.33
Libya
0.53
.33
35
Lithuania
0.30
.33
Luxembourg
0.53
0
Macedonia
0.30
.33
Madagascar
1
1
Malaysia
0.53
.66
Malta
1
0
Mauritius
0.53
.33
Mexico
0.53
0
Moldova Montenegro
0.53 0.30
.33 .33
Morocco
0.30
.33
Namibia
0.53
.33
Netherlands
0.53
.50
0.30
.33
Nicaragua Norway
1 1
0 0
Pakistan
0.53
.33
Panama Peru
0.30 0.53
0 0
Philippines
0.30
.33
Poland
1
0
Portugal
0.30
.33
Romania
0.30
.33
Russia
0.30
.33
Rwanda
1
1
Saudi Arabia Singapore
0.53
.66
1
1
Slovak Republic Slovenia
1
1
New Zealand
0.30
.33
South Africa
0.53
.33
Spain
0.24
.33
Sri Lanka
0.30
.33
Sweden
1
0
Switzerland
1
0
Tajikistan
0.53
.66
Tanzania
0.30
.33
Thailand
0.30
.33
Trinidad Tobago Tunisia
0.47
.66
0.30
.33
Turkey
0.30
0
Ukraine
0.30
.33
UAE
0.30
.33
Uganda
0.30
.33
UK
1
0
USA
0.09
.06
Uruguay
1
1
Venezuela
0.30
0
Vietnam
0.30
.33
Zimbabwe
0.30
.33
36
FIGURE 11 FSHH INDEX BY COUNTRY GROUPS 0.8
0.7
0.6
FSHH INDEX
0.5
0.4
0.3
0.2
0.1
0 ALL
OECD
EUROPE
COUNTRY GROUPS
37
FIGURE 12 CBSS BY COUNTRY GROUPS 0.3
0.25
0.2
0.15
0.1
0.05
0 ALL
OECD
EUROPE
C O U N T R Y GR OU PS
38
FIGURE 13 FSHH INDEX & CBSS INDEX (88 COUNTRIES, YEAR 2009) 1.2
1
0.8
0.6
0.4
0.2
0 0
0.2
0.4
0.6
0.8
1
1.2
F SHH I N D EX
39
F I GU R E 14 : F SHH I N D EX & C B SS IN D EX ( 10 2 C O U N T R I ES, Y EA R 2 0 0 9 )
1.2
1
0.8
0.6
0.4
0.2
0 0
0.2
0.4
0.6
0.8
1
1.2
FSH H
40
