Armenia - Financial Sector Development Financial Supervision 29 May 2005 Peter Nijsse Financial Sector Supervision The functional model in the Netherlands

Financial Supervision Presentation 1.Foundations of a supervisory system for the financial sector 2.Financial supervision in the Netherlands 3.Useful advice for Armenia?

Financial Supervision Design principles for a supervisory system Financial supervision should: be in line with the existing market and institutional structure be future proof reflect ideas of policy makers on the desired market development promote instead of hamper market developments and product innovation be cost efficient

Financial Supervision Aspects of financial supervision Macro prudential supervision (system stability) Micro prudential supervision Conduct of business supervision Competition policy

Financial Supervision Prudential supervision in the EU Source: ECB (2003 and 2004) IntegratedSectoral Austria Belgium Denmark Estonia Germany Hungary Ireland Latvia Malta Netherlands Sweden United Kingdom Cyprus Czech Republic Finland France Greece Italy Lithuania Luxembourg Poland Portugal Slovakia Slovenia Spain

Financial Supervision Supervision in the Netherlands Different approach consequence of: Liberal market philosophy (requires strong supervisors, especially in the conduct of business area) High market share of financial conglomerates and growth of cross-sector competition

Financial Supervision Market share in 2004 ( billion) BanksInsuranceTotal Total domestic turnover Turnover of conglomerates * Market share of conglomerates 58%75%61% Source: DNB * Conglomerates: ING, Rabobank, Fortis, SNS Reaal, Aegon, Eureko, Delta Lloyd Group

Financial Supervision The Dutch Model Prior to 2002

Financial Supervision The new model after 2002 Cross-sector, functional supervision Macro and micro prudential supervision Central Bank Conduct of business supervision Authority for Financial Markets Competition policy Competition Authority

Financial Supervision The New Dutch Model Supervisory structure after September 2002

Financial Supervision Why this model? High market concentration macro and micro prudential supervision closely linked Liberal market Conduct of business supervision extra important, requiring different approach and skills from prudential supervision Creating the right incentives for competition policy in an integrating EU market

Financial Supervision Experiences in the Netherlands Financial sector needed some time to adjust, but in general very positive experience so far Authority for Financial Markets has managed to build up a strong reputation in a short time, despite growing pains Crucial to have a strict delineation of tasks between supervisors (licensing!)

Financial Supervision Useful advice for Armenia? The optimal supervisory structure is largely dependent on the market structure and the existing institutional setting as well as on desired and expected future developments Conduct of business supervision will quickly grow in importance when markets develop If allowed, conglomerates are likely to develop in a relatively small financial market like Armenia Less regulation requires more (conduct of business-) supervision Conduct of business supervision is a different ballgame compared to prudential supervision

Financial Supervision Conclusions Currently, emphasis in Armenia is on prudential supervision Macro- and micro prudential supervision may very well remain combined within the central bank For conduct of business supervision, however, you may need a separate supervisor If cross sector activities develop as well as for efficiency reasons, a functional supervisory structure is more effective than a sectoral structure