The World Bank Finance Forum International Experience on Integrated Supervision José de Luna Martínez June 20, 2002

Contents 1. What are the reasons for the adoption of integrated supervision in developing and advanced countries? 2. How far have countries gone in establishing unified supervisory agencies for the financial sector industry? 3. What are some of the “practical” problems in adopting integrated supervision?

1. What are the reasons for the adoption of integrated supervision in developing and advanced countries?

Recent Developments in the Financial Sector and the Structure of Regulation and Supervision Insurance companies Banks Securities firms Financial Conglomerates (with banking, insurance, securities and other intermediaries) Bank supervisor Insurance supervisor Securities supervisor Unified Supervisory Agencies (for banking, securities, insurance and other intermediaries)

Reasons for Unification of Supervisory Agencies* * Sample includes: Australia, Canada, Iceland, Korea, Latvia, Mexico, Norway and Sweden. Reasons % of Agencies 1. Evolution of the financial system towards a more universal type 100% 2. Maximize economies of scale and scope 63% 3. Address unregulated areas and activities 25% 4. Address other weaknesses in regulation and supervision 25% 5. Need for operational restructuring of regulatory agencies (in particular, after a financial crisis) 25% 6. Poor communication and cooperation among existing regulatory agencies. 13%

Countries that Have Adopted Integrated Supervision Australia Australia Austria Austria Canada Canada Colombia Colombia Denmark Denmark El Salvador El Salvador Estonia Estonia Germany Germany Hungary Hungary Iceland Iceland Jamaica Jamaica Japan Japan Korea Korea Latvia Latvia Malaysia Malaysia Bulgaria Ireland Kazakhstan Poland Slovakia Slovenia Ukraine Malta Malta Mauritius Mauritius Nigeria Nigeria Norway Norway Pakistan Pakistan Paraguay Paraguay Peru Peru Singapore Singapore Sweden Sweden UK UK Uruguay Uruguay Venezuela Venezuela Zambia Zambia Full or partial integrated supervision Considering integrated supervision Source: Kenneth Mwenda and Alex Fleming (2001)

2. How Far Have Countries Gone in Establishing Integrated Supervisory Agencies?

Powers of Integrated Supervisory Agencies Regulatory and Supervisory Powers 1. Set licensing requirements. 2. Approve and revoke license to a financial intermediary. 3. Set accounting and disclosure rules. 4. Set rules on the composition of capital. 5. Set minimum capital requirements. 6. Set prudential regulations on market, credit, and liquidity risks. 7. Conduct on-site examinations. 8. Conduct off-site examinations. 9. Impose sanctions and fines. 10. Consumer protection. Country Examples Agency Intermedi aries* %f powers they have KoreaB+S+I100% CanadaB+I90% AustraliaB+I80% LatviaB+S+I80% IcelandB+S+I70% MexicoB+S70% SwedenB+S+I70% NorwayB+S+I30% * B=Banking, S=Securities, I=Insurance

The Powers of the Integrated Supervisory Agencies* * Sample includes: Australia, Canada, Iceland, Korea, Latvia, Mexico, Norway and Sweden Regulatory and Supervisory Powers % of Agencies 1. Conduct on-site examinations 100% 2. Conduct off-site examinations 100% 3. Impose sanctions and fines 100% 4. Set regulations on credit, market and liq. Risks 88% 5. Set accounting and disclosure rules 75% 6. Set rules on the composition of capital 75% 7. Set licensing requirements 63% 8. Approve/ revoke a license to an intermediary 63% 9. Set minimum capital requirements 50% 10. Consumer protection 25%

Unified Supervisory Agencies: Moving from Institutional to Functional Regulation Model of Institutional Regulation Different rules for each type of intermediary. Different rules for each type of intermediary. Different supervisors for each type of intermediary. Different supervisors for each type of intermediary. Model of Functional Regulation Common rules for similar activities regardless of which intermediary carries them out. Either one single supervisor or multiple supervisors for each type of market failure. Transition from Institutional to Functional Regulation Develop a unified risk-based approach for regulation and supervision (with harmonized regulations on credit, market, and liquidity risks across intermediaries). Develop a unified risk-based approach for regulation and supervision (with harmonized regulations on credit, market, and liquidity risks across intermediaries). Harmonize other regulatory standards across financial intermediaries (licensing, accounting, information disclosure etc) Harmonize other regulatory standards across financial intermediaries (licensing, accounting, information disclosure etc) Harmonize supervisory practices (on-site, off-site supervision, surveillance) Harmonize supervisory practices (on-site, off-site supervision, surveillance)

Degree of Integration of Regulatory and Supervisory Processes across Financial Intermediaries in Selected Countries* Based on the results of a WB survey that included: Australia, Canada, Iceland, Korea, Latvia, Mexico, Norway and Sweden Regulatory and Supervisory Processes Degree of Integration 1. Assessment of risk management effectiveness in such areas as: credit, market and liquidity risks. 81% 2. Off-site monitoring and analysis 76% 3. Same requirements for licensing 62% 4. Consolidated supervision 62% 5. Similar components of capital 52% 6. Accounting rules in areas such as: Valuation of real estate assets, valuation of securities, and reserving for losses on assets 48% 7. Similar minimum capital adequacy requirements 43%

Degree of Integration of Supervisory and Regulatory Processes Across Financial Intermediaries by Country* Country Examples Country Degree of integration Canada81% Mexico67% Latvia62% Australia57% Norway57% Korea52% Sweden48%

3. What Are the Practical Problems of Establishing an Integrated Supervisory Agency?

Problems to Integrate Supervisory Agencies (% of agencies that were affected by any of the following problems) Main Problems Agencies that were affected 1. Legal constraints (need to amend a number of financial sector legislations). 75% 2. Departure of experienced personnel. 63% 3. Demoralization of staff of the merged entities. 50% 4. Delays to integrate IT systems and infrastructure of merged agencies 50% 5. Budgetary problems (insufficient funds to complete the integration of agencies). 13% 6. Lack of mission and clarity and the new merged institution. 13%

Time Required to Merge Supervisory Agencies Main Tasks Average No. of Years Required 1. Set the definitive organizational structure of the new merged entity Set the strategic (business) plan of the new entity describing its objectives, strategies and actions needed to achieve them Set in the legal framework the scope of legal powers, responsibilities and goals of the new regulatory agency Integrate the IT systems of the merged entities Reallocate personnel and define new roles Integrate budgetary processes Appoint (confirm) the heads of the new departments of the merged entity. 0.7

Average Number of Years Required to Complete the Integration of Supervisory Agencies

Final Remarks Establishing a singe regulatory agency does not, in and of itself, correct regulatory weaknesses. Establishing a singe regulatory agency does not, in and of itself, correct regulatory weaknesses. Regulatory unification will only be successful if it raises regulatory effectiveness. Regulatory unification will only be successful if it raises regulatory effectiveness. The transition from institutional regulation (with several regulators) to functional regulation with a single regulator is a complex process. The transition from institutional regulation (with several regulators) to functional regulation with a single regulator is a complex process. There are many benefits of adopting a single regulator, but these benefits will require a long time to materialize. There are many benefits of adopting a single regulator, but these benefits will require a long time to materialize.