1. Pavel Racocha May, 2004 Dubrovnik, Croatia
Gradual Integration of Financial Regulation and Supervision In the Czech Republic
Pavel Racocha
May, 2004
Dubrovnik, Croatia

2. General considerations
Variety in institutional structure of financial regulation and supervision world-wide.
Two basic models - traditional and functional.
Trend toward integration of financial regulation and supervision, especially in the EU and more developed countries.
However, traditional model with separate authorities still prevails world-wide.

3. General considerations - continued
Structures of financial regulation and supervision are country specific.
No optimal and generally recommended model.
Principle of subsidiarity is applied in EU.
Institutional structure is important, but there are other key pre-conditions for effective financial regulation and supervision.

4. Traditional model
Structure of financial regulation and supervision reflects sectors of financial intermediation e.g. banking, capital market, investment services and insurance.
Three alternatives:
- three (or more) authorities
- partial integration (twin peak arrangement etc.)
- single authority

5. Functional model
Institutional structure of financial regulation and supervision follows regulatory matrix, which reflects market failures.
Areas of financial regulation and supervision correspond with types of market failures.
Information asymmetry - prudential regulation and supervision focusing on the safety and soundness of financial institutions.

6. Functional model - continued
Market misconduct - consumer protection and focus on fair trading in securities.
Systemic instability - focus on stability of the financial system as a whole, oversight of payment systems, lender of last resort.
Anti-competitive behaviour - regulation and supervision to ensure appropriate degree of competition in financial system

7. Functional model - basic alternative
One authority for prudential regulation and supervision of financial institutions
Other authority for regulation and supervision of market misconduct
Central bank - financial stability, lender of last resort, oversight of payment systems
Regulatory authority for protection of competition (for the whole economy)

8. Functional model - two other alternatives
Partial integration, for example, twin peak model.
Single authority, usually with exemption of protection of competition.
- If concentrated within central bank, then central bank becomes a real mega-regulator.
- Otherwise close co-operation between single authority (FSA) and central bank necessary.

9. Key pre-conditions for effective regulation and supervision
Clearly determined goals
Independence (operational, personal, financial) balanced by accountability and transparency
Adequate financial and human resources
Adequate legal framework supporting enforcement of regulations
Implementation of international standards
Regulation and supervision under one roof

10. Regulation and Supervision of the Czech Financial Sector

11. Pros for integration of financial regulation and supervision in the Czech Republic
Four regulatory agencies are too many for relatively small Czech financial system.
Integrated structure is more transparent for the general public.
Diversification of businesses of financial institutions.
Supporting supervision of financial groups on a consolidated basis.
Synergies, e.g. economies of scope, to make better use of limited human resources.

12. Pros for integration of financial regulation and supervision in the Czech Republic - continued
Economies of scale, e.g single set of supporting services and uniform procedures.
Avoiding duplicities and/or shadow zone in financial regulation and supervision.
Pre-condition for level playing field for competition by unified regulatory rules and supervisory procedures whenever it is possible and desirable
Supporting international co-operation.

13. Risks and costs connected with integration of financial regulation and supervision in the Czech Republic
Decreasing efficiency of supervision on an operational level
High financial costs
Challenges connected with integration of different cultures
Challenges connected with integration of complex and different IT systems
Reputational risk

14. Why gradual approach Integration is a complex task
Need for improvement in legal definitions of the goals of regulation and supervision
Consensus about the statute of unified authority has not yet been reached
Differences between existing agencies
Mitigation of risk of integration mismanagement

15. Project of integration of financial regulation and supervision
Consensual proposal of Ministry of Finance, Czech National Bank and Czech Security Commission (April 2004)
Two stages of integration:
- First stage - establishment of twin peak system, principle of regulation and supervision under one roof is followed.
- Second stage - integration of financial regulation and supervision into a single authority.

16. First stage - twin peak system
Integration of regulation and supervision of credit institutions - the CNB takes-over regulation and supervision of credit unions as of 30/
Integration of supervision over remaining parts of financial system - SEC will become responsible for regulation and supervision of market conduct, securities sector and insurance and pension fund sector as of 31/

17. First stage - twin peak system - continued
Responsibilities of Ministry of Finance:
- preparation of laws
- supervision of use of regular state support for building savings scheme, pension funds and life insurance

18. Second stage Project of integration (December 2006).
Implementation to be completed ca one year before joining EMU, e.g. roughly in
Key questions remain open including:
- the issue of independence of unified authority
- the role of the CNB and the SEC
- regulation and supervision under one roof

19. THANK YOU QUESTIONS?