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Aligning Supervisory Structure with Country Needs - Issues in Unification of
Supervisory AgenciesStefan Ingves
Director
Monetary & Financial Systems Department
International Monetary Fund
Contents
• Forces Encouraging Unification
• Different Approaches
• Key Considerations
• Managerial Challenges
• The Swedish Experience
• IMF Staff Advice
Forces EncouragingUnification
- Emergence of conglomerates..and cross-sector products
- Converging techniques..and changing skill sets.
- Changing environment
- Aftermath of crises
- Often a herd instinct...
Different Approaches
Full integration in one agency ....– choices to be made about (i) location vis-a vis the
central bank and (ii) relation between prudential and ‘conduct of business’ supervision
Partial integration ....
Pseudo integration ...– through oversight boards – through physical proximity and shared resources
Key Considerations
Size (and circumstances) of financial sector
Relative size of sectors
Segmentation of markets
Availability of resources
Concentration of power
Independence... hence funding
Managerial Challenges
Integrating different approaches (i) Central bankers vs. bank supervisors... (ii) Insurance and bank supervision vs.
securties supervision
Integrating different career pathsManaging the change process is crucial
Change can be very expensive....give rise to misleading expectations... and lead to capture by special interests
Managerial Challenges
Change should not be for change’s sake
in some cases it may be better to
(i) focus on fine tuning existing structure to best assess risks..
(ii) improve framework for coordination
(iii) work towards consistency and convergence in regulation across sectors
Case Study – The Swedish Experience
Sweden among first countries to unify. Unification preceded the crisis...
– not propelled by financial sector crisis, though events unfolded in parallel
Unification based on – forward looking assessment which anticipated
modernization of the system– desire to address managerial challenges in
insurance supervision
Case Study – The Swedish Experience
Institutional Arrangements – FI unified regulator and supervisor for banks,
securities & insurance, Riksbank responsible for monetary policy and payment systems.
– Authority and responsibility of each clearly defined in law.
Independence– FI independent and reports to Ministry of Finance– law prohibits interference by Government.
Case Study – The Swedish Experience
The financial system today– Dominated by four major financial groups
(FMFGs) which have• 4/5ths of financial sector assets; • 2/3rd of bank deposits and mutual fund assets. • In addition, each group owns an insurance co.
and is active both cross border and cross sector In retrospect, unified supervision appropriate structure for the system as it has evolved.
Case Study – The Swedish Experience
Key risks for FMFGs– Cross border propagation of shocks from foreign
operations– Interbank contagion from common large exposures– Contagion from life insurance companies facing
demographic changes– Operational risks inherent in large and complex
institutions
Case Study – The Swedish Experience
Major challenges faced by supervisors– Lack of resources, skilled and experienced staff– Lack of legal authority to take corrective action
and enforcement measures – FMFGs “too big to fail” and “too big to rescue”;
hopefully, not “too big to supervise” or “too big to manage” !
Case Study – The Swedish Experience
Unified structure aids in consolidated cross sector, cross border supervision– Joint cross border supervisory group for the largest
FMFG with FI as lead supervisor– risk-focused approach to systemically important
institutions
Issues to be addressed – Orderly winding up of large and complex financial
institutions - ...but, how would cross border resolution issued be handled ?
IMF Staff Advice
No single optimal structure. Do what
works best for consolidated supervision ‘Talk and share’..... helps if the public sector
has a culture of cooperation.
....and build such channels across borders, too.
Keep supervision where it will not be
starved of resources
IMF Staff Advice
• Finally, if unifying after a crisis: – Keep restructuring agency separate from the
supervising agency
– Don’t use central bank funds to nationalize weak institutions.
– Get the timing right• Legislative support easier to obtain during
crisis, but can distract from tasks in hand.
Thank [email protected]
