Gradual integration of financial regulation and supervision in the czech republic
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Gradual Integration of Financial Regulation and Supervision In the Czech Republic. Pavel Racocha May, 2004 Dubrovnik, Croatia. General considerations. Variety in institutional structure of financial regulation and supervision world-wide. Two basic models - traditional and functional.

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Gradual Integration of Financial Regulation and Supervision In the Czech Republic

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Gradual Integration of Financial Regulation and Supervision In the Czech Republic

Pavel Racocha

May, 2004

Dubrovnik, Croatia


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.


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.


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


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.


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


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)


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.


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


Regulation and Supervision of the Czech Financial Sector


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.


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.


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


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


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.


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 30/6 2005.

  • 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 31/12 2005.


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


Second stage

  • Project of integration (December 2006).

  • Implementation to be completed ca one year before joining EMU, e.g. roughly in 2009.

  • 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


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