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INSTITUTIONAL STRUCTURE OF FINANCIAL REGULATION: THE BASIC ISSUES. David T Llewellyn Professor of Money & Banking, Loughborough University President, SUERF Paper Presented at World Bank seminar Aligning Supervisory Structures with Country Needs Washington DC, 4-5 th December, 2003.

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institutional structure of financial regulation the basic issues

INSTITUTIONAL STRUCTURE OF FINANCIAL REGULATION: THE BASIC ISSUES

David T Llewellyn

Professor of Money & Banking,

Loughborough University

President, SUERF

Paper Presented at World Bank seminar

Aligning Supervisory Structures with Country Needs

Washington DC, 4-5th December, 2003

structure of paper
STRUCTURE OF PAPER
  • Why institutional structure is important
  • Range of Options: Regulation Matrix
  • Advantages and Disadvantages
  • Role of Central Bank
  • International experience
initial perspectives
INITIAL PERSPECTIVES
  • Regulation and the financial system
  • Over-regulation
  • Objectives of regulation & supervision
    • Systemic stability
    • Safety & soundness
    • Consumer protection
    • Consumer confidence
  • Role of central bank
  • No universal model
slide4
No structure is perfect
  • Two Questions and a dilemma
    • Should central bank supervise banks?
    • How many agencies?
  • Use of resources
  • Skills & remuneration
  • Accountability
  • Political independence
universal functions
Universal Functions
  • Prudential regulation
  • Prudential supervision
  • Systemic stability
  • Conduct of business: regulation
  • Conduct of business: supervision
slide6
Safety Net arrangements
  • Liquidity assistance
  • Insolvent institutions
  • Crisis resolution
  • Market integrity
origin of the debate
ORIGIN OF THE DEBATE
  • Financial structure
  • Financial innovation
  • Financial conglomerates
  • Piece-meal responses
  • Objectives change
  • Internationalisation
  • Accountability
  • Effectiveness & Efficiency
key issues
KEY ISSUES
  • Number of agencies
    • Spectrum
  • Prudential v Conduct of business
  • Role of central bank
  • Structure of agencies
  • Objectives
  • Co-ordination
slide9
Political independence
  • Accountability
  • Costs
  • Role of competition agency
  • Concentration of powers
  • Self regulation?
  • International co-ordination
importance of the issue
IMPORTANCE OF THE ISSUE
  • Effectiveness
  • Clarity of responsibility
  • Conflict resolution
  • Costs
  • Duplication
  • Regulatory arbitrage
  • Public perceptions
integration
INTEGRATION
  • Integration/Unified agencies
  • Mega agency
regulatory matrix
REGULATORY MATRIX
  • Prudential Regulation
    • Banks
    • Insurance
    • Securities
  • Systemic
  • Consumer Protection
  • Competition
a spectrum
A SPECTRUM

Fragmented

Integrated

Twin Peaks

Mega

alteratnive criteria
ALTERATNIVE CRITERIA
  • Institutional
  • Function
  • Objectives
  • Market Failures
case for mega agency
CASE FOR MEGA AGENCY
  • Economies of scale
  • Economies of scope (synergies)
  • Group-wide view of risks
  • Coverage
  • Simplicity
  • Blurred distinctions
slide16
Business structure
  • Consistency
  • Regulatory arbitrage
  • Scarce resources
  • Accountability
  • Costs on firms
case for specialist agencies
CASE FOR SPECIALIST AGENCIES
  • Differences persist
  • Different risks
  • Different approaches
  • Distinctions eroded
  • Conflict resolution: political
slide18
Concentration of power
  • Moral hazard
  • Bureaucratic
  • Competition in regulation
  • Economies of scale?
  • Focus
  • Legal issues
twin peaks austrial model
TWIN PEAKSAUSTRIAL MODEL
  • Single/Integrated Prudential Agency
  • Single Conduct or Business Agency
  • Competition Agency
  • Systemic Stability Agency
central bank
CENTRAL BANK
  • Systemic stability: universal
  • Concentration of power
  • Conflicts of interest
  • Bail-outs
  • LLR
surveys
SURVEYS
  • Luna Martinez and Rose (2003)
  • Masciandaro (2003)
  • Llewellyn (1999)
  • Healey (2001)
caution in interpretation
CAUTION IN INTERPRETATION
  • Changing Landscape
  • Complex and nuances
  • Practice v Form
  • Co-ordination
  • Federal states
trade off
TRADE OFF
  • Degree of unification
  • Role of Central Bank

CENTRAL BANK

• Power of central bank

• Conflicts of interest

• LLR scope

concentration
CONCENTRATION
  • Lower involvement of central bank
  • Smaller is the financial sector
  • Equity dominated governance
  • Concentration of intermediation
  • Public governance
conclusion
CONCLUSION
  • No Single Model
  • Diversity within models
final message
FINAL MESSAGE
  • Institutional structure is important
  • But how important?
  • Not a panacea
  • Do not exaggerate significance!
  • What is important
slide27
“New structures do not guarantee better regulation. More appropriate structures may help but, fundamentally, better regulation comes from stronger laws, better-trained staff and better enforcement. Any country that thinks that tinkering with the structure of agencies will, by itself, find past shortcomings is doomed to relive past crises”. (Jeff Carmichael, 2003)