The Single Supervisor, the Hungarian Case

1. The Single Supervisor,the Hungarian Case László Balogh, Hungarian Financial Supervisory Authority Conference at the World Bank, Washington D.C, December 4-5, 2003

2. Agenda • Introduction • Specificities of Hungary • Aims of Supervisory Integration • Steps taken • Results - Unresolved items • Practical challenges • Conclusions HFSA

3. There is no optimal and exclusive structure A single structure is not an aim itself, rather a tool to achieve effective consolidated supervision While harmonizing supervision, sectoral specificities should be treated Clear strategy and good managerial skills are important to handle the transition Legal, cultural, and historical environment should not be disregarded Introduction HFSA

4. Features of the Sector in Hungary • Open financial markets • Substantial foreign participation • 70% foreign capital in banking sector • 80% in the insurance sector • less than 15% public sector participation • Universal banking, since 1999 • Dominance of financial groups (cca. 80%) • Expansion of cross-sectoral products HFSA

5. Historical Background in Hungary • No long lasting supervisory history, starting the late 1980’s • Central Bank has never had a banking supervisory function • 3 predecessor institutions since 1990’s: • Banking and Capital Market Supervision - through the merger of (1996): • Banking Supervision • Securities and Exchange Supervision • Insurance Supervision • Pension Fund Supervision HFSA

6. Features of Supervision before 1999 • Fragmented supervisory structures • Diverging level of operative independence • Different approach and regulatory background to off-site and on-site examinations • Poor and slow supervisory co-operation among institutions • Low impact on regulation – MoF responsibility • Low international profile – low level of co-operation • Supervision remained on solo basis untill the end of the 1990’s HFSA

7. Aims of Supervisory Integration KEY OBJECTIVE: TO PROMOTE EFFICIENT CONSOLIDATED SUPERVISION Conditions thereof: • good and rapid information exchange, • good co-operation among supervisors, • approximating supervisory approach, • appropriate legal background • improved operative independence HFSA

8. Aims of supervisory integration (2) • Channelling all available information into one supervisory body • Grouping all supervisory knowledge at one place • Making benefit of synergies • Consolidated supervision of groups • Following evolving market structure • Expected economies of scale HFSA

9. Aims of supervisory integration(3) • Strengthening the operative independence of all three former supervisory structures • More in line with relevant international standards and tendencies • Prepare the supervision for the EU role • To avoid market captures HFSA

10. Setting up the Single Supervisor • Policy decision in September 1999 • Government decision in October 1999 • Relevant law adopted in December 1999 • Interim management of the transition • Establishment of the merged supervisory authority in April 2000 HFSA

11. Functional set-up HFSA

12. International road map • Permanent International Monitoring/ Compliance with standards • IMF-World Bank FSAP: pilot project (2000 and 2002) • Basle Core Principles: self-assessment exercise • IAIS: self-assessment exercise • IOSCO: self-assessment exercise • OECD:Regulatory Reform Project (2000) Country Review,Structural Chapter (2001) • EU: Peer Review (2001 and 2003) HFSA

13. Issues • Financial groups, consolidated supervision • Improving effective supervision • Harmonizing supervisory approach • Improve regulatory responsivness • Upgrading supervision vs.industry groups – to avoid industry capture • Better cost efficiency • Independent regulatory agency – new type of entity • EU perspectives HFSA

14. New place for the supervisory institution INSTITUTIONAL AUTONOMY Growing level of overall independence • President elected by the parliament for fixed six year term (nomination) - renewable • Supervisory decisions are final, they cannot be appealed at higher administrative body • Right of appeal with the court only HFSA

15. New place for the supervisory institution 2 INSTITUTIONAL AUTONOMY • HFSA cannot be instructed, it should only act under rules and regulations • Ring-fencing of daily supervisory responsabilities vis-avis the possible political influence • Internal operational rules are not approved any longer by the Minister of Finance HFSA

16. New place for the supervisory institution 3 • BUDGETARY AUTONOMY – Key issue • No contribution from Governement Budget • Self financing authority - fees paid by the industry BUT: • Fines cannot be used for covering operational costs! • Fees to be paid by the sector: established by law • The HFSA’s budget: part of the public finances • However: autonomy in deciding the allocations of expenses according to needs • The budget cannot be centralised by the Ministry of Finance HFSA

17. New place for the supervisory institution 4 • ADMINISTRATIVE AUTONOMY • Supervisors are civil servants • Supervisory liability is with the President of the Authority • Income level of the staff is over civil servants’ but much lower than the market level – limits the power of the HFSA to obtain the best experts on the market! • New step: getting closer to the market in income level, some exemptions from civil service payment scheme HFSA

18. New place for the supervisory institution 5 • REGULATORY AUTONOMY • Individualsupervisorydecisions are enforceable • Sanctioning power is ensured • Secondary regulations issued by the Government or the Minister of Finance in the form of decrees • Active involvment of the HFSA • Process is slow, rigid, burdensome • Supervisory Guidelines are issued -legally not binding, but followed by the industry • Unresolved: Power for the Supervision to regulate! HFSA

19. New place for the supervisory institution 6 • ACCOUNTABILITY AND TRANSPARENCY • Accountability to the Government • Controll by the State Audit Office • Regular reporting to the Government • New Step: Regular reporting to the competent parliamentary commission • Establishment of the Supervisory Council – Advisory body for the President HFSA

20. New place for the supervisory institution 7 ACCOUNTABILITY AND TRANSPARENCY • Accountability to the industry – dialogue! • Individual supervisory resolutions are made public – matter of policy • Reporting back to the industry- market analysis reports etc. • Supervisory recommendations for the industry • Predictability- sanctioning policy is published HFSA

21. Practical Challenges • Managerial skills for transition • Identification of the new institution • Mission statement • Elaborated widely within the institution • Positioning within the public institutions • Communication to market participants about renewed supervisory policy HFSA

22. Practical Challenges 2 • Financing the supervisory institution – from the market • Retaining experienced staff • Salary levels – close to market levels • Dilemma: • Strict prudential rules versus • International competitivness • Co-operation with the Central Bank - systemic stability HFSA

23. Practical Challenges 3 • Raising public awarness • Transposition of int’l supervisory standards • Building international network • Unification of IT systems • Finding a single headquarter • Revision and redefinition of supervisory policy • Revision of sectoral regulatory framework HFSA

24. Experience • Better overview of the industry • Better overview of regulatory deficiencies and inconsistencies • Better positioned to initiate legislative modifications • Better level of consolidated supervision • More interaction between sectoral experts • Better understanding of cross sectoral market attitude and risks • Over time: in function of results improving investment climate HFSA

25. Conclusions • Well prepared decision is needed • Once decision is made, quick implementation • Appropriate time needed, not an overnight • Determined, devoted and skillful managment of transition • Timing is key – a relatively stable period • Sequencing of steps HFSA

26. Conclusions 2 • Clear, upgraded, convincing objectives • For the staff • For the market • For the public, for the politicians • Public communication and awareness raising • No perfect, predefined development track • Need of flexibility, reevaluation during the process • Learning by doing • Cross fertilization of divergent supervisory experience HFSA

27. Conclusions 3 • IT system integration – good opportunity to reassess overall data quality and data need • International experience sharing • Bilateral • „Clearing houses” • Effective implementetion builds up credibility internally and internationally • Contributes to good investment climate HFSA

28. Possible Conflicts • Larger independence, but • Independence is not automatic! • One has to live with and protect it! • „De jure” and „de facto” independence • Independence and accountability hand in hand! • Overdominance of banking, to counterbalance! HFSA

29. Possible Conflicts 2 • Eventual overlooking of sectoral aspects • Lack of regulatory power • Continueos professional debates with the MoF • Rigid, time consuming, inefficient regulatory responses • Harmonising data provision • Focusing data provision • Streamlining data provision HFSA

30. Instead of a Happy End… After 4 years: reassassment of the HFSA by policy makers – new restrictive legislation is underway • Independence substantially cut back • Accountability to be replaced by direct ministerial controll • Early removal of top management in the middle of their tenure • Non observance of: • internationally recognized supervisory standards • World Bank - IMF FSAP recommendations • Salary scales to be pushed back to civil service level • Consequences…..? HFSA