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Towards an integrated supervisor: experiences from The Netherlands Aerdt Houben Head Supervisory Strategy department De Nederlandsche Bank Washington D.C., 6 June 2006 Outline 1. What determines the structure of financial supervision? International trend towards integrated supervision

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Towards an integrated supervisor experiences from the netherlands l.jpg

Towards an integrated supervisor: experiences from The Netherlands

Aerdt Houben

Head Supervisory Strategy department

De Nederlandsche Bank

Washington D.C., 6 June 2006


Outline l.jpg
Outline Netherlands

1. What determines the structure of financial supervision?

  • International trend towards integrated supervision

  • Advantages of integrated supervision

  • Alternative cross-sectoral models: one size does not fit all

    2. Why did The Netherlands reform, and how?

  • Background

  • Steps towards the new framework

  • The Twin Peaks model: merger and reorganization

  • What have we accomplished so far?

    • Early experiences

    • First results


  • 1 international trend towards integrated supervision l.jpg
    1. International trend towards integrated supervision Netherlands

    1971

    2002

    2003

    2004

    2006

    1985

    1987

    1988

    1992

    1999

    2000

    Norway

    Denmark

    Austria

    Germany

    Estonia

    Australia

    Iceland

    Ireland

    Czech R.

    Slovakia

    Canada

    Belgium

    The Netherlands

    AFM: CONDUCT

    DNB: PRUDENTIAL

    Singapore

    UK

    Japan

    Hungary

    Sweden


    1 advantages of integrated supervision l.jpg
    1. Advantages of integrated supervision Netherlands

    • Enhances the overall quality of supervision:

    • Promotes cross-sectoral consistency of supervision

    • Facilitates better monitoring of the financial system

    • Allows rapid policy responses

    • Reduces scope for regulatory overlap or white spots

    • Maximizes economies of scale and scope in supervision

    • Strengthens accountability


    Alternative cross sectoral models one size does not fit all l.jpg
    Alternative cross-sectoral models: Netherlandsone size does not fit all

    Prudential and Conduct-of-Business supervision integrated?

    yes

    no

    “One Peak”

    Singapore, Ireland,

    Czech Republic,

    Slovakia

    yes

    “Twin Peaks”

    The Netherlands

    Integrated with

    Central Bank?

    “FSA”

    UK, Japan, Canada

    Scandinavia,

    Belgium and more

    “Three Peaks”

    Australia

    Germany,Austria

    no


    Outline6 l.jpg
    Outline Netherlands

    1. What determines the structure of financial supervision?

    • International trend towards integrated supervision

    • Advantages of integrated supervision

    • Alternative cross-sectoral models: one size does not fit all

      2. Why did The Netherlands reform, and how?

    • Background

    • Steps towards the new framework

    • The Twin Peaks model: merger and reorganization

  • What have we accomplished so far?

    • Early experiences

    • First results


  • 2 background l.jpg
    2. NetherlandsBackground

    • Need for change: Increasing demands on supervisor’s effectiveness and accountability

    • Key consideration (1): Interwoven financial sector (products and institutions)

    • Key consideration (2): Concentrated financial sector

    • Path dependence: Central Bank with

      • established reputation

      • extensive financial sector and supervisory expertise

      • autonomous administrative authority


    2 steps towards the new framework l.jpg
    2. NetherlandsSteps towards the new framework

    • Removal of barriers to financial conglomerates (1990)

    • Council of Financial Supervisors established (1999)

    • New supervisory structure: establishment AFM (2002)

    • Merger between DNB and PVK (2004)


    Slide9 l.jpg

    2. Supervisory landscape Netherlandsbefore merger DNB-PVK and establishment AFM

    Sectoral

    Systemic

    Prudential

    Conduct of business

    Not typical securities

    Typical securities

    Per sector

    Cross sector

    Per sector

    Cross sector

    Credit institutions

    Mutual funds

    DNB

    DNB

    RFT

    DNB

    RFT

    STE

    Insurance companies

    Pension funds

    PVK

    PVK

    Securities firms

    STE

    STE


    Slide10 l.jpg

    Systemic Netherlands

    Prudential

    Conduct of business

    Per sector

    Cross sector

    Per sector

    Cross sector

    Credit institutions

    Mutual funds

    DNB

    AFM

    Insurance companies

    Pension funds

    Securities firms

    2. Supervisory landscape after merger DNB-PVK and establishment AFM

    Functional


    Slide11 l.jpg

    2. The Twin Peaks model Netherlands

    Before2004

    DNB (banks,

    investment firms)

    Conduct supervision

    Prudential supervision

    Lender Of Last Resort

    Systemic Stability

    PVK (insurers,

    pension funds)

    Conduct supervision

    Prudential supervision

    STE/AFM (securities

    firms,exchanges)

    Conduct supervision

    Prudential supervision

    DNB

    AFM

    Prudential Supervision

    Market Conduct Supervision

    Conduct-of-Business Supervision

    After 2004

    Systemic Stability

    Lender Of Last Resort


    2 merger and internal reorganization required more than 2 years l.jpg
    2. Merger and internal reorganization required more than 2 years

    April 2004

    Dec

    2002

    June 2003

    phase 4

    12 months

    phase 1

    6 months

    phase 3

    5 months

    Oct 2003

    phase 2

    4 months

    Strategy:

    behind the integration

    Planning:

    Integration process

    Implementation:

    from day 1

    Completion:

    full integration

    • Formulate strategy and logic behind integration

    • Identify synergy targets

    • Determine main new modes of operation

    • Develop criteria for the implementation process

    • Develop new main organisational model

    Implement organizational structure and processes

    Monitor synergies and cost savings

    Develop plan of action for phase 4

    Implement organizational structure and processes

    Monitor synergies and use replacement policy

    Resolve outstanding issues

    Develop detailed structure of organisational model

    Identify and implement quick wins

    Develop broad implementation planning

    Determine monitoring parameters and process for monitoring


    Outline13 l.jpg
    Outline years

    1. What determines the structure of financial supervision?

    • International trend towards integrated supervision

    • Advantages of integrated supervision

    • Alternative cross-sectoral models: one size does not fit all

      2. Why did The Netherlands reform, and how?

    • Background

    • Steps towards the new framework

    • The Twin Peaks model: merger and reorganization

  • What have we accomplished so far?

    • Early experiences

    • First results


  • 3 early e xperiences l.jpg
    3. Early e yearsxperiences

    • Increase in effectiveness and efficiency of supervision

    • Better view of overarching financial stability risks

    • Simultaneous integration/reorganization proved efficient

    • Institute specific labour agreement proved practical

    • Employees need time to adjust


    3 first results l.jpg
    3. yearsFirst results

    • IMF FSAP 2004

    • Palmnet

    • FIRM

    • FTK

    • Vision on Supervision

      2006-2010

    More risk-oriented and transparent supervisory framework


    Wrap up l.jpg
    Wrap-up years

    Three propositions:

    • Supervisory structures are made-to-measure

    • Twin Peaks is optimal model for The Netherlands

    • Because of supervisory overlap, DNB and AFM need to cooperate closely


    Towards an integrated supervisor experiences from the netherlands18 l.jpg

    Towards an integrated supervisor: experiences from The Netherlands

    René Geskes

    Head Conduct of Business Supervision

    Authority for the Financial Markets

    Washington D.C., 6 June 2006


    Agenda l.jpg
    Agenda Netherlands

    • Covenant DNB and AFM

    • Supervision in action: how does it work?

    • Regulation, policy and domestic and international consultations

    • Coordination on top level

    • Overlap in supervision


    Covenant dnb and afm l.jpg
    Covenant DNB and AFM Netherlands

    • The new covenant between the AFM and the DNB was signed in 2004

    • Agreement about

      • Licensing process

      • Investigations

      • Regulatory measures

      • Information exchange

      • Illegal financial institutions

    • and how to avoid getting in each other’s way


    Covenant dnb and afm21 l.jpg
    Covenant DNB and AFM Netherlands

    • Functional division of supervisory responsibilities, distinguishing between general, market conduct and prudential aspects of business

    • and how to avoid getting in each other’s way

    General aspects of operations

    Organizational structure, strategy, reporting lines, proper management and internal (ICT) controls

    Market conduct-specific aspects of operations

    Client administration, separation of assets, complaint handling, client relations and supplying information to (prospective) clients, Chinese walls, insider dealing, price rigging and conflict of interest and compliance

    Prudential aspects of operations

    Solvency risk management (credit-, market-, operational-, liquidity- and insurance risk), financial guarantees, capital and large exposure reporting and prudent management in outsourcing activities


    Covenant dnb and afm22 l.jpg
    Covenant DNB and AFM Netherlands

    credit institutions and insurers

    securities institutions and collective investment schemes

    General aspects of operations

    AFM

    DNB

    Market conduct-specific aspects of operations

    AFM

    DNB

    Prudential aspects of operations


    Agenda23 l.jpg
    Agenda Netherlands

    • Covenant DNB and AFM

    • Supervision in action: how does it work?

    • Regulation, policy and domestic and international consultations

    • Coordination on top level

    • Overlap in supervision


    Supervision in action licensing l.jpg
    Supervision in action: licensing Netherlands

    DNB (prudential)

    Authorizes banks and insurance companies

    • Opinion on:

    • fit and properness of managers

    • operational management (including AO/IC)

    Sharing of information

    AFM (Market Conduct)

    Authorizes securities institutions and collective investment schemes


    Supervision in action investigations l.jpg
    Supervision in action: Investigations Netherlands

    • Planned investigations

    Sharing of planning and interim reports (each quarter)

    Prior to investigation request for relevant information

    Special wishes must be addressed!

    If suspected failing falls in field of other regulator: information request!

    • Unplanned investigations

    Notification of other regulator

    • Reporting

    Joint reporting or sharing of results with due observance of statutory secrecy provisions


    Supervision in action information exchange l.jpg
    Supervision in action: Information exchange Netherlands

    Both supervisors must, either by request or on their won initiative, exchange information on institutions under their supervision!

    All data which supervised entities are required to supply (standard legal obligations)

    Examples: annual statements, management letters, auditor’s reports

    Exchange without notification to supervised entity

    • Standard information

    Is specific. Notification of exchange of such information unless undesirable in the interest of an ongoing investigation or other circumstances

    • Other information


    Supervision in action supervisory measures l.jpg
    Supervision in action: Supervisory measures Netherlands

    • General measures

    Can be taken autonomously by each supervisor after – if possible - consultation of the other supervisor

    (unless impossible)

    • “Radical’ measures

    Power is confined to authorizing supervisor

    First – if possible – consultation of the other supervisor

    Non-authorizing supervisor may initiate a radical measure by issuing a substantiated advice to the authorizing supervisor!!!

    Authorizing supervisor assesses the advice against the principals of sound management – no fact finding!


    Supervision in action illegal institutions l.jpg
    Supervision in action: Illegal institutions Netherlands

    • Covenant applies equally to actions against an institution that is unregistered yet requires authorization


    Agenda29 l.jpg
    Agenda Netherlands

    • Covenant DNB and AFM

    • Supervision in action: how does it work?

    • Regulation, policy and domestic and international consultations

    • Coordination on top level

    • Overlap in supervision


    Regulation policy and domestic and international consultations l.jpg
    Regulation, policy and domestic and international consultations

    • Co-ordination and mutual attuning promote the adequate arrangements of policies and regulations

    • Jointly advise of the Minister of Finance

    • Inform each other concerning current issues addressed within international co-operative bodies


    Agenda31 l.jpg
    Agenda consultations

    • Covenant DNB and AFM

    • Supervision in action: how does it work?

    • Regulation, policy and domestic and international consultations

    • Coordination on top level

    • Overlap in supervision


    Slide32 l.jpg

    • Appointment of coordinators:

      Supervision

      Policy and regulation

      Domestic and international consultation

    • Board level meetings 4 times a year

    • Standing committees/temporary working groups if necessary


    Agenda33 l.jpg
    Agenda consultations

    • Covenant DNB and AFM

    • Supervision in action: how does it work?

    • Lawmaking, policy and (inter)national coordination

    • Coordination on top level

    • Overlap in supervision


    Slide34 l.jpg

    Supervision Coordination Bureau

    • Aim: limit the burden for supervised institutions

    • Register and resolve complaints concerning overlap in operational supervision by the AFM and DNB

    • Highlight problems where the pattern of complaints points to potential shortcomings in regulations, policy or implementation, that in turn call for longer-term solutions

    • Decision and take measures. The institution concerned will be notified of the position of the supervisory authorities