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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

Towards an integrated supervisor: experiences from The Netherlands

Aerdt Houben

Head Supervisory Strategy department

De Nederlandsche Bank

Washington D.C., 6 June 2006

outline
Outline

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
1. International trend towards integrated supervision

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
1. Advantages of integrated supervision
  • 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
Alternative cross-sectoral models: one 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
Outline

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
2. Background
  • 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
2. Steps 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

2. Supervisory landscape before 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

Systemic

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

2. The Twin Peaks model

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
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
Outline

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
3. Early experiences
  • 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
3. First results
  • IMF FSAP 2004
  • Palmnet
  • FIRM
  • FTK
  • Vision on Supervision

2006-2010

More risk-oriented and transparent supervisory framework

wrap up
Wrap-up

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

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
Agenda
  • 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
Covenant DNB and AFM
  • 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
Covenant DNB and AFM
  • 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
Covenant DNB and AFM

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
Agenda
  • 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
Supervision in action: licensing

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
Supervision in action: Investigations
  • 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
Supervision in action: Information exchange

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
Supervision in action: Supervisory measures
  • 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
Supervision in action: Illegal institutions
  • Covenant applies equally to actions against an institution that is unregistered yet requires authorization
agenda29
Agenda
  • 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
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
Agenda
  • 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

Coordination on top level

  • 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
Agenda
  • 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

Overlap in supervision

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