The Rationale for Supervisory Integration in Latvia

1
The Rationale for Supervisory Integration in
Latvia

• Uldis Cerps
• Chairman, Financial and Capital Market
  Commission, Latvia
• World Bank and International Monetary Fund
  conference
• "Aligning Financial Supervisory Structures with
  Country Needs"

2
Background of the Latvian Market

• Latvia member state of the European Union since
  2004 with a population of 2.4 million
• Intensive foreign ownership by West European
  banking groups(gt50)
• Banks account for over 95 of financial system
  assets
• Insurance market dominated by West European
  insurance groups, but relatively small
• Modern, dematerialized, but very small stock
  market operated by OMX
• Financial Sector contributes over 4 to Latvias
  GDP

3
Old Regulatory Structure Before 2001

• Banking supervision Bank of Latvia
• Securities market supervision Securities Market
  Commission (oversight by the Ministry of Finance)
• Insurance supervision State Insurance
  Supervisory Inspection (oversight by the Ministry
  of Finance)
• Deposit guarantee system Deposit Guarantee Fund
  Administration (a division of the Ministry of
  Finance)

4
New Regulatory Structure since 2001

• FKTK A single regulatory agency in charge of
  banking, insurance and securities market
  supervision and management of the Deposit
  Guarantee Fund and the Fund for the protection of
  the insured
• Managed by a 5 person board, all of which are
  professional appointments 2 by the parliament ,
  and 3 by the chairman of FKTK

5
Some Lessons Learned

• Lesson 1
• Understand whether your country REALLY needs an
  FSA and put it on paper.
• There is NO single best model for supervising
  financial markets
• Try answering the questions of Tomasso
  Padoa-Schioppa
• One supervisor or many?
• Inside or outside the central bank?

6
The Case for an FSA in Latvia

• Need to share the competence and experience
  accumulated in the banking supervision after
  withering the banking crisis of 1995 and 1998
• Need for level playing field and consistent
  regulatory framework across sectors
• Need for a politically neutral and cost-efficient
  model to provide adequate financing for
  supervision of all financial market sectors
• Need to better manage cross-sector issues
• Need to enhance information flow among the
  regulators

7
The Case for the FSA in Latvia (cont.)

• Need to make sure that the supervisors have
  equivalent powers in all financial sectors
• Stop competing for the best talent among the
  supervisory authorities and create functional
  synergies
• FSA model worked convincingly well in
  Scandinavian countries
• There was some (albeit not much) academic debate
  on the issue which policymakers could study back
  in the year 2000

8
Lesson 2. Plan transition carefully

• One shall know who is (will be) in charge at the
  level of top management at the early stages of
  transition uncertainty irritates everybody and
  spoils climate
• One must have at least a broad understanding on
  the proposed organizational structure of the FSA
  and it shall make sense
• Outsourcing certain services (e.g. IT, security,
  book-keeping etc.) greatly helps to minimize the
  burden of transition
• Have realistic deadlines (in Latvia, the real
  work on merging 4 institutions took circa 8
  months)

9
Lesson 3. Think of your people

• Downsizing (often significant) is always
  accompanying mergers, even those of regulatory
  agencies
• People are prepared already. They just want to
  hear the truth.
• Make your values known to everybody and stick to
  them
• Employment decisions need to be made, as far as
  possible, at the initial stages of transition

10
Lesson 4. Formalize what can be formalized

• Document and make public all processes,
  procedures and products who delivers what,
  when, who is involved, etc.
• Document and make public your annual work plan
• Document and make public your budget, preferably
  for at least 2 years ahead
• Consider introducing ISO quality standard at
  minimum you will make sure that the FSA is not
  accused of lacking proper procedures

11
Lesson 5. Work closely with the industry

• Formalize consultation process with the industry
• Make use of consultative panels before adopting
  new regulatory measures
• Make sure the industry understands the need for
  your country to follow the best international
  practice in the financial services business

12
Lesson 6. If you happen to be the boss...

• Have a clear picture of your goals for the
  market, and your goals for the FSA
• Make sure the top management works as a team
• Just in case. Make a list containing conditions
  when you will have no other option but to leave

13
Final Remarks

• We in Latvia are generally very happy with the
  new model of a single regulatory authority
• It helps us to face new challenges common to all
  supervisors in Europe
• Relationship between home and host supervisors
• Harmonization of cross-sectoral regulation
• Dealing with complex models of Basel II
• Dealing with large cross-border financial groups

14
Thank you!

• Contacts
• Financial and Capital Market Commission
• Kungu iela 1, LV 1050, Riga
• Latvia
• phone [phone]
• www.fktk.lv