INSTITUTIONAL STRUCTURE OF FINANCIAL REGULATION: THE BASIC ISSUES

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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, 4-5th December, 2003

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STRUCTURE OF PAPER

• Why institutional structure is important
• Range of Options Regulation Matrix
• Advantages and Disadvantages
• Role of Central Bank
• International experience

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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

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• 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

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Universal Functions

• Prudential regulation
• Prudential supervision
• Systemic stability
• Conduct of business regulation
• Conduct of business supervision

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• Safety Net arrangements
• Liquidity assistance
• Insolvent institutions
• Crisis resolution
• Market integrity

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ORIGIN OF THE DEBATE

• Financial structure
• Financial innovation
• Financial conglomerates
• Piece-meal responses
• Objectives change
• Internationalisation
• Accountability
• Effectiveness Efficiency

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KEY ISSUES

• Number of agencies
• Spectrum
• Prudential v Conduct of business
• Role of central bank
• Structure of agencies
• Objectives
• Co-ordination

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• Political independence
• Accountability
• Costs
• Role of competition agency
• Concentration of powers
• Self regulation?
• International co-ordination

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IMPORTANCE OF THE ISSUE

• Effectiveness
• Clarity of responsibility
• Conflict resolution
• Costs
• Duplication
• Regulatory arbitrage
• Public perceptions

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INTEGRATION

• Integration/Unified agencies
• Mega agency

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REGULATORY MATRIX

• Prudential Regulation
• Banks
• Insurance
• Securities
• Systemic
• Consumer Protection
• Competition

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A SPECTRUM

• Fragmented
• ?
• Integrated
• ?
• Twin Peaks
• ?
• Mega

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ALTERATNIVE CRITERIA

1. Institutional
2. Function
3. Objectives
4. Market Failures

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CASE FOR MEGA AGENCY

• Economies of scale
• Economies of scope (synergies)
• Group-wide view of risks
• Coverage
• Simplicity
• Blurred distinctions

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• Business structure
• Consistency
• Regulatory arbitrage
• Scarce resources
• Accountability
• Costs on firms

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CASE FOR SPECIALIST AGENCIES

• Differences persist
• Different risks
• Different approaches
• Distinctions eroded
• Conflict resolution political

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• Concentration of power
• Moral hazard
• Bureaucratic
• Competition in regulation
• Economies of scale?
• Focus
• Legal issues

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TWIN PEAKSAUSTRIAL MODEL

1. Single/Integrated Prudential Agency
2. Single Conduct or Business Agency
3. Competition Agency
4. Systemic Stability Agency

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CENTRAL BANK

• Systemic stability universal
• Concentration of power
• Conflicts of interest
• Bail-outs
• LLR

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SURVEYS

• Luna Martinez and Rose (2003)
• Masciandaro (2003)
• Llewellyn (1999)
• Healey (2001)

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CAUTION IN INTERPRETATION

• Changing Landscape
• Complex and nuances
• Practice v Form
• Co-ordination
• Federal states

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TRADE OFF

• Degree of unification
• Role of Central Bank
• CENTRAL BANK
• Power of central bank
• Conflicts of interest
• LLR scope

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CONCENTRATION

• Lower involvement of central bank
• Smaller is the financial sector
• Equity dominated governance
• Concentration of intermediation
• Public governance

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CONCLUSION

• No Single Model
• Diversity within models

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FINAL MESSAGE

• Institutional structure is important
• But how important?
• Not a panacea
• Do not exaggerate significance!
• What is important

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• 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)