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Borio, C.E.V., and R. Filosa, 1994, “The Changing Borders of Banking: Trends and Implications,” BIS Economic Paper, No. 43, December (Basle: Bank for International Settlements).
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Goodhart, C.A.E., 1995, “Some Regulatory Concerns,” London School of Economics Financial Markets Group, Special Paper, No. 79, December.
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Comments received from MAE staff including Michael Andrews, Udaibir Das, and V. Sundararajan are gratefully acknowledged.
Throughout this paper we take “banks” and “banking” to refer to any institution that performs the payments system and intermediation functions of a bank whether or not it uses the word in its name.
For the time being the issue of whether other parts of the financial sector (e.g., pension funds or finance houses) should also be included within the scope of a unified regulatory agency will be considered in Section V below.
It may, however, assist in the elimination of gaps in regulatory coverage which in some circumstances may have contributed to the financial crisis in the first place, for example as the result of a systemically-significant unsupervised group of financial institutions.
Basel Committee (1997), Core Principle 1 states, “An effective system of banking supervision will have clear responsibilities and objectives for each agency involved in the supervision of banking organizations. Each such agency should possess operational independence and adequate resources. A suitable legal framework for banking supervision is also necessary, including provisions relating to authorization of banking organizations and their ongoing supervision; powers to address compliance with laws as well as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place.” While referring specifically to banking, the prerequisites identified in this Core Principle are equally applicable to the regulation of any financial institution or activity. The Code of Good Practices on Transparency of Monetary and Financial Policies (“Transparency Code”) also contains a number of principles that are relevant to these issues.
Transparency Code, Part VIII.
The Practitioner Panel was also established in November 1998, and is now placed on a statutory basis by the Financial Services and Markets Act. Its membership comprises senior representatives of the businesses that are regulated by the FSA. The Panel may make representations to the FSA, and the Act requires that the Authority “have regard” to such representations. By s.11, if the FSA disagrees with the view expressed or proposal made in the representation it must give the panel a statement in writing of its reasons for disagreeing, and this statement may be made public.
Sometimes referred to as “bancassurance” or “All-Finanz” groups.
This literature is relatively extensive, given that the subject of regulatory structure has otherwise been under-researched. First to make this argument were Borio and Filosa (1994). Their work has been followed by Goodhart (1995), Taylor (1995), and Goodhart et al (1998).
These groups combine at least two of the activities of banking, insurance, and securities.
Achieving agreement on assigning a lead regulator has proved remarkably difficult in practice.
Particularly when they are formed to evade effective supervision.
It may also be significant that international cooperation also tends to occur on institutional lines and in this respect the work of the Joint Forum is the exception rather than the rule.
In such circumstances, constructive ambiguity may not be all that constructive.
However, as Goodhart and Schoenmaker argue, the validity of this argument is to a large degree dependent on the structure of the banking and financial system; the greater that the system involves intermediaries financing maturity mismatch positions through the wholesale markets the greater the potential for conflict between monetary and financial stability goals.
While RTGS system and other institutional arrangements to control risk may act to decrease systemic risks, issues relating to the increased complexity and opacity of settlement arrangements pose a new set of concerns for the supervisor. (Financial Sector Inquiry: Final Report (1997), p. 377).
This has been a problem in Latvia, for example, where locating suitable accommodation for the unified agency has contributed to delays in implementation.
This outcome was avoided in the U.K. because a new centralized management structure was implemented in advance of the new legislation.
The Finnish Financial Supervisory Authority is responsible for the supervision of banks and securities companies. Insurance company regulation is combined with the regulation of private sector pension funds in a separate authority. This arrangement reflects the relative unimportance of financial conglomerates in Finland compared with other Nordic countries. See Taylor and Fleming (1999) for further discussion.
This argument was influential with the Australian Wallis inquiry which decided against establishing a single regulator for the financial sector. See Commonwealth of Australia Financial System Inquiry: Final Report (1997).
This arrangement has not been widely adopted although the regulatory structures in France, Germany and Italy reflect it to some degree (prudential regulation in those countries not being fully unified). Thus in France, the Commission Bancaire is the prudential supervisor of banks and securities firms, but the Commission des Operations de Bourse (COB) is the market surveillance regulator. The Australian approach deals with the issue in a different way, by combining prudential regulation in respect of banks and insurance companies in the Australian Prudential Regulatory Authority (APRA). The Australian Securities and Investments Commission (ASIC) is responsible for all aspects of securities regulation: prudential, business conduct, market integrity, and disclosure by listed companies.
This is likely to be a particular concern in transition or developing economies where regulatory capacity may, in any case, be already relatively weak.