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INSTITUTIONAL STRUCTURE OF FINANCIAL REGULATION: THE BASIC ISSUES

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, 4-5 th December, 2003.

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INSTITUTIONAL STRUCTURE OF FINANCIAL REGULATION: THE BASIC ISSUES

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  1. 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

  2. STRUCTURE OF PAPER • Why institutional structure is important • Range of Options: Regulation Matrix • Advantages and Disadvantages • Role of Central Bank • International experience

  3. 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

  4. 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

  5. Universal Functions • Prudential regulation • Prudential supervision • Systemic stability • Conduct of business: regulation • Conduct of business: supervision

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

  7. ORIGIN OF THE DEBATE • Financial structure • Financial innovation • Financial conglomerates • Piece-meal responses • Objectives change • Internationalisation • Accountability • Effectiveness & Efficiency

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

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

  10. IMPORTANCE OF THE ISSUE • Effectiveness • Clarity of responsibility • Conflict resolution • Costs • Duplication • Regulatory arbitrage • Public perceptions

  11. INTEGRATION • Integration/Unified agencies • Mega agency

  12. REGULATORY MATRIX • Prudential Regulation • Banks • Insurance • Securities • Systemic • Consumer Protection • Competition

  13. A SPECTRUM Fragmented  Integrated  Twin Peaks  Mega

  14. ALTERATNIVE CRITERIA • Institutional • Function • Objectives • Market Failures

  15. CASE FOR MEGA AGENCY • Economies of scale • Economies of scope (synergies) • Group-wide view of risks • Coverage • Simplicity • Blurred distinctions

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

  17. CASE FOR SPECIALIST AGENCIES • Differences persist • Different risks • Different approaches • Distinctions eroded • Conflict resolution: political

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

  19. TWIN PEAKSAUSTRIAL MODEL • Single/Integrated Prudential Agency • Single Conduct or Business Agency • Competition Agency • Systemic Stability Agency

  20. CENTRAL BANK • Systemic stability: universal • Concentration of power • Conflicts of interest • Bail-outs • LLR

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

  22. CAUTION IN INTERPRETATION • Changing Landscape • Complex and nuances • Practice v Form • Co-ordination • Federal states

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

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

  25. CONCLUSION • No Single Model • Diversity within models

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

  27. “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)

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