Financial Market Law and Regulation Theory and practice of financial market regulation

1. Financial Market Law and RegulationTheory and practice of financial market regulation Carmine Di Noia

2. Financial markets Definition/s Markets – Intermediaries – Financial Instruments Banking, Securities, Insurance (further functional and timing differentiation) • Monetary (short term)/capital (medium-long term) • Primary/Secondary • Retail/Wholesale • Internal/International • Regulated/Unregulated

3. Financial Intermediaries: • Banks, securities int., insurance firms • Banks: real time claim with sure nominal value • Commercial Banks/Investment banks • Dealing (Own account/on behalf of), Portfolio management, advisory services • Life Insurance

4. 1. Why do we regulate(/supervise)? Same reasons of public intervention in the economy: • Stability • Efficiency • Equity

5. 2. Why do we regulate(/supervise)? • Macroeconomic Stability (Monetary Policy, LLR, Payment Systems, Settlement and Clearing, Wholesale Mkts) • Microeconomic Stability (Prudential Supervision, entry/exit controls, registers, capital requirements, limits to activities, controls on off-balance operations, protection schemes…) • Market Transparency and Investor Protection (disclosure requirements, proper behaviour, homogeneous treatment, conflict of interest) • Efficiency: Safeguarding and Promoting Competition

6. 3. Theory of financial intermediation and regulation • Traditional or classic • New view • Asymmetric info • New theory

7. Traditional theories • Banks: only inter-mediaries • Economic stability/positive slope of interest rate curve • Reasons for banks: timing transformation, risk sharing, transaction cost reduction, investment divisibility, payment services • Deposits: lower return than market

8. Traditional regulation • Banks: only inter-mediaries = Banks important! Only intermediaries in the economy: must be regulated! • Nazionalization, antitrust, asset and liabilities limitations, (functional, geographical, reserve requirements) • Cons: inefficient, no economies of scale and scope, no innovation

9. New view • Gurley and Shaw, Tobin • Financial Innovation • Speciality of Banks due to regulation, NOT nature! • End of banks due to competition by other intermediaries? • Deregulation

10. Asymmetric info theories • Asset asymmetries: scope economies for monitoring (Diamond) • Liability asymmetries: optimal deposit (Diamond-Dybvig) • Risk-based regulation (Basle, AD risk based)

11. New theories • No difference between banks and other intermediaries • “Less bank” (deposit and loans, more services (asset management, underwriting, advice) • Inter-mediaries among entities in surplus and deficit on one side and financial markets on the other • Regulation by objective (twin/four peaks) • Separation central banking/banking supervision • Federal dimension

12. 4. How do we regulate at national level • INSTITUTIONAL (by subject) • REGULATION BY OBJECTIVE • SINGLE REGULATOR • FUNCTIONAL - by activity

13. Financial supervision in selected countries, 2012 CB (Central bank), PA (Prudential Authority on banks, securities and insurance, different from CB), B (Prudential Agency for banks), IP (Investor protection Authority for banks, securities and insurance), S (Securities Authority), I (Insurance Authority), PF (Pension Fund Authority), FSA (Single prudential and investor protection regulator), G (Government department)

14. “Optimal” Model? • Different for industrial, emerging and developing countries. • Path-dependence: any reform starts from a status quo, and this is often “hybrid”, characterized by the adoption of regulatory regimes that mix different elements of the models above. • In Europe, today, the debate focuses on: a) centralizing powers and responsibilities versus maintaining a mainly domestic view, b) choosing a regulatory model (currently in the single countries).

15. Domestic regulation/supervision still good? • One currency (but not UK), one monetary policy.....different FM rules? Consolidated regulation • How to deal with financial groups and conglomerates? Need some consolidated supervision (more than lead regulator) • Incentives for policy makers and regulators to compete in regulatory or supervisory laxity in order to attract more firms and funds locally. At the same time, it is not clear who will pay the costs of insolvency. And it is not clear how a solvency (or even a liquidity) crisis will be managed. • Hence…More Harmonization in FMR is needed as FM integration goes on (M&A among exchanges, internet, X-border mergers among intermediaries, dual and X-border offerings and listings), in order to promote further integration

16. However… • Not necessarily harmonization means full centralization. The Euro area (but UK?) may be too large for one (or more) central regulator (s) • Too many different national rules exist (commercial codes, company laws, insolvency procedures, corporate governance) • Fiscal policies still not harmonized • In many cases, national enforcement might still be desirable • Too early for full centralization….too late for complete decentralization

17. Then...September 12 package..... • Exclusive power of ECB on prudential supervision of banks of Euro area • Opt in by EU non euro countries • Supervisory Board within ECB • Still some parts of a Federal model • Securities and Insurance untouched • Use of art. 127(6) TFEU

18. The sourcesof the EU financiallegalframework • Lisbon treaty • Directives, Regulations, Communications, .... • Commission/Council/Parliament or other • Minimum/Maximum Harmonization • Implementation • Level 1 or 2

19. Figure 1. The Lamfalussy Structure Council Commission Parliament L1 Legislation L2 Implementing details ESC1 EIOPC1 EBC1 L3 Guidelines CEIOPS3 CEBS2 CESR3 Commission L4 Enforcement EBC = European Banking Committee ESC = European Securities Committee EIOPC = European Insurance and Occupational Pensions Committee CEBS = Committee of European Banking Supervisors CESR = Committee of European Securities Regulators CEIOPS = Committee of European Insurance and Occupational Pensions Supervisors ¹ Finance ministries ² Supervisors and Central Banks ³ Supervisors