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Gradual Integration of Financial Regulation and Supervision In the Czech Republic. Pavel Racocha May, 2004 Dubrovnik, Croatia. General considerations. Variety in institutional structure of financial regulation and supervision world-wide. Two basic models - traditional and functional.
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Gradual Integration of Financial Regulation and Supervision In the Czech Republic Pavel Racocha May, 2004 Dubrovnik, Croatia
General considerations • Variety in institutional structure of financial regulation and supervision world-wide. • Two basic models - traditional and functional. • Trend toward integration of financial regulation and supervision, especially in the EU and more developed countries. • However, traditional model with separate authorities still prevails world-wide.
General considerations - continued • Structures of financial regulation and supervision are country specific. • No optimal and generally recommended model. • Principle of subsidiarity is applied in EU. • Institutional structure is important, but there are other key pre-conditions for effective financial regulation and supervision.
Traditional model • Structure of financial regulation and supervision reflects sectors of financial intermediation e.g. banking, capital market, investment services and insurance. • Three alternatives: - three (or more) authorities - partial integration (twin peak arrangement etc.) - single authority
Functional model • Institutional structure of financial regulation and supervision follows regulatory matrix, which reflects market failures. • Areas of financial regulation and supervision correspond with types of market failures. • Information asymmetry - prudential regulation and supervision focusing on the safety and soundness of financial institutions.
Functional model - continued • Market misconduct - consumer protection and focus on fair trading in securities. • Systemic instability - focus on stability of the financial system as a whole, oversight of payment systems, lender of last resort. • Anti-competitive behaviour - regulation and supervision to ensure appropriate degree of competition in financial system
Functional model - basic alternative • One authority for prudential regulation and supervision of financial institutions • Other authority for regulation and supervision of market misconduct • Central bank - financial stability, lender of last resort, oversight of payment systems • Regulatory authority for protection of competition (for the whole economy)
Functional model - two other alternatives • Partial integration, for example, twin peak model. • Single authority, usually with exemption of protection of competition. - If concentrated within central bank, then central bank becomes a real mega-regulator. - Otherwise close co-operation between single authority (FSA) and central bank necessary.
Key pre-conditions for effective regulation and supervision • Clearly determined goals • Independence (operational, personal, financial) balanced by accountability and transparency • Adequate financial and human resources • Adequate legal framework supporting enforcement of regulations • Implementation of international standards • Regulation and supervision under one roof
Pros for integration of financial regulation and supervision in the Czech Republic • Four regulatory agencies are too many for relatively small Czech financial system. • Integrated structure is more transparent for the general public. • Diversification of businesses of financial institutions. • Supporting supervision of financial groups on a consolidated basis. • Synergies, e.g. economies of scope, to make better use of limited human resources.
Pros for integration of financial regulation and supervision in the Czech Republic - continued • Economies of scale, e.g single set of supporting services and uniform procedures. • Avoiding duplicities and/or shadow zone in financial regulation and supervision. • Pre-condition for level playing field for competition by unified regulatory rules and supervisory procedures whenever it is possible and desirable • Supporting international co-operation.
Risks and costs connected with integration of financial regulation and supervision in the Czech Republic • Decreasing efficiency of supervision on an operational level • High financial costs • Challenges connected with integration of different cultures • Challenges connected with integration of complex and different IT systems • Reputational risk
Why gradual approach • Integration is a complex task • Need for improvement in legal definitions of the goals of regulation and supervision • Consensus about the statute of unified authority has not yet been reached • Differences between existing agencies • Mitigation of risk of integration mismanagement
Project of integration of financial regulation and supervision • Consensual proposal of Ministry of Finance, Czech National Bank and Czech Security Commission (April 2004) • Two stages of integration: - First stage - establishment of twin peak system, principle of regulation and supervision under one roof is followed. - Second stage - integration of financial regulation and supervision into a single authority.
First stage - twin peak system • Integration of regulation and supervision of credit institutions - the CNB takes-over regulation and supervision of credit unions as of 30/6 2005. • Integration of supervision over remaining parts of financial system - SEC will become responsible for regulation and supervision of market conduct, securities sector and insurance and pension fund sector as of 31/12 2005.
First stage - twin peak system - continued • Responsibilities of Ministry of Finance: - preparation of laws - supervision of use of regular state support for building savings scheme, pension funds and life insurance
Second stage • Project of integration (December 2006). • Implementation to be completed ca one year before joining EMU, e.g. roughly in 2009. • Key questions remain open including: - the issue of independence of unified authority - the role of the CNB and the SEC - regulation and supervision under one roof