Developments in Financial Supervision in Institutional Terms: Alignment to the Hungarian Needs

1. Developments in Financial Supervision in Institutional Terms:Alignment to the Hungarian Needs Group of Banking Supervisors from Central and Eastern Europe, Annual Conference Dubrovnik, May 26-28, 2004

2. There is no optimal and exclusive structure of supervision A single structure is not an aim itself, rather a tool to achieve effective consolidated supervision While harmonizing supervision, sectoral specificities should be observed Legal, cultural, and historical environment of the country should not be disregarded In case of a merger, clear strategy and good managerial skills are important to handle the transition Introductory Thesis

3. Hungarian Financial Supervisory Authority • Hungarian Financial Suprvisory Authority – single financial supervisor • Established in April 2000 • Responsible for the overall financial sector • In operation for 4 years • Financed exclusively by the sector

4. Hungarian Financial Supervisory Authority 2 • Supervisory decisions are final, they can be appealed with the court only • Supervisory resolutions are mandatory for individual institutions, including fines • Non- binding supervisory guidelines • No regulatory power, legally binding regulations cannot be issued by the HFSA

5. Features of the Sector in Hungary in the late 1990’s • Open financial markets • Substantial foreign participation • 70% foreign capital in banking sector(95% today) • 90% in the insurance sector • Less then 18% public sector participation(1%) • Universal banking, since 1999 • Dominance of financial groups (cca. 80%) • Expansion of cross-sectoral products

6. Historical Background in Hungary • No long lasting supervisory history, starting the late 1980’s • Central Bank has never had a banking supervisory function • 3 predecessor institutions since 1990’s: • Banking and Capital Market Supervision - through the early merger of (1996): • Banking Supervision • Securities and Exchange Supervision • Insurance Supervision • Pension Fund Supervision

7. Features of Supervision before 1999 • Fragmented supervisory structures • Diverging level of operative independence • Different approach and regulatory background to off-site and on-site examinations • Poor and slow supervisory co-operation among institutions • Low impact on regulation – MoF responsibility • In general: low international profile – low level of co-operation • Supervision remained on solo basis untill the end of the 1990’s

8. OBJECTIVE: TO PROMOTE EFFICIENT CONSOLIDATED SUPERVISION Conditions thereof: • good and rapid information exchange, • good co-operation among supervisors, • approximating supervisory approach, • appropriate legal background • improved operative independence

9. Aims of supervisory integration • Channelling all available information into one supervisory body • Grouping all supervisory knowledge at one place • Making benefit of synergies • Consolidated supervision of groups • Following evolving market structure • Expected economies of scale

10. Aims of supervisory integration(2) • Strengthening the operative independence of all three former supervisory structures • More in line with relevant international standards and tendencies • Prepare the supervision for the EU role • To avoid market captures

11. Setting up the Single Supervisor • Policy decision: in September 1999 • Government decision in October 1999 • Relevant law adopted in December 1999 • Interim management of the transition • Establishment of the merged supervisory authority in April 2000

12. Functional set-up in 2000-2003

13. International road map • Permanent International Monitoring - Compliance with international standards • IMF-World Bank FSAP: pilot project (2000 and 2002) • Basle Core Principles: self-assessment exercise • IAIS: self-assessment exercise • IOSCO: self-assessment exercise • OECD:Regulatory Reform Project (2000) Country Review,Structural Chapter (2001) • EU: Peer Review (2001 and 2003)

14. Issues • Financial groups, consolidated supervision • Improving effective supervision • Harmonizing supervisory approach • Improve regulatory responsivness • Upgrading supervision vs.industry groups – to avoid industry capture • Better cost efficiency • Independent regulatory agency – new type of entity • EU perspectives

15. Practical Challenges • Managerial skills for transition • Identification of the new institution • Mission statement • Elaborated widely within the institution • Positioning within the public institutions • Communication to market participants about renewed supervisory policy • In-house training of staff

16. Practical Challenges 2 • Financing the supervisory institution – from the market • Retaining experienced staff • Salary levels – close to market levels • Dilemma: • Strict prudential rules versus • International competitivness • Co-operation with the Central Bank - systemic stability

17. Practical Challenges 3 • Redefinition of supervisory policy • Transposition of int’l supervisory standards • Full revision of all supervisory tools (harmonisation) • Manuals, guidelines, data provison, regulations, sanctions etc. • Revision of sectoral regulatory framework • Building international network • Unification of IT systems • Finding a single headquarter • Raising public awarness – consumers’ interests

18. Experience • Better overview of the industry • Better overview of regulatory deficiencies and inconsistencies • Better positioned to initiate legislative modifications • Better level of consolidated supervision • More interaction between sectoral experts • Better understanding of cross sectoral market attitude and risks • Over time: in function of results improving investment climate

19. Conclusions If supervisory integration is decided: • Well prepared decision is needed • Once decision is made, quick implementation • Appropriate time needed, not an overnight • Determined, devoted and skillful managment of transition • Timing is key – a relatively stable period • Sequencing of steps

20. Conclusions 2 • Clear, upgraded, convincing objectives • For the staff • For the market • For the public, for the politicians • Public communication and awareness raising • Leads to expectations: better consumer protection • No perfect, predefined development track • Need of flexibility, reevaluation during the process • Learning by doing • Cross fertilization of divergent supervisory experience

21. Conclusions 3 • IT system integration – good opportunity to reassess overall data quality and data need • International experience sharing • Bilateral • „Clearing house” • Effective implementetion builds up credibility internally and internationally • Contributes to good investment climate

22. Possible Conflicts • Eventual overlooking of sectoral aspects • Overdominance of banking, needs counterbalance • Lack of regulatory power • Continueos professional debates with the MoF • Rigid, time consuming, inefficient regulatory responses • Streamlining data provision • Focusing data provision • Appropriate response to consumer expactations

23. New legal developments • The new Act XXII of 2004 on the protection of the interests of the depositors and investors entered into force in May 2004. • The new legislation rearranges the management structure of the HFSA • Establishment of the Board of the HFSA and a separate executive management

24. Recent changes with the HFSA

25. Recent Institutional Changes Board of the HFSA: • New five member Board takes decisions on the HFSA’s strategy, policies and on yearly inspection program • Non binding supervisory guidelines are issued by the Board • Issues, withdraws licences of institutions • Approves supervisory methodology of HFSA • Board meets at least every month

26. Recent Institutional Changes 2 • The Chairman is elected by Parliament, Members of the Board appointed by the President of the Republic for a 6 year term. • Chairman of the Board submits reports on the activities of the HFSA to the Finance Minister every quarter • The Minister makes assessment on the HFSA’s activities • The Minister controls whether the HFSA operates in line with its mandate and is entitled to require the Board to remedy eventual defficiencies in the HFSA’s operations

27. Recent Institutional Changes 3 • The Internal Operational Rules of the HFSA are proposed by the Board and approved by the Minister • The professional staff of the HFSA is managed by the Director General and by his/her deputies • The DG and the deputies are appointed by the Prime Minister for fixed six year term • The operation of the HFSA, conducting inspections, deciding on supervisory measures are the prerogatives of the DG