regulatory framework jeff carmichael chairman australian prudential regulation authority
Post on 20-Dec-2015
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TRANSCRIPT
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Topics for The Session
Contributions & risks from NBFIs
Effective regulation:
Powers
Rules & Regulations
Internal Practices & Procedures
Regulatory Structure
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Financial Services
• Payments services• Liquidity• Divisibility• Store of value• Information efficiencies• Risk pooling
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NBFI Roles
• Broaden spectrum of risks• Encourage savings and investment• Foster risk management• Enhance systemic resilience• Fill the gaps• Provide competition for banks
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Empirical Evidence
Growing evidence that:
• Financial development contributes to economic development
• Contribution is increased where NBFIs are involved
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Sources of Risk from NBFIs
1. NBFIs can circumvent the intention of banking regulation, eg Asian experience
• Thai finance companies
• Hire purchase in Malaysia
• Korean Merchant Banks & ITCs
Plus:
• Pseudo-banks in Latin America
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Sources of Risk from NBFIs
2. NBFI associations with banks through conglomerates, eg Asians again
• Korea and Indonesia
• State banks in Australia
• Latin America also
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Community Expectations
o Market conduct:
– Policemen role– Severity of penalties less important that likelihood
of being caught
o Prudential:
– Doctor role– Prevention rather than prosecution
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Characteristics of Prudential Regulation
1. Intervention is graduated:
– Breaches are a warning– Process involves cooperation
2. Regulators are not infallible:
– The process increases risk– No regulator can guarantee no failures
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The Road to Effectiveness
• Stronger powers• Stronger policies• Stronger internal practices and processes
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Powers - Conduct & Prudential• Licensing• Information• Examinations• Investigations• Standards/regulations• Administrative sanctions• Directions• Prosecution
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Prudential Powers• Ownership & Control• Appoint experts• “Whistleblower” provisions
• Statutory management/inspector• Transfers of business• Liquidation
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Australia - Prudential Powers
Banks Life Insurers
General Insurers
Pensions
Licensing Y Y Y P
Standards Y Y Y N
Appoint External Expert N Y Y N
Ownership & Control Y N Y N
Statutory Management Y Y Y Y
Directions Y Y Y N
Investigation N N N N
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Solvency Vs Risk
Australian Insurance Act 1973 – Capital set at greater of:• $2 million• 15% of OCP• 20% of Premium IncomeNew framework (2002) requires:• More capital for higher risks• Capital for asset risks
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Dangers of Over-Prescription
US Vs International Accounting standards
Same issue in Prudential Regulation
Prescription leads to:o Legalistic responseso Questions of who is responsibleo Inflexibility
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Australian Changes
• New risk-rating system• Escalation procedures• Wide circulation of high-risk assessments• Dealing with informants• Greater enforcement orientation
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Priorities
• Start with internal practices and processes• Push your laws to the limit• Never miss an opportunity to push reform• Learn from failures and from each other
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Objectives of Regulation
Ultimate Goals
• Efficiency• Fairness• Safety• Stability
Market Failures• Anti-
competitive behaviour
• Market misconduct
• Information asymmetry
• Systemic contagion
Regulatory Actions• Anti trust• Anti collusion• Disclosure• Education• Financial law enforcement• Governance• Licensing• Capital adequacy• Liquidity• Risk management• Failure management• Macro economic policy• Payment system
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Approaches to Structure
• Industry: Separate agencies for each industry group
• Pure form: One agency for each group but responsible for all 4 market failures
• Objectives: Separate agencies for each market failure
• Pure form: One agency for failure but responsible for all institutions
• Reality: Nearly all are hybrid
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The Traditional Industry Approach
Pressure from:• Convergence in financial markets and the emergence of financial conglomerates
• The need for greater regulatory neutrality
• Better use of scarce regulatory skills and resources
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Rationale for Integration
1 Aligns the regulatory structure with the industry structure
2 Resource efficiencies
3 Maximize regulatory neutrality
• Integrated regulation is objectives-based
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Choosing Among Structures
There is no single regulatory structure that is ideal for all countries and for all points in time
Ultimately a matter of judgement
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The Pure Objectives-based Model
• Case for:– Maximizes regulatory focus– Minimizes cultural clashes– Reduces confusion about safety nets
• Case against:– Still requires inter-agency cooperation– Resolution of conflicts can be a problem
• Responses:– Resolution mechanisms– Clear demarcations– Higher level of aggregation of objectives
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Combining Prudential & Conduct
• Case for combining:– One umbrella regulator for all parts of conglomerates– Bigger and more powerful agency– Can resolve regulatory conflicts internally
• Case for separation:– Cultural clashes– Loss of focus - from multiple objectives– Potential misperceptions about the safety net– Failure in one area can erode credibility in others
No definitive answer but most so far have elected to combine
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Combining Prudential & Systemic
• Case for combining:– Synergies in systemic stability regulation– Last resort lending needs knowledge of banks– Avoids crisis management by committee– C banks are more independent and better staffed
• Case for separation:– C bank with 2 objectives - loss of focus– Supervisory staff not always equal C banks– C banks lack the expertise for NBFI regulation– Cultural clashes
Most have elected not to combine so far
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Latin American Structures
COUNTRY Structure Structure No.
ARGENTINA Institutional Institutional 7
BAHAMAS Institutional Integrated 5
BARBADOS Institutional FSA 4
BOLIVIA FSA NBFI 2
BRAZIL Institutional Other 1
CHILE NBFI Total 19
COLOMBIA Integrated
COSTA RICA FSA
ECUADOR Integrated
EL SALVADOR Integrated
GUATEMALA Integrated
HONDURAS FSA
JAMAICA NBFI
MEXICO Banks & Securities
NICARAGUA FSA
PANAMA Institutional
PERU Integrated
TRINIDAD AND TOBAGO Institutional
VENEZUELA Institutional
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What Does IR Really Offer?
o Integrated regulation does not:Automatically correct regulatory failures(though it can contribute)
o Integrated regulation does:• Help with conglomerates• Reduce regulatory arbitrage• Make better use of scarce resources
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Regulatory Neutrality
• Simply putting different regulators together is not enough
• ‘Integration’ needs:• An integrated staff structure
• A harmonized set of powers and Laws
• A common approach to standards
• A common approach to analysis and inspection
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Regulation by Risk
5 Fundamental Risk Types:• Credit risk
• Market risk
• Insurance risk
• Liquidity risk
• Governance (operational) risk
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Conglomerate Regulation
• Integration eliminates “turf” wars
• Single set of definitions (controllers, affiliates etc)
• Consistent set of powers across industry groups
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Summary
NBFIs offer risks and rewards
Risks need sound regulation
NBFI regulation in the region is underdeveloped
Areas for improvement: Powers
Policies
Practices & procedures
Extracting the benefits from integration is a big challenge