IMF Bank of Israel Financial Sector Conference ISRAEL S CAPITAL

IMF/Bank of Israel Financial Sector Conference ISRAEL’S CAPITAL MARKET REFORMS: SUPERVISORY APPROACHES AND MANAGING CHANGE Presentation on Approaches in: Canada, Singapore & Australia By John Palmer Chairman of the Toronto International Leadership Centre for Financial Sector Supervision

Supervisory Approaches in Canada, Singapore & Australia Issues to explore: • How financial supervision has been integrated • Relationship with Central Bank

Advantages of Integrated Financial Supervision • Better overview/understanding of financial system and system-wide risks • Cross-fertilization of knowledge • More efficient use of scarce functional specialist resources/technical experts

Advantages of Integrated Financial Supervision (2) • Economies of scale in: – Training – Research – Technology – Methodological development – Corporate services • Greater critical mass and authority

Disadvantages of Integrated Financial Supervision • Potential down-grading of industry expertise • Tendency for banking supervisors to dominate • May become too powerful (a bully) • May affect quality of cooperation with solo regulators

Separating Integrated Supervisor from Central Bank • Most integrated supervisors have been separated from central bank • Reason is to separate regulation/supervision from financial support and avoid moral hazard • Danger is that it may weaken ability of central bank to maintain financial stability

Separating Integrated Supervisor from Central Bank (2) • If separated from Central Bank, surveillance of financial sector could weaken • Jury still out on effectiveness of Integrated Regulator/Central Bank informationsharing mechanisms

Models of Integrated Financial Supervision: OSFI • OSFI separate from Central Bank • Coordination mechanism (FISC) • Supports Bank’s macro-economic surveillance • Responsible for prudential supervision/regulation • Market conduct supervision a provincial responsibility

Models of Integrated Financial Supervision: OSFI (2) Supervises: • All Banks • National (federal) deposit-taking institutions • National Insurance companies (life and general) • National private pension funds Does not supervise: • Securities firms • Financial markets • Financial intermediaries • Provincial entities

Evaluation of the OSFI Model Advantages • Gained most of the advantages of integration (scale, understanding, specialisation, cross-fertilisation) • Avoided conflicts between prudential and market conduct supervision (transparency issue) • Mechanism for ensuring coordination with Central Bank works well

Evaluation of the OSFI Model (2) Disadvantages/Caveats • Most disadvantages avoided because integration has not been excessive (industry expertise retained) • Balkanised securities supervision a major problem in Canada, but a larger issue • Success of Central Bank coordination mechanism partially dependent on relationships

Models of Integrated Financial Supervision: MAS • Supervision part of Central Bank • Participates in macro-economic surveillance • Responsible for prudential and market conduct regulation

Models of Integrated Financial Supervision: MAS (2) Supervises: • Banks and finance companies • Insurance companies • Securities firms • Financial markets • Financial intermediaries

Evaluation of the MAS Model Advantages • Gained most of the advantages of integration (scale, understanding, specialisation) • Found some synergies between prudential and market conduct supervision • Also some synergies between Central Bank’s presence in the market and supervision • Integrated approach to macro-prudential surveillance works reasonably well

Evaluation of the MAS Model (2) Disadvantages • Most disadvantages avoided because integration has been cautious (industry expertise retained) • Potential conflict between prudential and market conduct regulation has created some tensions but manageable • Potential moral hazard issue between prudential supervision and Central Bank LOLR function has not been a problem but not tested

Models of Integrated Financial Supervision: APRA Supervision in Australia divided on functional lines: • Prudential supervision • Market conduct regulation

Models of Integrated Financial Supervision: APRA (2) APRA responsible for prudential supervision; includes: • Banks and deposit-taking institutions • Insurance Companies • Superannuation (pension) funds

Models of Integrated Financial Supervision: APRA (3) ASIC responsible for market conduct regulation; includes: • Securities firms • Markets • Financial advisors • Unit trusts • Market conduct issues affecting all institutions

Models of Integrated Financial Supervision: APRA (4) • Both regulators (APRA & ASIC) separate from Central Bank • Mechanisms in place to ensure information -sharing/cooperation: - RBA Governor sits on both boards - APRA & ASIC have reciprocal board representation

Evaluation of the APRA Model Advantages • Gained many of the benefits of integration (scale, specialisation, understanding) • Lack of full independence from Treasury has limited benefits (salaries, supervisory action) • Separation of securities supervision has avoided conflicts but created tensions

Evaluation of the APRA Model (2) Disadvantages: • Some down-grading of industry expertise due to ambitious integration approach • Effectiveness of Central Bank informationsharing mechanisms still untested

Integrating Supervisory Functions: Thoughts on Process Based on Experiences of Canada, Singapore and Australia • Create a new organisation • Keep your eye on the ball (supervision) • Move quickly but not too quickly • Be careful of how far you integrate (functional vs industry structures)

Some Tentative Conclusions, Based on OSFI, MAS & APRA • Integrated regulation has worked well in Singapore and Canada (but note different approaches) • Some transitional issues in Australia • No model is ideal; each has strengths and weaknesses • In small countries, integrated financial supervision merits attention (resources issue) • Central bank linkage an unresolved issue