1、 DEPARTAMENTO DE DERECHO CENTRO DE ESTUDIOS DE DERECHO PRIVADO _ Ro Hondo 1, San Angel, C.P. 01000 Mxico, D.F. Tels: 628.4000 exts. 4675, 3748 Fax: 490-4678; E-mail: cuetoitam.mx , atinocoitam.mx, rtovaritam.mx 1 Efficiency in Financial Regulation and Reform of Supervisory Authorities: A Survey in t
2、he APEC Region. August 2002 Due to the present document is a working paper, it cannot be use or refer without the acquiescence of his author. (See page 4) DEPARTAMENTO DE DERECHO CENTRO DE ESTUDIOS DE DERECHO PRIVADO _ Ro Hondo 1, San Angel, C.P. 01000 Mxico, D.F. Tels: 628.4000 exts. 4675, 3748 Fax
3、: 490-4678; E-mail: cuetoitam.mx , atinocoitam.mx, rtovaritam.mx 2 EXECUTIVE SUMMARY Traditionally, the financial regulation it used to structure itself on the basis of specialized organizations, each one responsible to supervise the intermediaries by the type of activity that was carried out. The c
4、urrent trend is toward an integrated model that reunite in one or two organizations the different functions that previously were responsibility of diverse specialized authorities. The discussion with respect the advantages and disadvantages of adopting an integrated model of supervision is relativel
5、y recent although non new. In spite of the decisions about completely integrate the regulation in the Scandinavian countries was part of an initiated evolutionary process that began at middle of 80 s Unlike what it happened in Denmark, Norway and Sweden, the proposal made by the Wallis Committee to
6、reform the organizational structure of financial regulation in Australia gave rise an intense discussion between government and regulated institutions. As result of this, the Australian government adopted a scheme of twin peaks by mean that the regulation is handle only by two authorities, on that c
7、onsolidates the prudential regulation and other that consolidate all conduct of business regulation. Some of the most intensive debate with respect to this subject was in the United Kingdom, from the proposal of reform present by the Ministry of Treasure and that finally concluded with the creation
8、of the Financial Services Authority. The debate between governments, financial intermediaries, and academic have put in clear that the dispersion and duplicity of regulatory jurisdiction, a overlap and often confused normative frame, and the lack of coordination and cooperation among the diverse age
9、ncies, are some of the deficiency in the model dispersed of supervision. Some countries are prime cases for a reform of the financial regulation institutional organization in order to encourage the development and efficiency of the financial entities without put in risk the safety and soundness of t
10、he financial systems. From the modern theory of economic regulations it is possible to assess a regulatory regimen by how close is to address the market failures on the market supposed to regulated and how minimal is the social cost it imposed over its regulated entities and the market as a whole. T
11、he market failures characteristic in financial markets comes from asymmetric information phenomenal. DEPARTAMENTO DE DERECHO CENTRO DE ESTUDIOS DE DERECHO PRIVADO _ Ro Hondo 1, San Angel, C.P. 01000 Mxico, D.F. Tels: 628.4000 exts. 4675, 3748 Fax: 490-4678; E-mail: cuetoitam.mx , atinocoitam.mx, rto
12、varitam.mx 3 The recent evolution in the financial markets, guided by innovation and liberalization, requires a regulator high efficient in a regulatory task intensive in information coordination cross multiple financial product lines inside a highly integrated financial groups in a rising competiti
13、ve environment. A regulatory regime of fragmented supervisory authorities increases the risk of regulatory failures therefore not always capable to exploit the economies of scale and scope in a regulatory task intensive in opportune information gathering and processing, also exposed to regulatory fo
14、rbearance and becoming interest groups by themselves. In fact, becoming each regulator a monopoly over its regulated entities, creating rents by protecting a turf of captive supervisory powers incompatible and unsynchronized with each other. Therefore, incrementing the cost of regulation. The reform
15、 toward a single regulator finds its objectives in obtaining economies of scale and scope in the vertical integration of specific unambiguous regulatory objectives. In a way similar to the integration of successive monopolies in order to avoid double or triple marginalization of monopoly rents over
16、a single processes. Economies in the information gathering and processing are guided to efficient regulation in an independent institutional framework to avoid regulatory failures. The experience in this reform is recent in the cases of Australia, Japan and Korea after the UK and Scandinavian experi
17、ence. Considering the cost of regulation as a fixed cost on each domestic financial market. An efficient setting would be a low fixed cost relative to a high sized financial market. The relative performance efficiency between the multiple regulatory agencies model and the single regulator model is e
18、mpirically an open question, despite of the international spread of the single model in the last decade in more than ten countries. In cases like the United States and Canada the multiple agencies and double layer (at federal and state level) regulatory model does not clearly implies a costly obstac
19、le to its financial markets growth and evolution. However, low income countries with severe underdeveloped financial markets and costly multiple authorities scheme calls for a prime candidates to reform its financial regulatory. Using indicators from supervisory cost and financial activity size, Mex
20、ico appears to be the economy with the highest fixed cost in an underdeveloped or small size financial activity relative to the GDP therefore, it means a highly inefficient regulatory organization. Urgent supervisory institutional scheme reform is required according with international benchmarks. DE
21、PARTAMENTO DE DERECHO CENTRO DE ESTUDIOS DE DERECHO PRIVADO _ Ro Hondo 1, San Angel, C.P. 01000 Mxico, D.F. Tels: 628.4000 exts. 4675, 3748 Fax: 490-4678; E-mail: cuetoitam.mx , atinocoitam.mx, rtovaritam.mx 4 The present paper was elaborated during June and July 2002, under direction of Prof. Ramir
22、o Tovar Landa Ph.D. DEPARTAMENTO DE DERECHO CENTRO DE ESTUDIOS DE DERECHO PRIVADO _ Ro Hondo 1, San Angel, C.P. 01000 Mxico, D.F. Tels: 628.4000 exts. 4675, 3748 Fax: 490-4678; E-mail: cuetoitam.mx , atinocoitam.mx, rtovaritam.mx 5 1. Supervising Financial Intermediaries: A complex dance between inn
23、ovation and regulation. Financial institutions provide payment services and a variety of products that enable the corporate sector and households to cope with economic uncertainties by hedging, pooling, sharing and pricing risks. A stable and efficient financial sector reduces the costs and risk of
24、investment and trade of goods and services. Financial markets provide an important source of information that helps to coordinate the decentralization of decisions within the economy. Rates of returns in financial markets guide households in allocating income between consumption and savings, and in
25、allocating their stock of wealth. Firms rely on financial markets prices to inform their choices among investment projects and to determine how such projects should be financed. Nowadays the financial services are experiencing an era of rapid innovations, characterized by the development of two tech
26、nologies, data processing and telecommunications, which are at the heart of the financial services and its competitive environment. The underlying technologies of finance, data processing and telecommunications, have becoming dramatically more powerful and less costly on almost daily basis. These im
27、proved technologies have allowed to innovate and improve the management and processing of data, assess risks, and thereby design new products and services, often using convergent services, and mixing traditional products in order to offer on new ones (e.g. banking and insurance) that can better meet
28、 the financial demands of individuals and firms. Moreover, these products and services can be offered across wide geographic areas. The securitization of many categories of previously illiquid assets, most notably, real estate mortgages and credit card receivables are good illustrations of these dev
29、elopments. In the financial markets, as other regulated sectors, inevitably coexist regulation and innovation, a complex and often socially costly relationship. Innovation consists of firms developing new products or services and/or new production processes. Often, but not always, the new products a
30、re based on new processes; sometimes also new organizations and organizational innovations, are involved. Innovation in products and processes, are not new to the financial services sector. Firms in the various sub-sectors of finance have a long history of new instruments and services and of develop
31、ing improved “back office” processes to reduce the costs of existing services an to support the offering of new ones. DEPARTAMENTO DE DERECHO CENTRO DE ESTUDIOS DE DERECHO PRIVADO _ Ro Hondo 1, San Angel, C.P. 01000 Mxico, D.F. Tels: 628.4000 exts. 4675, 3748 Fax: 490-4678; E-mail: cuetoitam.mx , at
32、inocoitam.mx, rtovaritam.mx 6 The appearance of new financial products (e.g. derivatives) has implied new complexity levels with respect to the traditional financial products. Financial product innovation implied greater complexity, and often, their greater leveraging possibilities open new opportun
33、ities for risk-taking, their broad utilization involve new informational requirements to individual investors, also the managers of financial intermediaries pose great prudential regulatory concerns (i.e. banks and other depositories, insures companies etc.) because the use of these instruments as p
34、art of a deliberate risk-increasing strategy increase. Markets liberalization policies toward the direction of less restrictions and protectionism, have reinforced these technological improvements, yielding heightened levels of competition throughout the financial services sector. In turn, these gre
35、ater competitive pressures have forced incumbent to find improved and less costly ways of providing financial services, and deregulation has made it easier for innovations to enter these markets. The users of financial services have more choices and opportunities over wider geographic areas, includi
36、ng the opportunities to make mistakes; the incumbent purveyors of financial services face more competition. Inevitably, this rapid change, urge incumbents to successfully adapt, other will falter, merge or possibly fail, the competitive pressures do rise a set of regulatory concerns because financia
37、l failure among the financial intermediaries increase and, therefore, the task of typical financial regulation become more complex. At present time it is difficult to separate market-derived risk from traditional banking risk, at the same time banking and insurance tend to converge. It seems possibl
38、e to have an increase in competition coupled with a reduction of insolvency risk via improving diversification, via consolidation, as an outcome of the liberalization process. Size provides the potential of exploiting scale economies from overhead in administrative and back-office operations, inform
39、ation technologies, and in investment-banking type operations related to information gathering and fund management. Also size may help in archive scope economies, of combining different products lines because increases the relationship value and decreased averaging marketing costs, also such economi
40、es exist between commercial and investment banking. Consequently, the distinction between commercial banks, securities firms, insurance companies and other financial institutions has become blurred, DEPARTAMENTO DE DERECHO CENTRO DE ESTUDIOS DE DERECHO PRIVADO _ Ro Hondo 1, San Angel, C.P. 01000 Mxi
41、co, D.F. Tels: 628.4000 exts. 4675, 3748 Fax: 490-4678; E-mail: cuetoitam.mx , atinocoitam.mx, rtovaritam.mx 7 and large diversified financial conglomerates have been created that span the spectrum of financial services and global markets1. Traditionally, prudential supervision2 has focused on asses
42、sment of the quality of the banks balance sheet and loans at a point in time and then determines whether the bank complies with capital requirements and restrictions on assets holdings. Because this kind of prudential supervision is based on regulatory rules, it is referred as a pure regulatory appr
43、oach based in the one-size-fits-all model. However, the traditional approach is no longer adequate in which financial innovation has produced new markets and instruments that make it easy for banks to make huge beats easily and quickly. In this new financial environment, a bank that is quite healthy
44、 at a particular point in time can be driven into failure extremely rapidly from trading losses. The safety and soundness scrutiny of banks regulators should be strengthened in a period of rapid innovation, market concentration coupled with heightened competitive pressures, may lead to take high ris
45、ks at the expense of depositors or deposit insurers. New policies toward the safety and soundness regulatory instruments include better ways of measuring capital (i.e. market value accounting framework) and of measuring risk (e.g. financial stress tests). This change in financial environment has res
46、ulted in a major shift toward a supervisory forward looking approach where the regulator focus less on compliance with specific regulatory rules and the risk of the financial instruments currently in the banks portfolio and more on the soundness of the banks management practices with regard to contr
47、olling risk. More recently, emphasis is added to reinforced supervision by disclosure requirements in order to increase transparency and foster market discipline, as well as allowing banks to relay on their own internal models to assess and control risk. This represents a move from rigid to flexible
48、 view of capital requirements3. Supervisors will have to assess as efficiently as possible how well banks are 1 International Monetary Fund, “ International Capital Markets 1999. Annex IV” . 2 Traditionally prudential supervision has its origin in the impossibility of the users by themselves to judge the safety and soundness of the financial institutions that operates in the market. This impossibility
