1、FinancialInstitutionsCenterG09G0A G0D G09 G0D G09 G0D G09 G0D G09 G0D G0D byGiorgio Di GiorgioCarmine Di Noia01-02The Wharton Financial Institutions CenterG09G0A G0A G0AG0D G0A G09G0A G0A G09 G0D G0A G0D G09 G0D G09G09 G0A G09 G09 G0A G0D G0A G0A G0AG0D G0D G0A G0A G0D G09 G0DG09 G0D G0AG0D G0A G0D
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3、G09 G0A $ G09 G0A G09 G09 G09 G0A G09 G09 G0A G09 G0DG09 G09 G09 G0D G0DG09 G0A ! G0AG09 G09 G09 G0A G0A G0A % G0A implementation of these principles through a new EU Securities Committee; implementation of Community law by Member States within the framework of strengthened cooperation and networkin
4、g between national regulators; stronger work by the EU Commission to ensure open and fair competition in the European financial markets). The objective of the present work is to set up a proposal for the reorganization of regulatory arrangements and supervisory agencies in financial markets in the E
5、uropean Union. The paper starts with a section investigating objectives and theoretical models for the regulation of the financial system3. We then describe recent evolutionary dynamics in financial markets, intermediaries and instruments and we argue that the current domestic-based and different fr
6、ameworks for financial market regulation in a single currency area are not appropriate. Hence, we present a proposal for a new configuration for supervising the domestic financial market through the assignment of different objectives or “finalities“ to different authorities. This perspective would t
7、hus entrust the attainment of the three objectives of supervision on the entire financial market - stability, investor protection (transparency), competition - to three distinct authorities regardless of the subjective nature of the intermediaries, whether they be in banking, finance or insurance4.
8、It would highlight the objective of competition in the financial sector as an important finality explicitly monitored by the regulator. For the sake of consistency, the existing rules applying to other forms of financial intermediation would be extended to include the life insurance sector. The natu
9、ral choice to make is between centralized or decentralized regulation. After discussing the pros and cons of the two approaches, we suggest a two-level architecture for financial market regulation which is inspired by the current organization of the European System of Central Banks. We suggest to es
10、tablish a European System of Financial Regulators, with three distinct independent authorities (plus the ECB) at the European level. These agencies ought to be characterized by homogeneous procedures in terms of their creation, functioning and funding. They will push and coordinate the work of the t
11、hree corresponding national authorities in each member country. At both the European and domestic level, a coordination committee would be the site for resolving conflicts and controversies. An important issue in our proposal for a regulatory reform in the Euro area concerns the problem of who takes
12、 care of financial stability from a macroeconomic point of view in the Euro 3See also Goodhart and Shoenmaker, 1992; Dewatripont and Tirole, 1994; Merton and Bodie, 1995; Goodhart 1996; White, 1997; Llewellyn (1999). 4The reference is, in the following, to life-insurance, whose behaviour is very clo
13、se to the other financial intermediaries. 4 area. We re-examine the matter of the need for a lender of last resort and of the proper relationship of the European Central Bank with other financial market regulators. The paper is organized as follows. In section II we describe the objectives and the m
14、otivations for financial markets regulation and we identify four models of regulatory structure. In section III we deal with the regulatory frameworks currently in place in the Euro area and we argue that these are not suitable in a single-currency highly integrated area. We then present in section
15、IV our hypothesis of reform based on a fully coherent application of the supervisory model by objectives (or by finality). Finally, we summarize our conclusions. II. MODELS FOR FINANCIAL MARKET REGULATION AND SUPERVISION. II.1 Financial Market Regulation. The theoretical underpinning for public inte
16、rvention in economic matters is traditionally based on the need to correct market imperfections and unfair distribution of the resources. Three more general objectives of public intervention derive thereby: the pursuit of stability, equity in the distribution of resources and the efficient use of th
17、ose resources. The regulation of the financial system can be viewed as a particularly important case of public control over the economy. The accumulation of capital and the allocation of financial resources constitute an essential aspect in the process of the economic development of a nation. The pe
18、culiarities of financial intermediation and of the operators who perform this function justify the existence of a broader system of controls with respect to other forms of economic activity. Various theoretical motivations have been advanced to support the opportunity of a particularly stringent reg
19、ulation for banks and other financial intermediaries. Such motivations are based on the existence of particular forms of market failure in the credit and financial sectors5. The objectives of financial market regulation. The definition of the term financial market has traditionally included the bank
20、ing, financial and insurance segments. The bounds dividing institutions, instruments and markets were clear-cut, so that further distinctions were drawn within the different classes of intermediaries (with banks 5White (1996) identifies certain categories of “market failure“, describing them with sp
21、ecial regard for the financial markets: i) situations of market power brought about because of collusion, concentration, technological conditions or public regulatory conditions; ii) economies of scale, as in the case of capital markets where an inverse relation exists between the volume of transact
22、ions and the costs of transaction; iii) externality (spill-over) effects, as in the case of a bank failure generally affecting the confidence of savers in the entire banking system; iv) public good problems, as in the case of the property of prices formed on the exchanges; v) information asymmetries
23、, typically found among buyers and sellers of financial products; vi) individuals who are unable to know their own best interest, as in the case of forms of savings they are “unacquainted with“ present in financial markets. 5 specialized in short or medium/long term maturities, functional/commercial
24、 operations, deposits and investments; with financial intermediaries handling broker-dealer negotiations, asset management and advisory functions, and with insurance companies dealing in life and other insurance policies). These distinctions were mirrored in the regulatory structure with different a
25、gencies for banks (often the Central Bank), securities and insurance firms at a national and international level (Basel Committee for Banking Supervision, International Organization of Securities Commissions, IOSCO, and the International Association of Insurance Supervisors, IAIS). In this essay, as
26、 the bounds dividing the various types of financial institutions are becoming increasingly blurred (Corrigan, 1987), we shall refer to the financial market as an economic space wherein operators of various kinds - banks, financial intermediaries, mutual funds, insurance companies, pension funds - of
27、fer financial instruments and services. A primary objective of financial market regulation is the pursuit of macroeconomic and microeconomic stability. Safeguarding of the stability of the system translates into macro-controls over currencies, interest rates and payment systems which are functions,
28、together with the lender of last resort function typical of the entities which are in charge of monetary policy: the central banks. Measures pertaining to the micro-stability (prudential regulation) of the intermediaries can be subdivided into two categories: general rules on the stability of all bu
29、siness enterprises and entrepreneurial activities, such as the legally required amount of capital, borrowing limits and integrity requirements; and more specific rules due to the special nature of financial intermediation, such as risk-based capital ratios, limits to portfolio investments and the re
30、gulation of off-balance activities, the managing of deposit insurance funds or investor compensation schemes. Furthermore micro-stability controls can be directed to the financial exchanges, clearing houses and securities settlement systems. A second objective of financial regulation is transparency
31、 in the market and of intermediaries and investor protection. This is linked to the more general objective of equity in the distribution of the available resources and may be mapped into the search for “equity in the distribution of information as a precious good“ among operators.6At the macro level
32、, transparency 6One of the classic instances of market failure is relative to the presence of information asymmetries. However, some recent theories of financial intermediation (Allen and Santomero, 1997) seem to go beyond theories based on information: a look at reality in fact shows that while tra
33、nsaction costs and asymmetric information have greatly decreased, the activity of intermediation has considerably increased. Financial markets seem to be more and more markets for intermediaries than for investors or firms. The nature of all financial intermediaries (not only banks, but also mutual
34、funds, financial intermediaries, financial firms, pension funds) seems to be that of operators who perform risk management activities on behalf of third parties and decrease the “costs of participation“ in the financial market: these two aspects have not yet been the object of in-depth analysis by i
35、ntermediation theorists. These same two motivations are thought to contribute to the building of long-term relationships between intermediaries and customers in such a way that the latter avoid ex ante research costs by simply buying the implicit insurance supplied by the intermediaries (Allen 6 rul
36、es impose equal treatment (for example, rules regarding takeovers and public offers) and the correct dissemination of information (insider trading, manipulation and, more generally, the rules dealing with exchanges microstructure and price-discovery mechanisms). At the micro level, such rules aim at
37、 non-discrimination in relationships among intermediaries and different customers (conduct of business rules). A third objective of financial market regulation, linked with the general objective of efficiency, is the safeguarding and promotion of competition in the financial intermediation sector. T
38、his requires rules for controlling the structure of competition in the markets and, at the micro level, regulations in the matter of concentrations, cartels and abuse of dominant positions. Specific controls over financial intermediation are justified by the forms that competition can assume in that
39、 field. They are related to the promotion of competition as well as to limiting possible destabilizing excesses generated by competition itself.7II.2 Financial Market Supervisory Models. There is neither a unique theoretical model nor just one practical approach to the regulation and supervision of
40、financial markets. Significant differences are found in the literature in terms of both definition and classification of regulatory models and techniques. We identify four approaches for financial market supervision and regulation: “institutional supervision“, “supervision by objectives“, “functiona
41、l supervision“ and “single-regulator supervision“. Institutional supervision. In the more traditional “institutional approach“ (also known as “sectional“ or “by subjects“ or “by markets“), supervision is performed over each single category of financial operator (or over each single segment of the fi
42、nancial market) and is assigned to a distinct agency for the entire complex of activities. In this model, which follows the traditional segmentation of the financial system into three markets, we thus have three supervisory authorities acting as watchdogs over, respectively, banks, financial interme
43、diaries and mutual funds, and insurance companies (and the corresponding markets). The authorities control intermediaries and markets through entry selection processes (e.g., authorizations and enrolling procedures in special registers), constant monitoring of and Gale, 1998). 7On more than one occa
44、sion the European Commission has reaffirmed the applicability to financial markets of the general regulation on competition. The Court of Justice has also upheld such orientation. 7 the business activities (controls, inspections and sanctions) and eventual exits from the market (suspensions or remov
45、al)8. “Institutional” regulation facilitates the effective realization of controls, being performed with regards to subjects that are regulated as to every aspect of their activity and as to all the objectives of regulation. Each intermediary and market has only one supervisory authority as a counte
46、rpart. The latter, in turn, is highly specialized. As a result, duplication of controls is avoided and the costs of regulation can be considerably reduced. The institutional approach seems to be particularly effective in cases of intermediaries of a very similar type and that do operate in just one
47、of the three traditional segments of financial intermediation. Vice versa, the institutional model may give rise, in the presence of more subjects entitled to perform the same financial intermediation activities9, to distortions in the supervisory activity caused by the enforcement of different disp
48、ositions for operations of the same nature that are executed by different entities. The disadvantages of this approach are represented by the previously mentioned trend toward multiple-sector activities and by the progressive de-specialization of the intermediaries. In turn, these phenomena are connected to the growing integration of both markets and instruments, that frequently leads to the building of large financial conglomerates. In a context where the boundaries separating the various institutions are progressively being erased, it is no longer possible to establish whether a partic
