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Regulatory Framework

Regulatory Framework. Jeff Carmichael. Topics for The Session. Contributions & risks from NBFIs Objectives of regulation Different types of regulation Regulatory structure. Financial Services. Payments services Liquidity Divisibility Store of value Information efficiencies

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Regulatory Framework

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  1. Regulatory Framework Jeff Carmichael

  2. Topics for The Session • Contributions & risks from NBFIs • Objectives of regulation • Different types of regulation • Regulatory structure

  3. Financial Services • Payments services • Liquidity • Divisibility • Store of value • Information efficiencies • Risk pooling

  4. Empirical Evidence Growing evidence that: • Financial development contributes to economic development • Contribution is increased where NBFIs are involved

  5. Sources of Risk from NBFIs • NBFIs can circumvent the intention of banking regulation, eg Asian experience • Thai finance companies • Hire purchase in Malaysia • Korean Merchant Banks & ITCs

  6. Sources of Risk from NBFIs • NBFI associations with banks through conglomerates, eg Asians again • Korea and Indonesia • State banks in Australia Not so much an issue in Africa

  7. NBFI Risks in Africa? • Concentration of risks Size of institutions Industry concentration Dominant commercial companies Underdeveloped regulation

  8. Philosophical Foundations Regulation rests on market failure and the impact of that failure on: efficiency, safety, and fairness Sources of market failure: Anti-competitive Behaviour Market Misconduct Information Asymmetry Systemic Instability

  9. Anti-Competitive Behaviour Regulatory Measures include: • Rules covering industry structure; • Rules to prevent anti-competitive behaviour; and • Rules to ensure contestability

  10. Market Misconduct Common problem areas: • Unfair & fraudulent conduct; • Inadequate disclosure Regulatory Measures include: • Disclosure standards; • Conduct rules: • Entry restrictions; • Governance requirements; and • Minimal financial strength requirements

  11. Asymmetric Information Arises from inherent complexity of products and institutions Regulatory Measures include: • Entry requirements; • Capital requirements; • Liquidity requirements; • Governance requirements; and • Customer support schemes

  12. Systemic Instability Confidence is fundamental to the financial system Regulatory Measures include: • Monetary and fiscal policy; • Lender of last resort; and • Payments system regulation

  13. The Road to Effectiveness • Better structures • Stronger laws • Stronger policies • Stronger internal practices and processes to improve enforcement

  14. Models of Regulatory Structure • Separate Regulators: Separate agencies for each industry group (31) • Mexican: Banking and Capital Markets (9) • South African: All NBFIs together (3) • Canadian: Banking and Insurance together (13) • UK: Unified Regulator outside Central Bank (10) • Singaporean: Unified Regulator inside Central Bank (3)

  15. Separate Regulators Pros: • Easiest to implement • “Tailored” supervision Cons: • Lack of scale • No synergies • Duplication of infrastructure • Doesn’t cope well with Conglomerates • Potential for Arbitrage • Potential for Capture

  16. Mexican Model Pros: • Better scale • Consistency across securities dealers Cons: • Synergies are limited • Clash of cultures • Possible loss of focus • Central bank issues • Conglomerates and arbitrage still a danger • Some duplication of infrastructure • Capture of those that remain outside

  17. South African Model Pros: • Some scale economies efficiency of resource use • Better synergies than Mexican • Leave central bank to focus on monetary policy and doesn’t impair banking supervision by removal Cons: • Synergies still limited • Cultural clashes • Possible loss of focus • Still some duplication • Need to avoid “one size fits all” • Conglomerates

  18. Canadian Model Pros: • Significant scale economies/resource efficiencies • Regulatory synergies • Less scope for arbitrage • Frees CB for monetary policy • In the extreme aligns with market failure Cons: • Still some duplication • Possible loss of CB credibility for banking • Some conglomerates may still escape • Dominance of regulator and danger of “one size fits all”

  19. UK Model Pros: • Very cost effective • Maximizes synergies • Eliminates arbitrage and covers conglomerates • No central bank distraction Cons: • Cultural clash • Potential loss of focus • Possible loss of CB credibility for banking • Reputational contagion • Dominant regulator and danger of “one size fits all”

  20. Singaporean Model Pros: • Maximum cost effectiveness and synergies • Eliminates arbitrage and covers conglomerates • Avoids loss of credibility and resources for banking • CB responsible for all systemic stability Cons: • Extremely powerful agency • Multiple objectives and loss of focus • Cultural clashes maximised • Takes CB away from core competencies • Reputational contagion risk including monetary policy • Danger of “one size fits all”

  21. Weighing the Issues • No perfect model for all countries and all time • Push towards integration driven by: • Elimination of regulatory arbitrage • Better regulation of conglomerates • Efficient use of scarce regulatory resources

  22. Closing Thoughts • Changing regulatory structure doesn’t fix regulatory failure • Use reform opportunities wisely • Beware the vested interests

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