PRELIMINARY DRAFT : DECEMBER, 16, 2003
CENTRAL BANKS OR SINGLE FINANCIAL AUTHORITIES? ECONOMICS, POLITICS AND LAW
Donato Masciandaro¨
ABSTRACT
The objective of this work is to offer a political delegation approach for the analysis of the financial supervision architectures. Focusing on the key issue in the debate on financial supervision structure – single authority versus multi-authorities model – the paper claims that the optimal degree of concentration in the financial supervision regime cannot be defined a priori; rather it is an expected variable, calculated by the policymakers that maintains or reform the financial architecture. Therefore the adopted approach is to consider the supervisory structure with one or more authorities as an endogenous variable, determined in turn by the dynamics of other structural variables, economic and institutional, that can explain the political delegation process. In order to construct this endogenous variable, it is first introduced a Financial Authorities’ Concentration Index (FAC Index). The comparative analysis of 69 countries, based on this indicator, showed that an increase in the degree of concentration was evident in the developed countries, and particularly in the European Union. Then, in order to consider the nature of the institutions involved in the control responsibilities – i.e. what role the central bank plays - it is introduced an index of the central bank's involvement in financial supervision, the Central Bank as Financial Authority Index (CBFA Index). Each national regime can be identified with the two above characteristics. Two the most frequent models: countries with a high concentration of powers with low central bank involvement (Single Financial Authority Regime); countries with a low concentration of powers with high central bank involvement (Central Bank Dominated Multiple Supervisors Regime). Finally, to empirically gauge the possible structural determinants of the degree of concentration of powers, it is performed an econometric analysis of the Probit and Logit types. The econometric results signal that the probability of supervision unification is inversely linked to the involvement of the central bank. The two possible explanation of this relationship are the blurring hazard effect and the monopolistic bureau effect. The unification of financial supervision also seems to be a more markedly European phenomenon, linked especially to the Germanic and Scandinavian roots of the legal institutions.
JEL #: E58, G20, G38, L51; Keywords: Central Bank, Financial Supervision, Political Economy, Delegation, Law
¨ Paolo Baffi Centre, Bocconi University and Department of Economics, Mathematics and Statistics, University of Lecce. The author is indebted for helpful comments and suggestions to Bjorn Skogstad Aamo, Angelo Baglioni, Franco Bruni, Giorgio Di Giorgio, Darren Hannah, Iman van Lelyveld, David Llewellyn, Angelo Porta, Dirk Schoenmaker, Martin Schuler, Guido Tabellini. All remaining errors are the author’ responsibility.
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CENTRAL BANKS OR SINGLE FINANCIAL AUTHORITIES? ECONOMICS, POLITICS AND LAW
SUMMARY
1. Introduction
2. Financial Supervision Architectures: The Traditional Approach
3. Financial Supervision Architecture as Endogenous Variable: a Political Delegation Approach
4. The Degree of Consolidation in Financial Supervision: the FAC Index
5. The Degree of Central Bank Involvement in Financial Supervision: The BCFA Index
6. The Trade Off between Supervision Consolidation and Central Bank Involvement: the Econometric Analysis
7. Conclusions
8. References
9. Annex I The Financial Supervision Architectures in 69 countries
10. Annex II Determinants of Financial Supervision Consolidation with Different Samples and Indexes
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CENTRAL BANKS OR SINGLE FINANCIAL AUTHORITIES? ECONOMICS, POLITICS AND LAW
1.Introduction
This paper presents an analysis of recent trends and determinants in the architectures of financial supervision. We wish to explore theoretically and empirically the consolidation process in the financial institutional settings, using a sample of 69 countries.
The financial supervision models vary significantly from country to country. A review of the financial supervision regimes1 indicates a trend toward a gradual concentration of supervisory powers. In Europe this trend toward the concentration of supervisory powers has been rather strong in recent years: in addition to the Norway - the first country to establish a single supervisor in 1986 - and the Iceland (1988), five other countries, members of the European Union (Austria, Denmark (1988), Germany (2002), Sweden (1991) and United Kingdom(1997)) have assigned the task of supervising the entire financial system to a single authority different and independent from the central bank. Also four countries involved in the EU enlargement process (Estonia (1999), Latvia (1998), Malta (2002) and Hungary (2000)) have reformed their structures, concentrating all the powers in a single authority2, while out of Europe the unified agency was established in Korea (1997).
The aim of the theoretical, institutional and empirical analyses is therefore to discover the dynamics in financial supervisory regimes, and their determinants – if any - in a worldwide cross-border perspective.
From the methodological standpoint, we develop in a delegation approach the classic intuitions of the new political economy3, applied in the financial supervision area4. We base our work on two main hypotheses: the definition of the supervisory regime is endogenous; the choice of policymakers to maintain or reform a given supervisory regime is constrained and influenced by the structural economic and institutional features of their own countries, rather than by a generic, ill- defined social welfare function. Furthermore, it will be quite natural to acknowledge the suggestions of the recent new comparative economics5. In other words the thesis that it will be tested is the following: in a given country, the optimal financial supervisory design is dependent on structural economic and institutional features. Each financial supervisory architecture is confirmed or reformed by the policymakers, who in turn are influenced by the economic and institutional structure of their countries. Therefore, the financial supervisory architecture can be considered an endogenous variable, which depends on a set of medium/long-term features.
1 The review is performed in Section four. 2 De Luna Martinez and Rose (2001) claim there are at least other seven countries considering to adopt a form of integrated supervis ion: Bulgaria, Indonesia, Kazakhstan, Poland, Slovakia, Slovenia and Ukraine. European Central Bank (2003) claims that a single supervisory authority will likely be established in Belgium. 3 For the new political economy approach see Drazen (2000) and Persson and Tabellini (2000). 4 For the theory of financial regulation see Llwellyn (1999), (2001), and Estrella (2001). 5 For the law, endowment and finance literature see Beck, Demirguc – Kunt and Levine (2002). See also La Porta et al. (1998), (1999).
3 The paper is organized as follows. Focusing on the key issue in the debate on financial supervisory structure – single authority versus multi-authorities model – Section two claims that the optimal degree of concentration in the financial supervisory regime cannot be defined a priori; rather it is an expected variable, calculated by the policymakers that maintains or reform the financial architectures. Therefore in Section three the adopted approach is to consider the supervisory structure with one or more authorities as an endogenous variable, determined in turn by the dynamics of other structural variables, economic and institutional, that can summarize and explain the political delegation process. Furthermore it has been proposed an analogy between our methodology and the recent developments of the theory of endogeneity in the central bank independence literature. In order to construct an endogenous variable, in Section four it is introduced a Financial Authorities’ Concentration Index (FAC Index), to have an indicator of the degree of concentration of powers. The comparative analysis of 69 countries is performed in Section five. Then in Section six it is considered the nature of the institutions involved in the control responsibilities. In particular, we must ask what role the central bank plays in the various national institutional settings. It is introduced an index of the central bank's involvement in financial supervision, the Central Bank as Financial Authority Index (CBFA Index). Using both the FAC Index and the CBFA Index we shed light on the current trends in the financial supervision architecture. In Section seven, to empirically gauge the possible determinants of the degree of concentration of powers, it is performed an econometric analysis of the Probit and Logit types. Section eight put forward some conclusions.
2. Financial Supervision Architectures: The Traditional Approach
From the conceptual point of view, our starting point is obviously the blurring effect6 that current developments in the banking and financial industry are having on supervisory issues7. Increasing integration has taken place between the banking, securities and insurance markets, as well as among the corresponding products and instruments. The blurring effect produces in particular two intertwined phenomena: the emergence of financial conglomerates8, that is likely to produce important changes in nature and dimensions of the single intermediaries, as well as in the degree of consolidation of the banking and financial industry ; the growth of the securitisation of traditional forms of banking activities and the proliferation of sophisticated ways of bundling, repackaging and trading risks, that weakened the classic distinction between equity, debt and loans 9, leading changes in nature and dimensions of the financial markets.
The financial blurring process poses at least three questions in the debate on financial supervision structure10: sectoral (institutional) approach versus functional approach; single supervisor model versus multi-authorities model; and, particularly in the European Union, centralized setting versus decentralized setting11.
6 See the “classic” Corrigan (1987). 7 See Dale (1997) and White (1997). 8 See European Commission (2002) and de Luna Martinez and Rose (2003). 9 de Luna Martinez and Rose (2003). 10 See Di Giorgio and Di Noia (2002). 11 The range of possible models for the structure of financial supervision at a national and a European level is identified by Kremers, Schoenmaker and Wierts (2001).
4 It is a fact that, in the perspective of increasing financial integration, the relevance of the first question has been rapidly declining. Theoretically, the sectoral approach is based on the possibility of separating the banking, securities and insurance markets. The progressive erosion of market separation is likely to cause the "default" of the institutional approach12. Institutionally, the above hypothesis that the financial blurring trend favors the alternative functional supervisory approach is confirmed by the fact that various models (“pure” or “mixed”) of such a supervisory approach have been adopted recently or is currently under discussion in several countries13.
From the other standpoint, particularly in the European context14, the centralized versus decentralized question seems to be 1) a second-stage problem, given that alternative solutions are likely to be strictly dependent on the various European national answers or positions on the optimal design of the financial supervisory framework, notwithstanding it has been rightly noted that the choice at the European level does not necessarily have to co-incide with the choices at the national level15, 2) closely linked to the answer to the single supervisor approach versus multi-authorities approach dilemma, 3) less urgent respect to the national dilemmas, given that while the blurring effect urges countries to choose their supervisory model, at the European level it can possible to wait for comparative data16 and experiences.
Today, therefore, given the dominance of the functional approach and the "deferred" nature of the centralized-decentralized questions, the alternative between the financial single authority (FSA) (integrated) model and the financial multi - authorities (FMA) model seem to be the more relevant one.
Identifying the optimal supervisory regime between the FSA model and the FMA model is a truly interesting problem. Prima facie, from the theoretical point of view, the FSA model seems to be the "natural" and best answer to the challenges posed by the market-blurring and financial conglomerates phenomena17. If, in the long run, the expected financial structure is a perfect integrated and unique market, the best design for the supervisory architecture would seem to be the single authority18. Furthermore, also considering the institutional point of view, the success of the FSA model seems to be growing, particularly in the European area: the UK19, Austria, Denmark, Germany, Norway and Sweden20 have chosen to delegate financial supervision to a single authority21, as well as Estonia, Latvia, Malta and Hungary. But the answer is not so simple.
12 For a deeper analysis see Masciandaro and Porta (2003). See also Di Giorgio and Di Noia (2002) and Schoenmaker (2003). 13 See Section four. 14 On the European financial regulation architecture debate see Schoenmaker (2003), Schuler (2003); see also Prati and Schinasi (1999), Padoa Schioppa (1999), Vives (1999), European Commission (2000), Favero et al.(2000), European Central Bank (2001), Wise Men (2001), OECD (2001) and (2002), Di Giorgio and Di Noia (2002). In particular, for the European Financial Services Authority solution see Eijffinger (2001) and Vives (2001). 15 Schoenmaker (2003). 16 Schoenmaker (2003). 17 See De Luna Martinez and Rose (2001). The importance of financial conglomerates in explaining the current regulators architecture reforms is claimed in Abrams and Taylor (2001), Whalen (2001), Grunbichler and Darlap (2003), Schoenmaker (2003). 18 See Lanoo (2000) and Briault (1999). 19 See Briault and Gelter (1995), Norgren (1998), Briault (1999) 20 See Taylor and Fleming (1999). 21 See Lannoo (2000).
5 A strand of recent literature22 pointed out that, given different institutional settings, it is possible to highlight the corresponding gains and losses23, and then to perform a rational cost-benefit analysis to choose between alternative models24.
We agree with the initial intuition—the importance of the cost-benefit analysis25—but the relative conclusion on the possibility to find an optimal supervisory regime seem to be rather unsatisfactory and inconclusive. First, one can say that, given a single authority, it is possible to increase the efficiency in the relationship between supervisor and regulated firms, because the cost of supervision and the possibility of supervisory arbitrage decrease26. But one can also say that, given the SFA model, efficiency in the supervisor-regulated firm relationships decreases because, with a single authority, the capture risks could increase27 as well as the innovations incentive in the regulated industry could decrease28 (Table 1). Therefore, the sign and the magnitude of the SFA model effects, with respect to the regulated firm relationship issues, seem rather vague and ambiguous.
One can reach the same kind of conclusion by analyzing the relationship between the single authority and the political system (independence and accountability29, discretionality 30 or capture31?), the effects in terms of supervisory organization and resource allocation (economies32 or diseconomies of scale33, benefits or costs of goal conflicts’ internalization34?), and the consequences of financial services costumers (confidence35 or over-confidence36?).
Therefore it has been correctly claimed that there no exist a “superior” model of supervision37.In reality, the gains and losses of a supervisory model are expected variables, calculated by the agents (i.e. the policymakers) that maintains or reform the supervisory regime. But the expectations of policymakers, given their own specific goals, are likely to be influenced by structural economic and institutional variables, which may vary from country to country. Therefore the supervisory regime is not a given. On the contrary, given the national economic and institutional endowment, these
22 See explicitly Hawkesby (2000), but most of the quoted studies seem to be consistent with the cost-benefit approach. 23 For a complete analysis on the arguments in favor of and against integrated supervision see De Luna Martinez and Rose (2001). 24 In the specific banking regulation area, Kahn and Santos (2001), provide a theoretical analysis of several alternative institutional allocations of regulations. 25 The prons and cons of the integrated model are analysed in Barth, Nolle, Phumiwasana and Yago (2002), Kremers, Schoenmaker and Wierts (2003), 26 Briault (1999), Llewellyn (1999b), Goodhart (2002). 27 Taylor (1995). 28 Barth, Nolle, Phumiwasana and Yago (2002). 29 Briault (1999), Llewellyn (1999b), Lannoo (2000), Abrams and Taylor (2001). On the meaning of regulatory and supervisory independence see Quintyn and Taylor (2002). Beck, Demirguc-Kunt and Levine (2003) examine the impact of bank supervision independence on the corporate financing obstacles. 30 Goodhart et al. (1998). See also Laslett and Taylor (1998), Quintyn and Taylor (2002). On the risks of excessive power of a single regulator see also Taylor (1995), Briault (1999), Llewellyn (1999b). 31 Fender and Von Hagen (1998). 32 Briault (1999) and (2002), Llewellyn (1999b), Lannoo (2000). Abrams and Taylor (2001) and Goodhart (2002) claim that the economies of scale argument is most applicable in small countries or those with small financial systems. Abrams and Taylor (2001) argue that the shortage of supervisory resources is a serious problem particularly in emerging market economies. 33 Goodhart et al. (1998). 34 Briault (1999), Llewellyn (1999b), Lannoo (2000), Wall and Eisenbeis (2000). 35 Llewellyn (1999b). 36 Lannoo (2000). 37 Briault (2002), Lumpkin (2002), Schoenmaker (2003).
6 variables can determine, ceteris paribus, the policymakers’ expected gains or losses of a specific supervisory regime. The supervisory regime becomes the endogenous variable. In other words, the optimal supervisory regime is a sort of path-dependent variable.
TAB. 1 SINGLE AUTHORITY: TRADITIONAL COST BENEFIT ANALYSIS
EXPECTED BENEFITS EXPECTED COSTS AUTHORITY- REGULATED SUPERVISION CAPTURE FIRMS COSTS + RISKS + RELATIONSHIPS SUPERVISION INNOVATIONS ARBITRAGE DISINCENTIVES
AUTHORITY- INDEPENDENCE CAPTURE POLITICAL GAINS RISKS SYSTEM RELATIONSHIPS
AUTHORITY ECONOMIES DISECONOMIES INTERNAL OF OF ORGANIZATION SCALE SCALE
GOAL GOAL CONFLICTS CONFLICTS INTERNALIZATION INTERNALIZATION BENEFITS COSTS
FINANCIAL CONFIDENCE OVERCONFIDENCE SERVICES BENEFITS COSTS COSTUMERS
Having defined the theoretical framework of the endogenous supervisory regime, the following question is empirical: are there common cross-border economic and/or institutional structural variables that explain why a country chooses or rejects a given supervisory model?
7 It is evident that, if a given supervisory regime is characterized by common economic and institutional endowments, the probability that this model will be adopted in a specific country, or in a specific area, will depend on the presence of these endowments.
3. Financial Supervision Architecture as Endogenous Variable: a Political Delegation Approach
The preceding Section made it manifestly evident that the quest for optimal financial supervision architecture cannot be pursued through a simple analysis of the costs and benefits expected from the possible alternative structures.
If, in fact, one proposes to compare two counterpoised models—a Single Authority versus a system with Multiple Authorities—one realizes that each of them offers expected benefits but also expected risks. So a theoretical analysis of the potential effects of alternative supervisory structures does not take us very far.
The first natural response to this problem would therefore be to estimate the real effects the two alternative supervisory models have on key economic variables. But this immediately fosters at least three orders of difficulty.
Firstly, as we will show in the following Sections, the emergence of a Single Authority is only the most striking aspect of a more general and gradual phenomenon: diversification, from country to country, in the degree of centralization of financial supervisory power. What has occurred is that, compared to the traditional model of control by sectors, some countries have confirmed that model, other have radically changed it by adopting a Single Financial Authority, while others have taken or confirm intermediate choices. This raises the problem of measuring the degree of concentration of powers, country by country, in order to attempt the quantitative description of a qualitative phenomenon.
Hence the first objective of our research is to propose an indicator of this phenomenon to improve the descriptive analysis.
Secondly, the issue of the optimal degree of concentration of financial supervisory powers has emerged only recently, with the reforms adopted in various countries, so considering the type of supervisory regime as an explicative or exogenous (though not unique) variable of any other economic phenomenon means undertaking an analysis of extremely short historical series, with all the related problems of interpretation.
Thirdly, completely and satisfactorily identifying what the key economic variables are, and the most possible object of an estimate, on which a supervisory structure makes it effect felt, is not a simple problem. Alternative supervisory structures may, for example, affect the level of efficiency of the public resources invested in monitoring the financial markets. Indicators can be found for the efficiency phenomenon, and empirical analysis can therefore proceed.
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The point is that alternative structures may also (perhaps especially) affect other variables that are important but less easily expressed in concise indicators. Examples are stability38, reputation risk, or confident benefits, or the risk the authority will be captured by the policymakers or by the controlled intermediaries.
Thus a quantitative search for the effects of alternative supervisory structures is probably premature39. It might be interesting, rather, to ask: are there any common determinants in the decision each country makes to maintain or reform its control structure? Finding a response would help us not only to interpret what has happened in the past but also to project scenarios of change for the future.
Thus the second empirical objective of our research is to attempt to concentrate on an analysis of the causes that have helped bring about a given supervisory structure, in one or more countries, so as to provided an econometric analysis.
The approach we intend to follow here—extending the indication that the new political economy40 has formulated in analyzing the definition of public policies—is to consider the supervisory structure with one or more authorities as an endogenous variable, determined in turn by the dynamics of other structural variables, economic and institutional, that can summarize and explain the political process that leads a country to maintain or reform its supervisory structure.
A country confirms or reforms its supervisory structure when its policymakers decide it is advisable to do so. While we do not believe that policymakers are always and ever benevolent dictators, nor do we wish to exclude this a priori, we can assume that these decisions are generally determined, in turn, by structural factors of a financial, economic and institutional nature. The search for these factors is a task for economic analysis.
From the methodological standpoint41, the analogy with the abundant, consolidated literature on the independence of central banks may be of some interest, since, if we look closely, this issue is nothing more than the quest for an optimal structure for the monetary agency.
38 On the elusive and ambiguous nature of the concept of financial stability from an empirical point of view see among others Garcia Herrero and del Rio (2003), Schoenmaker 2003, Grunbichler and Darlap (2003). 39 Barth, Caprio and Levine (2001) empirically analyze the relationship between specific regulatory measures (capital ratios, deposit insurance, inspection rules, etc..), some bank performance indicators (asset growth, intermediation margin, costs, loan losses) and institutional indicators (corruption). The difference from the analysis described here is evident: the object of analysis is the general design of the controls, not the individual rules of supervision. Above all, however, this work does not resolve the difficulties pointed out here: even individual supervisory measures have changed in various countries in recent years, so saying that all the data already fully reflect the effects of reforms is a rather bold statement; secondly, a complete judgment on the effects produced is not possible, since the set of performance indicators used is obviously partial. Barth, Nolle, Phumiwasana and Yago (2002) examine the relationship between the structure, scope and independence of bank supervision and bank profitability; the results indicate a weak relationship, and – more importantly for our methodological remarks – the authors estimates using an alternative source of data failed to duplicate this result. Demirguc-Kunt, Laeven and Levine (2003) examine the impact of bank regulations on bank interest margins and overhead costs; bank regulation however become insignificant when controlling for national indicators of economic freedom or property rights protection, that represent structural institutional variables in our terminology. Barth, Demirguc-Kunt and Levine (2003) examine the impact of bank supervision on the financial obstacles faced by corporation across 49 countries; the data are based on survey questions. Again our above remarks can be applied: here we have the perceptions by specific economic agents of the effects of supervision on specific set on indicators. 40 For the new political economy approach see Persson and Tabellini (2000). 41 For a recent and complete survey see Berger, de Haan and Eijffinger (2000).
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In this literature, the theoretical models produced no general, univocal result regarding the desirability of a structure with an independent central bank versus one with a dependant monetary authority. In fact, considering the industrialized countries, while the relationship between independence and control over inflation seemed sufficiently robust and convincing42, the relationship between independence, on the one hand, and fiscal and real variables43, on the other, was far from certain. Thus the theoretical cost-benefit analysis of alternative monetary regimes could not be considered conclusive.
We then went on to verify the theoretical conjectures with comparative, institutional and empirical analysis. After constructing indices of independence of the central banks44, and having historical alternative models of independent and dependent monetary authorities45, we attempted to determine whether the degree of legal independence could be considered an independent variable in explaining important macroeconomic phenomena: inflation, deficits and public debt, income and growth46.
But above all, still on the methodological plane, the next step forward in the research was to endogenize the degree of central bank independence47, in order to identify what economic and/or institutional structures could explain the decision of one or more countries to maintain or reform their monetary regimes, i.e. the degree of independence of their central banks.
The studies on endogenization of the degree of central bank independence were both theoretical and empirical and helped explain under what conditions a given country might decide to reform the institutional structure of its central bank, to modify its degree of independence.
Various interpretative hypotheses were advanced to explain the genesis of the political process that leads a monetary regime to assume given characteristics. Development in endogenizing central bank independence – or its effectiveness - has been the subject of analysis in both economics and political science. Some48 revealed the possibility that the degree of central bank independence depends on the degree to which constituencies strongly averse to inflation are present, especially within the financial community, as political interest group, which drives policymakers to bolster the status of the central bank (financial interest group); others49 have stressed that the features of the legislative and/or political system can influence policymakers to decide whether to have a structure of monetary powers with an independent central bank (political interest group) 50; others
42 See Cukierman (1994) Berger, de Haan and Ejffinger (2000). See also Alesina and Gatti (1995) 43 See Cukierman (1992). 44 After the seminal central bank independence indices published by Grilli, Masciandaro and Tabellini (1991), followed by Cukierman indicators (1992), different indicators were proposed; for a discussion see Berger, de Haan and Eijffinger, (2000). 45 See Toniolo (1988). 46 See Alesina and Summer (1993), Cukierman (1994) and Berger, de Haan and Eijffinger (2000). 47 See Masciandaro (1995) and Berger, de Haan and Eijffinger (2000); note the difference between institutional setting endogeneity and inflationary bias endogeneity. 48 Maxfield (1994). Posen (1995), noting that there are distributive consequences in the choices of monetary regimes, stated that there is no reason to assume that the adoption of central bank independence is self-enforcing; that choice requires political support, and the financial sector is positioned to provide that support. De Haan and Van’t Hag (1995) raised doubts about Posen’s theory. On the relationships between financial sector preferences, low inflation and central bank independence see also van Lelyveld (2000). 49 Moser (1999) 50 Cukierman (1994); however his predictions are tested and rejected by Cukiermann and Webb (1995) and by De Haan and Van’t Hag (1995). Vaubel (1997) suggests that central banks, even if formally independent, can be captured; Sieg
10 have pointed out that the policymakers may have a specific interest in establishing an independent central bank in their country, for reasons linked to political stability51 or international credibility52 (specific public interest); others53 have stressed the role of the culture and of the tradition of monetary stability in a country or the importance of the citizen preferences54 (general public interest).
It is evident that studies of this type acquire great importance, especially in periods when there is a tendency to reform or at least to question the design of the rules. And while in the past this was the case with analyses of central bank independence, it now applies for the first time to the debate on authorities in the financial field. In fact to the best of our knowledge no studies examine the relationships between politics and financial supervisory architecture55.
In conclusion, regarding the issue of financial supervisory models, there are obvious analogies of approach with the debate on central bank independence, as well as one principal difference: in our case, we are "forced" to skip the first phase - exogeneity - and attempt the endogeneity approach directly.
Finally, the endogenization of the policymaker's choice of the optimal level of concentration in the supervisory architecture will be more effective, however, if analyzed as a problem of delegation, through a principal–agent approach. Principal-agent models have found interesting applications in the area of monetary policy studies56: it is in the interest of the policymaker (the principal) to delegate the conduct of anti-inflationary monetary policy to an independent central bank (the agent), because this makes that policy more effective.
The principal–agent approach can also be applied to the problem being examined here, even though the degree of complexity is rather greater.
The first step is to explain which objective (What?) the policymaker intends to pursue in delegating the supervisory policy over the banking, financial and insurance system. The second step is to analyze the policymaker wishes (Why?) to delegate this policy rather than implement it directly,
(1997) proposes a formal model of a captured independent central bank. Bernhard (1998) claims that information asymmetries of the monetary policy process can create conflicts between government ministers, their backbench legislators and, in multiparty government, their coalition partners; an independent central bank can help overcome these conflicts. Goodman (1991) argues that conservative government with expected short tenure will adopt an independent central bank to limits the ability of future government; see also Milesi- Ferretti (1995). On the relationship between government partisanship and central bank structure see Alesina (1989), Alesina and Sachs (1988). Moser (1999) analyses the relationship between the central bank independence and the features (checks and balances) of the legislative systems; Keefer and Stasavage (2001) introduce a theoretical model and empirical evidence on this issue. 51 Bagheri and Habibi (1998). De Haan and Van’t Hag (1995) test the hyphotesis that government planning to incur higher deficits may wish to increase credibility granting more central bank independence; no supporting evidence is found. The importance of central bank law design for the central bankers is clearly claimed in Poole (2003). 52 Maxfield (1997). 53 Berger (1997), Berger and de Haan (1997). Hayo (1998) claim that people’s preferences with respect to price stability matter in explaining low inflation rate, and that the central bank independence is just one aspect of a stability regime, with two competing interpretation on the role of the institutional design: preference – instrument interpretation versus historical-feedback interpretation. Franzese (1999) claims that the effectiveness of central bank independence depends on every variable in the broader political – economic environment. 54 Eggertsson and Le Borgne (2003). 55 In general, there are few recent examples of studies on politics and banking ;for a survey see Pagano and Volpin (2001). 56 For a survey see Masciandaro (1995), Berger, de Haan and Eijffinger (2000).
11 and whether his choices are motivated by general interests or are captive to specific interests57. The third step is to ask how many institutions the policymaker delegates this policy to (How many?) and, step four, which institution(s) he utilizes (Who?). What we are proposing here is a political delegation approach58 in dealing with the financial supervisory architecture issues.
4. The Degree of Consolidation in Financial Supervision: the FAC Index
If, therefore, we wish to consider the financial supervision regime as an endogenous variable, the first problem is to construct this variable. The question is: How to "measure" the degree of concentration of financial powers59?
To this end we attempted to construct a Financial Authorities Concentration Index ( FAC Index). The creation of the index is based on an analysis of which and how many authorities in 69 countries are empowered to supervise the three traditional sectors of financial activity: banking, securities markets, insurance60.
In Table 2, the initials have the following meaning: B = authority specialized in the banking sector; I = authority specialized in the insurance sector; S = authority specialized in the securities markets; U = single authority for all sectors ; BS = authority specialized in the banking sector and securities markets; BI = authority specialized in the banking sector and insurance sector; CB = central bank SI = authority specialized in the insurance sector and securities markets;
57See Stigler (1971), Laffont and Tirole (1991). For a Stiglerian view of bank regulation see Heinemann and Schuler (2003). 58 A recent paper – Alesina and Tabellini (2003) – proposed a general model in order to investigate the criteria that should lead a society to allocate policy tasks to elected policymakers (politicians) or non elected bureaucrats. The delegation approach to the monetary policy analysis has been proposed by Persson and Tabellini (1993), Walsh (1995), Svensson (1997), Fratianni, Von Hagen and Waller (1998), in order to solve the inflation bias stemming from a dynamic inconsistent problem. Eggertsson and Le Borgne (2003) proposed a model to explain why, and under what circumstances, a politician gives up rent and delegate policy tasks to an independent agency, applying this theory to the monetary policy. 59 The consolidation process of the financial supervision powers cannot be described using a discrete variable (Single Authority or not). De Luna Martinez and Rose (2001) correctly claim that also in the group of integrated supervisory agencies is not homogeneous as it seems. 60 Sources: see Annex I. The information are updated to the 2002.
12 TABLE 2: SUPERVISION AUTHORITIES IN 69 COUNTRIES (year 2003)
Banking Securities Insurance FAC Countries Sector (b) Sector (s) Sector (i) Rating Weight INDEX 1 Albania CB S I 1 0 1 2 Argentina CB S S 1 0 1 3 Australia BI BI,S BI 7 -1 6 4 Austria U U U 7 0 7 5 Belarus CB S I 1 0 1 6 Belgium BS BS I 5 0 5 7 Bosnia CB,B1,B2 S I 1 -1 0 8 Brazil CB S CB,I 1 1 2 9 Bulgaria CB S I 1 0 1 10 Canada BI Ss(**) BI 3 0 3 11 Chile B SI SI 3 0 3 12 Colombia BI S BI 3 0 3 13 Croatia CB S I 1 0 1 14 Cyprus CB S I 1 0 1 15 Czech Republic CB S I 1 0 1 16 Denmark U U U 7 0 7 17 Ecuador BI S BI 3 0 3 18 Egypt BC S I 1 0 1 19 Estonia U U U 7 0 7 20 Finland BS BS I 5 0 5 21 France BC,B1,B2,B3 BC,S I 1 -1+1 1 22 Georgia CB S I 1 0 1 23 Germany U U U 7 0 7 24 Greece CB S I 1 0 1 25 Hong Kong CB S I 1 0 1 26 Hungary U U U 7 0 7 27 Iceland U U U 7 0 7 28 India CB,B S I 1 -1 0 29 Ireland CB CB CB 7 0 7 30 Israel CB S,I I 1 1 2 31 Italy CB CB,S I 1 1 2 32 Jamaica CB SI SI 3 0 3 33 Japan U U U 7 0 7 34 Jordan CB S I 1 0 1 35 Latvia U U U 7 0 7 36 Lithuania CB S I 1 0 1 37 Luxembourg BS BS I 5 0 5 38 Macedonia CB S - 1 0 1 39 Malaysia CB S CB 3 0 3 40 Malta U U U 7 0 7 41 Mauritius CB SI SI 3 0 3 42 Mexico BS BS I 5 0 5
43 Moldova CB S - 1 0 1 44 Netherlands CB CB,S I 1 1 2 45 New Zealand CB S I 1 0 1 46 Norway U U U 7 0 7 47 Pakistan CB CB,SI SI 3 1 4 48 Peru BI S BI 3 0 3 49 Philippines CB CB,S I 1 1 2 50 Poland B B,S I1,I2 1 1-1 1 51 Portugal CB CB,S I 1 1 2
13 52 Romania CB S I 1 0 1 53 Russia CB S I 1 0 1 54 Singapore CB CB CB 7 0 7 55 Slovak Republic CB SI SI 3 0 2 56 Slovenia CB S I 1 0 1 57 South Africa CB SI SI 3 0 3 58 South Korea U U U 7 0 7 59 Spain CB.Bs(**) CB,S I 1 1-1 1 60 Sri Lanka CB S I 1 0 1 61 Sweden U U U 7 0 7 62 Switzerland BS BS I 5 0 5 63 Thailand CB S I 1 0 1 Trinidad and 64 Tobago CB S I 1 0 1 65 Tunisia CB S I 1 0 1 66 Turkey B G I 1 0 1 67 UK U U U 7 0 7 69 Ukraine CB S - 1 0 1 69 USA CB,B S,Ss** I,Is(**) 1 -1 0
(*) (b)= banking or central banking law; (s)= security markets law; (i)= insurance law (**) = state or regional agencies
Then, to transform the qualitative information into quantitative indications, to gauge the degree of consolidation of each specific model of national supervision, we assigned a numerical value to each type of authority, according to the following scale:
7 = Single authority for all three sectors (total number of supervisors=1) 5 = Single authority for the banking sector and securities markets (total number of supervisors=2) 3 = Single authority for the insurance sector and the securities markets, or for the insurance sector and the banking sector (total number of supervisors=2) 1 = Independent specialized authority for each sector (total number of supervisors=3)
The rationale with which we assigned the values considers the concept of concentration of supervisory powers: the greater the concentration, the higher the index value.
We elected to assign a value of 5 to the single supervisor for the banking sector and securities markets because of the predominant importance of banking intermediation and securities markets over insurance in every national financial industry. It also interesting to note that, in the group of integrated supervisory agencies countries, it seems to be a higher degree of integration between banking and securities supervision than between banking and insurance supervision61; therefore, the degree of concentration of powers is, ceteris paribus, greater62.
These observations do not, however, weigh another qualitative characteristic that emerges from Table 1: there are countries in which one sector is supervised by more than one authority.
61 De Luna Martinez and Rose (2001). 62 Alternatively, we propose an index (FAC Two) according to the following scale: 5 = Single authority for all three sectors (total number of supervisors=1); 3 = Single authority for two sectors (total number of supervisors=2); 1 = Independent specialized authority for each sector (total number of supervisors=3). As we will shown in Section 7, the econometric performances of the two indices (FAC and FAC Two) are quite similar.
14 It is likely that, other conditions being equal, when two control authorities exist in a given sector, and one of which has other powers in a second sector, the degree of concentration of power is greater. When, on the other hand, there are two control authorities in a given sector, neither of which has other powers in a second sector, the degree of concentration is diminished, because the total number of supervisors increases.
It would therefore seem advisable to include these aspects in evaluating the various national supervisory structures by modifying the index as follows: · adding 1 if in the country there is at least one sector with two authorities assigned to supervision, and one of these authorities is also responsible for at least one other sector; · subtracting 1 if in the country there is at least one sector with two authorities assigned to supervision, but none of these authorities has responsibility for another sector; · 0 elsewhere
Lastly, there are three qualitative characteristics of supervision models that we decided not to consider in constructing this index.
Firstly, we do not consider the nature of the authorities involved in the financial supervision setting. In particular, in several countries it is the central bank - i.e. the authority responsible for monetary policy - that is responsible for at least one of the three sectors considered, typically the supervision and control of the banking industry. The attribution of supervisory power to the central bank has been at the centre of an intense theoretical and institutional debate over the past decade63, which in analogy with the problem discussed here has come to no general conclusions, perhaps for the same methodological reasons illustrated earlier.
Furthermore, we don not consider the legal nature – public or private – of the supervisory agencies, nor their relationships with the political system (degree of independence, level of accountability, and so on).
We therefore decided to construct an index that captures the degree of concentration of financial supervisory power regardless of the nature of the institutions involved in this process, i.e. stressing the importance of the pure number of supervisors involved. We will consider the role of the nature of the authorities later on, when we shall deal with the role of the central bank in the overall architecture of financial controls 64.
Secondly, in each industrial country there is an authority to protect competition and the market, with duties that impinge on the financial sectors. But, since it is a factor common to all the structures, we decided not to take the antitrust powers into account in constructing the index65.
63 See Goodhart and Schoenmaker (1992), Masciandaro (1993) and (1995), Tuya and Zamalloa (1994), Di Giorgio and Di Noia (1999), Bruni (2001). More recently, Garcia Herrero and del Rio (2003) analyzed the relationship between financial stability and monetary policy design, finding that focusing the central bank objectives on price stability reduce the likelihood of instability, and that the same is true locating regulatory and supervisory responsibilities at the central bank. 64 Barth, Nolle, Phumiwasana and Yago (2002) claim that the key issues for banking supervision are 1) whether there should be one or multiple supervisory authorities and 2) whether the central bank should be involved in bank supervision. Here we use the same intuition to build up the two indices of financial authorities consolidation. 65 The relationship between competition policies and stability are examined in Carletti and Hartmann (2002).
15 Finally, the financial authorities can perform different functions in the regulatory as well as in the supervisory area66. However, at this first stage of the institutional analysis, we prefer to consider just the number of the agencies involved in the supervisory activities.
Therefore, the FAC Index for the 69 countries is shown in Table 2. The analysis of Table 2 lends itself to some comments (Figure 1). We decided to start with the sample of the 30 OECD countries67 so as to analyse the FAC Index based on a set of countries with a common level of economic development. Firstly, the number of countries with the maximum concentration of powers (FAC Index = 7) is higher in the European industrialized countries (39%) respect to the non European industrialized countries (28%). Secondly, the average level of concentration of powers is slightly higher in Europe: the mean FAC Index is 4.26, versus 4 for the non European industrialized countries.
Continuing our descriptive analysis, if we analyse all the sample of 69 countries, we discover that the number of countries with maximum concentration of powers (FAC Index = 7) represents 21% of the total, which is lower than the figure (36%) for the industrialized countries as a whole. Furthermore, the average FAC Index is 3.05, here again lower than the value (4.13) for just the industrialized countries. If we consider the 39 developing and emerging countries, the number of countries with a single financial authority (FAX Index = 7) represents 10% of the total only, and the average FAC Index is 2.17.
Thus the concentration of powers of financial supervision seems more characteristic of the developed countries than the developing or emerging states, particularly in the European context.
Secondly, if we consider the sub sample of the 39 European countries, we find that the number of countries with maximum concentration of powers (FAC Index = 7) represents 30% of the total, less than the figure (39%) for just the industrialized European countries, while the average FAC Index is 3.33, lower than the 4.26 for the industrialized European sample . Therefore, further descriptive analyses confirm that the phenomenon of concentration of powers has at least two characteristics, concerning more a) the developed countries and b) the European developed countries.
66 Llewellyn (2001) noted that the basic functions performed by regulatory and supervisory agencies cover ten main areas. For our purposes , in order to separate supervision – i.e. monitoring rules compliance – from regulation – i.e. rules setting with managerial discretion - it is possible to distinguish five supervision functions (prudential supervision of financial institutions; conduct of business supervision; administration of deposit insurance; market integrity; financial institutions crisis procedures) from four regulation functions: management of the payment system; prudential regulation, conduct of business regulation, liquidity management. Obviously, however, in different cases it’s non easy to do a clear cut between supervision and regulation; on this point of view it is paradigmatic the overlapping between liquidity management and crisis procedures. 67 Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Poland, Portugal, Slovak Republic, South Korea, Spain, Sweden, Switzerland, Turkey, UK, US.
16 Figure 1 The Financial Autorithies Concentration Index
European Union 4,5 Countries Non European OCSE 4 Countries
3,5 2007 Accession Countries 3
1 2,5 2 Non OCSE Countries 3 2 4
1,5 FAC Index (average values) 1
0,5
0 1 2 3 4 Countries
Let us now attempt to analyse the European Union, in the prospect of enlargement. Let us first consider the current member states of the Union68 : we note that six countries out of 15 (Austria, Denmark, Germany, Ireland, Sweden and the UK), equal to 40% of the total sample, reach the maximum level of FAC Index, while the average level of this index is 4.4. The level of the consolidation process is more or less the same in the European Union sample and in the European industrialized countries sample, given that the composition of the two samples is quite similar.
Secondly, let us analyse the countries involved in the 2004 enlargement process. We note that four countries out of 1069 (Estonia, Latvia, Malta and Hungary), equal to 40% of total sample, reach the maximum level of FAC Index, while the average level is 3.5. As a consequence, comparing the current EU member states with those aspiring to join, the latter show on average a lower level of concentration but an equal number of single financial authorities.
Lastly, if we consider also the three countries involved in the 2007 enlargement process70, in the sample of the 13 accession countries we find that the countries at the maximum level of the FAC Index represent 30% of the total, while the average level is 2.9. Thus, compared to the current EU situation, we would have a lower degree of concentration of powers.
5. The Degree of Central Bank Involvement in Financial Supervision: The BCFA Index
At this point, we should also consider the nature of the institutions involved in the supervision responsibilities. Any supervisory regime have to provide a link between the supervision and the central bank, given the potential relationships between monetary stability and financial stability71. It has been correctly pointed out 72 that, irrespective of what role, if any, assigned to the central bank with respect to the prudential supervision, it is universally the case that the central bank must
68 Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, UK. 69 Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lituania, Malta, Poland, Slovak Republic, Slovenia. 70 Bulgaria, Romania and Turkey. 71 See Garcia Herrero and Del Rio (2003). On the role of central bank in banking supervision see Goodhart and Schoenmaker (1995), Haubrich (1996), Peek, Rosengren and Tootle (1999), Abrams and Taylor (2001) 72 Llewellyn (2001).
17 be the authority for the stability of the payment system, liquidity assistence to markets and solvent institutions, and systemic stability73. The debate of the optimal characteristics of this link is particular important in the European Union, where monetary policy is separated from financial supervision74. Therefore we must ask what role the central bank plays in the various national institutional structures75. Focusing on the degree of involvement the central bank has in financial supervision as a whole can be immediately explained with the specific nature of that institution with respect to the others, since in every country it is the authority responsible for monetary policy and for the stability of the payment system.
So, to highlight that role, we introduced an index of the central bank's involvement in financial supervision: the Central Bank as Financial Authority Index (CBFA Index). For each country, and given the three main possible financial sectors (banking, securities and insurance) the index is76:
1 = the central bank has responsibility in no sector77; 2 = the central bank has responsibility in one sector; 3 = the central bank has responsibility in two sectors; 4 = the central bank has responsibility in all three sectors.
Therefore, each national supervisory regime can be identified with at least two characteristics: the degree of concentration of powers (FAC Index) and the degree di involvement of the central bank in that distribution of powers (CBFA Index) (Table 3).
73 On note 66, we have defined these functions as payment system management and liquidity management. 74 See Schoenmaker (2003), Padoa Schioppa (2003), Goodhart and Schoenmaker (1995), Eijffinger (2001), Vives (2001), Goodhart, Schoenmaker and Dsgupta (2003). 75 See Oosterloo and de Haan (2003). 76 Alternatively, the different levels of central bank involvement can be measured using the identical scale of the FAC Index ( labelled CBFA Two Index): 1 = the central bank has responsibility in no sector; 3 = the central bank has responsibility in one sector; 5 = the central bank has responsibility in two sectors; 7 = the central bank has responsibility in all three sectors. Obviously – Annex II, Table 17 - the econometric performances of the two indices (CBFA and CBFA Two) are equal.
77 Following the classification introduced in note 66 and used in note 73, we consider without supervision responsibility each central involved only in the payment system management and the liquidity management ( and consequently in the crisis procedures).
18
TABLE 3: CBFA INDEX & FAC INDEX IN 69 COUNTRIES (year 2002)
CBFA INDEX FAC Countries INDEX 1 Albania 2 1 2 Argentina 2 1 3 Australia 1 6 4 Austria 1 7 5 Belarus 2 1 6 Belgium 1 5 7 Bosnia 2 0 8 Brazil 3 2 9 Bulgaria 2 1 10 Canada 1 3 11 Chile 1 3 12 Colombia 1 3 13 Croatia 2 1 14 Cyprus 2 1 15 Czech Republic 2 1 16 Denmark 1 7 17 Ecuador 1 3 18 Egypt 2 1 19 Estonia 1 7 20 Finland 1 5 21 France 3 1 22 Georgia 2 1 23 Germany 1 7 24 Greece 2 1 25 Hong Kong 2 1 26 Hungary 1 7 27 Iceland 1 7 28 India 2 0 29 Ireland 4 7 30 Israel 2 2 31 Italy 3 2 32 Jamaica 2 3 33 Japan 1 7 34 Jordan 2 1 35 Latvia 1 7 36 Lithuania 2 1 37 Luxembourg 1 5 38 Macedonia 2 1 39 Malaysia 3 3 40 Malta 1 7 41 Mauritius 2 3 42 Mexico 1 5 43 Moldova 2 1 44 Netherlands 3 2 45 New Zealand 2 1 46 Norway 1 7 47 Pakistan 3 4 48 Peru 1 3 49 Philippines 3 2 50 Poland 1 1
19 51 Portugal 3 2 52 Romania 2 1 53 Russia 2 1 54 Singapore 4 7 55 Slovak Republic 2 2 56 Slovenia 2 1 57 South Africa 2 3 58 South Korea 1 7 59 Spain 3 1 60 Sri Lanka 2 1 61 Sweden 1 7 62 Switzerland 1 5 63 Thailand 2 1 64 Trinidad e Tobago 2 1 65 Tunisia 2 1 66 Turkey 1 1 67 UK 1 7 69 Ukraine 2 1 69 USA 2 0
The analysis of Table 3 lends itself to some comments78 (Figure 2). Firstly we compare the degree of central bank involvement for the entire sample of industrialized countries with the specific degree for the European industrialized countries. The average level of central bank involvement is a bit higher in Europe: the mean CBFA Index is 1.69, versus 1.60 for the non European industrialized countries.
If we now analyse all the sample of 69 countries, we discover that the average CBFA Index is 1.81, greater than the value (1.60) for just the industrialized countries. The central bank involvement in the financial supervision seems to be a bit more characteristic of the developing and emerging countries. In fact, if we consider the 39 developing and emerging countries the average CBFA Index is 1.97.
Secondly, is we consider the sub sample of the 38 European countries, we find that the average CBFA Index is 1.74, similar to the value of the industrialized European sample . Let us now attempt to analyse the European Union, again in the prospect of enlargement. Let us first consider the current member states of the Union : the level of the central bank involvement is higher in the European Union sample (1.93) than the European industrialized countries sample (1.69).
Finally, let us analyse the countries involved in the 2004 enlargement process: the average CBFA Index is 1.50. If we consider also the three countries involved in the 2007 enlargement process, in the sample of the 13 accession countries we find that the average level of the index is 1.53. Therefore comparing the current EU member states with those aspiring to join, the latter show on average a lower level of central bank involvement. In general the differences in the degree of central bank involvement (20%) seems to be lower than the differences in the degree of financial supervision consolidation (34%).
78 Obviously, a difference of 0.1 between two values of the FAC Index, that range from 0 to 7, means a 1% gap, while the same difference between two values of the CBFA Index, that range from 0 to 4, means a 2% gap.
20 Figure 2 The Central Bank as Financial Authority Index
2,5
Non OCSE Countries 2
European Union Non European OCSE Countries 1,5 Countries Accession Countries 1 2 3 1 4
CBFA Index (average values) 0,5
0 1 2 3 4 Countries
The analyses on the degree of financial supervision consolidation and on the level of central bank involvement let us to have a general picture on the supervisory regimes around the world. Figure 3 shows the levels of both indices for the 69 countries. Dividing the chart into four areas by drawing a line corresponding to half the maximum possible value (3.5 for the FAC Index and 1.5 for the CBFA Index), we delineate four possible supervisory models based on the possible combinations of a high or low level of concentration of powers with a high or low level of central bank involvement.
21
FIGURE 3: FAC INDEX and CBFA INDEX IN 69 COUNTRIES (year 2002)
FAC INDEX (1,7) =AUSTRIA, (4,7)=SINGAPORE DENMARK,HUNGARY,NORWAY SWEDEN ,JAPAN,ICELAND UK,ESTONIA,LATVIA, S.KOREA, GERMANY,MALTA in 2003 (1,6) AUSTRALIA (1,5)= BELGIUM (3,5)=IRELAND FINLAND,MEXICO LUXEMBOURG SWITZERLAND (3,4)= PAKISTAN 3.5 (1,3)=CILE,COLOMBIA (2,3)= ( 3,3) = MALAYSIA ECUADOR,PERU JAMAICA,MAURITIUS CANADA S.AFRICA
(2,2)=ISRAEL (3,2)= BRA, ITALY TUNISIA NETHERL. SLOVAK R. PORTUGAL, PHILIPPINES
(1,1)= POLAND (2,1)=ALB,ARG, (3,1)=FRANCE, SPAIN TURKEY BUL,CYP,CRO, CZECH, EGY,FRA,GEO JOR,GRE, H.K., LITH,MAC,MOL,N.Z, ROM, SRI,SLOVENIA, THA,T&T, TUN.,RUSSIA, UKRAINE (2,0)= BOSNIA, U.S.,INDIA
1.5
CBFA
22
Figure 3 shows that the two most frequent models are polarized: on the one hand, countries with a high concentration of powers with low central bank involvement (Single Financial Authority Regime), with 19 countries; on the other, countries with a low concentration of powers with high central bank involvement (Central Bank Dominated Multiple Supervisors Regime), with 41 Countries.
The polarization phenomena is more evident in the European Union case. For the actual EU State members, we have on the one hand, countries with a high concentration of powers with low central bank involvement (Single Financial Authority Regime), with 8 countries; on the other, countries with a low concentration of powers with high central bank involvement (Central Bank Dominated Multiple Supervisors Regime), with 6 countries. The Ireland is the exception, with a regime characterized by both a high degree of consolidation and a high level of central bank involvement. Furthermore, if we consider the hypothetical European Union of 27 member states, again we see a huge polarization of the supervisory models: on the one hand the Single Financial Authorities Regime (12 countries), on the other the Central Bank Dominated Multiple Supervisors Regime (11 countries); excluding Ireland, the three remaining countries are characterized by both a low degree of consolidation and a low level of central bank involvement
The descriptive evidence of these two alternative model helps to improve - and to correct too- the idea that actually, given the blurring process in the financial landscape, there are two kinds of prevalent supervisory approach: the integration of financial stability supervision and banking supervision under the roof of the central bank; the integration of the supervision of all financial market intermediaries in an integrated supervisory body79. In reality, the consolidation of supervision seems to be more evident in the case of Single Financial Authorities Regime, while in the case of Central Bank Dominated Multiple Supervisors Regime the approach seems to be more consistent to a “leader-followers” framework.
In other words, using the political delegation approach, the descriptive analysis signals at least two results. First, in the financial supervision arena, the policy makers around the world choose to delegate this policy, rather than implement it directly. Second, the political choice on how many agencies have to be involve in supervision is strictly intertwined with the role of central bank: the degree of supervision consolidation seems to be inversely correlated with the central bank involvement. How to explain – before to test it econometrically – these stylized facts? It has been argued80 that the reason of the trade off between the supervision consolidation and the central bank involvement is because of a fear that the safety net – central bank function of lender of last resort – might be spread to a wider set of institution than just banks if the central bank is also involved in supervising insurance and securities trading firms (blurring hazard effect). Furthermore, a political economy explanation could be add to this economic interpretation: in the country in which the central bank is deeply involved in supervision, the policy makers could fear the creation of a too much powerful bureaucratic agency, and therefore they prefer to have more supervision agency, and consequently a less consolidated supervisory regime (monopolistic bureau effect).
79 Grunbichler and Darlap (2003). 80 Llewellyn (2001).
23
6. The Trade Off between Supervision Consolidation and Central Bank Involvement: the Econometric Analysis
The descriptive analysis conducted in the preceding Section claims that each country has its index of concentration of powers of financial supervision, which reaches its maximum level in cases where there is a single authority and the minimum when there are more than three supervisors.
We are spontaneously prompted to ask: can common determinants be found in the decisions the policymakers in each country have made in recent years to maintain or reform their control structure, and then to choose the features of the delegation scheme?
Our response is precisely to regard the supervisory structure with a single or multiple authorities as an endogenous variable, determined in turn by the dynamics of other structural, economic and institutional variables, which can summarize and explain the political process that leads the policymakers in one country to decide to maintain or reform its supervisory structure, and then their own delegation scheme.
What are the structural variables that can explain the decisions of national policymakers? Policymakers can decide the architecture of controls on the basis of institutional characteristics and the economic and financial characteristics of their country. In particular, we can assume that the physiognomy of the institutional system, and that of the banking and financial system, are relevant in each country. And having identified in the above Section a possible relevance of the role the central bank plays in the supervisory regime, it may be interesting to consider this aspect as well.
To assess the relationship between the policymakers decisions to determine the financial architecture and given country economic and institutional characteristics we can estimate a model of the probability of different regime decisions as a function of these structural variables.
In fact the IFAC regimes can be viewed as resulting from a continuous, unobserved variable: the optimal degree of financial supervisors concentration. Each IFAC regime corresponds to a specific range of the optimal financial supervisors concentration, with higher discrete IFAC values corresponding to a higher range of financial concentration values. Since the IFAC is a qualitative ordinal variable, the estimation of a model for such a dependent variable necessitates the use of a specific technique.
Our qualitative dependent variable can be classified into more than two categories, given that the FAC Index is a polychotomous variable. But the FAC Index is also an ordinal variable, given that it reflects a ranking. Then the ordered multinomial model can be use for estimation in a context of an ordinal polychotomous variable81.
Let assume the unobserved continuous variable, the optimal degree of financial supervisors concentration, y*, is a linear function of a set of explanatory variables x, with parameter vector b, and an error term e: y*=b’ x + e
81 For further details on the ordinal polychotomous variable estimation see Wooldrige (2002).
24
As usual, y* is unobserved. What is observed are the choice of every policymaker to maintain or to reform the financial supervisory architecture: this choice is summarize in the value of the FAC Index. Given that the FAC Index range from zero to seven:
y = 0 if y* £ m1 y= 1 if m1 £ y* £ m2
------y=7 if m7 £ y*
The ms are unknown partition boundaries (or cut points) that define the ranges of the FAC Index; these parameters must be estimated in conjunction with the b vector. Estimation proceeds by maximum likelihood, assuming that e is normally distributed across countries observations, and the mean and variance of e are normalized to zero and one. This model can be estimated with an ordered probit model or with a ordered logit model82.
We have first produced an econometric analysis of the Probit type: the dependant variable is the FAC Index, while the independent regressors proved are a broad set of economic, financial and political variables, based both on our own assessment of variables that could play a significant role in explaining the financial regime, and on data availability. The selected sample is the broader one, represented by 68 countries83.
As it has claimed above, no theory exists on the relationships between politics and financial supervisory architecture. Therefore we try to test the more general hypotheses.
First, the policy maker choices in order to maintain or to reform the financial supervisory architecture could be depended on the structure of the financial systems itself. In the modern debate on financial structure, it’s usual to confront the equity dominance model (or market based regime) with the bank dominance model (or bank based regime). Furthermore, recent literature pointed out the close relationship, in every country, between the financial structure model and corporate governance model, with a particular attention to the relative political determinants.84 Therefore, the first relevant question is: does the financial structure model (i.e. the private governance model) (private governance factor) matter in defining the policy maker choices on the level of concentration in the supervisory structure?
The expected sign of the relationship between the degree of supervision consolidation and the private governance factor is undermined. In Section Two we stressed the importance of blurring process for the banking and the financial market worldwide. The blurring process means potential
82 The maximum likelihood estimations were carried out by a packaged ordered probit and ordered logit commands in STATA. 83 Initially we drop the peculiar case of the Monetary Authority of Singapore (MAS), that only on 1 October 2002, after the merger with the Board of the Commissioners of the Currency, became a central bank. The nature of exception of Singapore is stressed in De Luna Martinez and Rose (2001). We have to note also that in Ireland in May 2003 the Department of Enterprise, Trade and Employment (DETE) responsibilities on insurance sector were attributed to the Irish Central Bank. In any case we perform the econometric analyses considering also these cases (see above). 84 Pagano and Volpin (2000), Perotti and Von Thadden (2003).
25 changes in the nature and in the dimensions of intermediaries (the financial conglomerates effect). In a bank based regime, if we think that the policy makers choices depend on the features of their own regime, we can suppose a positive relationships between the kind of regime and the degree of financial supervision consolidation, in face of the financial conglomerates effect. At the same time, however, the blurring effects means potential changes in the nature and in the dimensions of the financial markets (the securitisation effects). Therefore, also in a market based regime, we can expect a positive relationships between the kind of regime nature and the degree of financial supervision consolidation, in face of the securitisation effect.
Second, , the institutional environment (i.e. the public governance climate) determines the ability of the policy makers to implement their choices. Then the second relevant question is: does the quality of the public governance (public governance factor) matter in defining the policy maker choices on the level of concentration in the supervisory structure?
Also the expected sign of the relationship between the degree of supervision consolidation and the public governance factor is undermined. In Section II we note that a policy maker, whatever is the financial regime of his country, can choose a higher degree of supervision in order to improve the capacity to face the challenges proposed by the blurring process. Then we can suppose a positive relationships between good governance indicators and financial supervision consolidation. But, at the same time, a policy maker can prefer a single financial agency in order to increase his probability to capture the financial supervisory structure. Therefore we could also expect a positive relationships between bad governance indicators and the financial supervision consolidation.
Finally, given the above descriptive analyses, we conclude our search for the explanatory variables by using the CBFA Index. The political choice of the optimal level of financial supervisors concentration could be depended on the role of central bank in the financial architecture. The third relevant question is: does the degree of central bank presence (central bank factor) in the financial supervision matter in defining the level of concentration in the supervisory structure? Given the descriptive analysis developed in the above Section and the two possible explanations – the blurring hazard effect and the monopolistic bureau effect - the expected sign of the relationship between central bank involvement and financial supervision consolidation is negative.
In Masciandaro and Porta (2003) we obtained as best specification the Equation (1):
( FAC ) = b + b ( CBFA ) + b ( MvBdum ) + i 1 2 i 3 i + b 5 ( mcap ) i + b 6 ( goodgov ) i + e t
with country i =1K68 (1)
Where the independent variables are the following:
1. CBFA Index is the indicator of involvement of the bank in supervision, defined in the above Section;
26 2. MvBdum Index (Market vs Bank Index): is a structural indicator (dummy) that expresses the financial system model of a given country, market-based versus bank-based, constructed on the basis of the indices created by Demigüç-Kunt and Levine. 85
4. mcap = Market capitalization/GDP 86, it shows a measure of the securities market size, relative to the GDP.
5. goodgov = Good Governance, it shows the structural capacity of the government to formulate and implement sound policies. The index is build using all the indicators proposed by Kaufmann et al.(2003)87. They define (public) governance as the exercise of authority through formal and informal traditions and institutions for the common good, thus encompassing: 1) the process of selecting, monitoring and replacing governments; 2) the capacity to formulate and implement sound policies and deliver public services; 3) the respect of citizens and the state for the institutions that govern economic and social interactions among them. Furthermore, for measurement and analysis purposes, these three dimensions of governance can be further unbundled to comprise two measurable concepts per each of the dimensions above for a total of six components: 1) voice and external accountability; 2) political stability and lack of violence; 3) government effectiveness; 4) lack of regulatory burden; 5) rule of law; 6) control of corruption. The authors present a set of estimates of these six dimensions of governance for four time periods: 1996,1998,2000,2002. For every country, therefore, first we calculate the mean of the four time values for each dimension of governance; then we build up an index of global good governance in the period 1996-2002, calculating the mean of the six different dimensions.
The estimation results of Equation (1) are reported in the first column, Table 4. Second column of Table 4 reports the estimation results of the same Equation (1) using an ordered Logit model. Note that the impact of a change in an explanatory variables on the estimated probabilities of the highest and lowest of the order classifications – in our case the Single Authority model and the “pure” Multi Supervisory model – is unequivocal: if bj is positive, for example, an increase in the value of xj increases the probability of having the Single Authority model, while decreases the probability of having the “pure” Multi Supervisory model.
85 Demigüç-Kunt and Levine (1999). 86 World Bank, 2001, World Development Indicators, Stock Markets 5.3. 87 Kaufmann, Kaan and Mastruzzi (2003).
27
TABLE 4: ORDERED PROBIT AND LOGIT ESTIMATES
VARIABLES probit logit DEPENDENT VARIABLE FAC FAC CBFA
Coefficient b2 - 0.94 -1.61 Std. Error (0.23) (0.43) P >z 0.00*** 0.00***
MvBdum
Coefficient b3 0.70 1.39 Std. Error (0.37) (0.66) P >z 0.05* 0.03*
mcap
Coefficient b5 - 0.62 -1.15 Std. Error (0.26) (0.46) P >z 0.02** 0.01***
goodgov
Coefficient b6 0.88 1.56 Std. Error (0.22) (0.40) P >z 0.00*** 0.00***
No of observations 68 68 LR chi2(5) 39.53 40.46 Prob>chi2 0.00 0.00 Pseudo R2 0.17 0.17 Log Likelihood -93.07 -92.60
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
These first econometric results seem interesting. The probability that a country will move toward a Single Authority model , is higher: 1)The lower the involvement of the central bank in these powers; 2) The smaller the financial system88; 3) the more equity dominated the private governance model; 4) the more the public governance is good.
88 If we think to the sample of the countries (14) with a Single Supervisor only, the UK seems to be the exception in the inverse relationship between the degree of financial supervision consolidation and the financial market dimension. In fact if the same regressions are performed without the UK – Annex II, Table 8 – all the results are confirmed, with a bit improvement. If we include Singapore, using the post 2003 Reform indexes of FAC and CBFA, the results – Annex II, Table 9 – on the role of central bank involvement and of the governance are confirmed, while the other relationships became weaker. The same if we consider – Annex II, Table 10 - Ireland using the post 2003 Reform indexes of FAC and CBFA.
28 Now, how should the empirical results be interpreted in terms of political delegation approach?
The empirical analysis, firstly, seems to suggest that the choices of the policymaker in terms of “whom” to delegate the supervisory policy to are closely linked to those regarding “ how many” institutions to delegate, according to an inverse relationship. In particular, the more the central bank is involved in financial supervisory powers, the lower the degree of unification of those powers is likely to be89. The first econometric analysis confirms the descriptive trade off between supervision consolidation and central bank involvement., that can be explain by the existence of a blurring hazard effect, and/or a monopolistic bureau effect.
Secondly, the choice of the degree of unification of supervisory powers seems to be influenced especially by the characteristics of the financial markets: more specifically, the smaller these markets, the more likely it seems that the probability of unification will increase, perhaps confirming the hypothesis of policymakers conditioned by the “small country” situation illustrated earlier.
Furthermore, a positive relationship between the market based regime and the degree of supervision consolidation seems to hold90. This fact could be explained by the focus of policymakers on the role of financial conglomerates, if there were evidence of a positive relationship between the degree of financial deepening and development of cross- sector intermediaries. The policymakers, in face of the possible effects of the growing presence of the financial conglomerates, prefer to increase the degree of consolidation in the supervision structure- Alternatively, the policymakers might be sensitive to the preferences of a highly concentrated banking and financial industry that appreciates a single supervisor (captive hypothesis).
Thirdly, the choice of policymakers to establish an unification of supervisory powers seems to be facilitated by an institutional environment characterized by good governance91. The relationship between good governance and supervision unification process can be explain if we suppose that a policymaker which care about the soundness and the efficiency can prefer the single financial authority as the optimal one in face of the blurring challenges.
Another hypothesis is that , in reality, good governance could be just a proxy of more deeper institutional factors, and so we do a further step: How robust are the results obtained thus far? To answer this question, we have attempted to insert control variables into the estimates.
Firstly, based on the descriptive analyses, we asked ourselves whether the choices of policymakers to increase the degree of concentration of supervisory powers might depend on the level of development in their respective countries. The geographical factor might also be important, in terms of membership, actual or potential, in the European Union.
Secondly, the relationship between the degree of concentration and the characteristics of the banking and financial markets might “obscure” the importance of other institutional variables,
89 At the same time, the variables that could explain the degree of central bank involvement in the financial supervision does not coincide with those that we use to analyze the degree of consolidation; in fact if you perform Probit and Logit regressions – Annex II, Table 11A and 11B – using CBFA as dependent variable and the same vector of financial and institutional variables, the result are not significant at all. 90 Note that the correlation index between the financial regime variable (MvBdum) and the market capitalization variable ( mcap) is high (…), but they influence the dependent variable with opposite sign. 91 All the three main results are confirmed if the FAC Two Index is used instead of FAC Index, as indicator of supervision consolidation. See Annex II, Table 12.
29 themselves determinants in explaining the characteristics of the banking and financial markets92. Recently, the structure of the financial markets was explained with three different approaches93: the law and finance view, in the static and dynamic versions; the politics and finance view; and the endowment view. In this paper, we have inserted control variables related to the law and finance view and the endowment view, while the politics and finance view was already represented by the indicator of governance. Furthermore, the same institutional variables can explained the significant role of the good governance variable in Equation (1).
Tables 6 and 7 report the probit and logit estimates with the inclusion of control variables. The results of the estimates, with the control variables inserted, show an improvement in their fitness and the robustness of at least two results. First the probability of a single financial authority is still inversely and significantly related to the involvement of the central bank. Second, the concentration of powers also seems to be linked to the institutional framework, especially to the Germanic and Scandinavian roots of the legal institutions. These results are confirmed with different samples too94, as Tables from A to D shown.
92 For example, in Demirguc-Kunt, Laeven and Levine (2003) regulation become insignificant in explain banking performances when controlling for institutional indicators. 93 Different approaches have been proposed to explain the country choice between bank based model and market based model: the “legal approach”, (La Porta, Lopez –de-Silanes, Shleifer and Vishny 1997, 1998); the “economic approach”(Rajan and Zingales, 2000); the “political economy approach” (Pagano and Volpin 2000, Verdier 2001, Rosenbluth and Schaap, 2001, Carney 2002, Perotti and von Thadden ,2003). 94 If the same regressions are performed without the UK – Annex II, Table 13 – all the results are confirmed. If we include Singapore, using the post 2003 Reform indexes of FAC and CBFA, the results – Annex II, Table 9 – on the role of the rules of law are confirmed, while the other relationships became weaker. The same if we consider – Annex II, Table 10 - Ireland using the post 2003 Reform indexes of FAC and CBFA. Finally all the results are completely confirmed if the FAC Two Index is used instead of FAC Index, as indicator of supervision consolidation. See Annex II, Table 16.
30
TABLE 6: ORDERED PROBIT ESTIMATES WITH CONTROL VARIABLES
VARIABLES probit I II III IV DEPENDENT FAC FAC FAC FAC FAC VARIABLE CBFA
Coefficient b2 - 0.94 -0.95 -0.96 -0.91 -0.88 Std. Error (0.23) (0.23) (0.23) (0.26) (0.26) P >z 0.00*** 0.00*** 0.00*** 0.00*** 0.00***
MvBdum
Coefficient b3 0.70 0.71 0.70 0.38 0.43 Std. Error (0.37) (0.37) (0.37) (0.41) (0.42) P >z 0.05* 0.05* 0.06 0.35 0.30
mcap
Coefficient b5 - 0.62 - 0.61 - 0.60 - 0.52 - 0.53 Std. Error (0.27) (0.27) (0.28) (0.30) (0.30) P >z 0.02** 0.02** 0.03** 0.08 0.07
goodgov
Coefficient b6 0.88 0.92 0.89 0.66 0.61 Std. Error (0.22) (0.32) (0.35) (0.39) (0.40) P >z 0.00*** 0.00*** 0.01*** 0.09 0.12
Gnpcapita Coefficient b -.000000431 -0.00000372 -0.0000346 -0.0000301 Std. Error (0.0000230) (0.0000232) (0.0000259) (0.0000270) P >z 0.85 0.87 0.18 0.26
EU membership Coefficient b 0.07 0.79 0.82 Std. Error (0.32) (0.43) (0.44) P >z 0.81 0.07 0.06*
Anglo Saxon Law Coefficient b 1.05 0.99 Std. Error (0.55) (0.55) P >z 0.05* 0.07
French Law Coefficient b 0.96 0.87 Std. Error (0.46) (0.48) P >z 0.04* 0.07
German Law Coefficient b 3.44 3.41 Std. Error (1.08) (1.07)
31 P >z 0.00*** 0.00***
Scandinavian Law 2.61 2.60 Coefficient b (0.87) (0.87) Std. Error 0.00*** 0.00*** P >z
Latitude Coefficient b -0.26 Std. Error (0.45) P >z 0.55
No of observations 68 68 68 68 68 LR chi2(5) 39.53 39.57 39.62 54.93 55.28 Prob>chi2 0.00 0.00 0.00 0.00 0.00 Pseudo R2 0.17 0.17 0.17 0.25 0.24 Log Likelihood -93.07 -93.05 -93.02 -85.73 -85.19
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
32
TABLE 7: ORDERED LOGIT ESTIMATES WITH CONTROL VARIABLES
VARIABLES logit I II III IV DEPENDENT FAC FAC FAC FAC FAC VARIABLE CBFA
Coefficient b2 -1.61 -1.61 -1.60 -1.57 -1.50 Std. Error (0.43) (0.43) (0.44) (0.46) (0.48) P >z (0.00)*** (0.00)*** (0.00)*** (0.00)*** (0.00)*** MvBdum
Coefficient b3 1.39 1.39 1.40 0.91 1.01 Std. Error (0.66) (0.66) (0.68) (0.74) (0.77) P >z 0.03** 0.03** 0.04* 0.33 0.18
mcap
Coefficient b5 -1.15 -1.15 -1.16 -1.11 -1.12 Std. Error (0.46) (0.47) (0.48) (0.55) (0.54) P >z 0.01*** 0.01*** 0.01*** 0.04* 0.04*
goodgov
Coefficient b6 1.56 1.54 1.56 1.08 0.99 Std. Error (0.40) (0.58) (0.63) (0.66) (0.67) P >z 0.00*** 0.00*** 0.01*** 0.10 0.14
Gnpcapita Coefficient b 0.000000127 0.000000953 -0.0000500 -0.0000421 Std. Error (0.0000445) (0.0000400) (0.0000468) (0.0000486) P >z 0.97 0.98 0.28 0.38
EU membership Coefficient b 0.04 1.32 1.34 Std. Error (0.57) (0.78) (0.79) P >z 0.94 0.09 0.08
Anglo Saxon Law Coefficient b 2.05 1.93 Std. Error (1.01) (1.03) P >z 0.04* 0.06
French Law Coefficient b 1.85 1.69 Std. Error (0.93) (0.87) P >z 0.02** 0.05*
German Law Coefficient b 5.76 5.69 Std. Error (1.91) (1.91) P >z 0.00*** 0.00***
Scandinavian Law
33 Coefficient b 4.45 4.44 Std. Error (1.55) (1.56) P >z 0.00*** 0.00***
Latitude Coefficient b -0.44 Std. Error (0.74) P >z 0.55
No of observations 68 68 68 68 68 LR chi2(5) 40.46 40.46 40.47 54.84 55.19 Prob>chi2 0.00 0.00 0.00 0.00 0.00 Pseudo R2 0.17 0.17 0.17 0.24 0.24 Log Likelihood -92.60 -92.60 -92.60 -85.41 -85.24
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
34
TABLE A: ORDERED PROBIT ESTIMATES : SUMMARY
VARIABLES 68 Without With With 68 countries UK Singapore Sing. & Ire. countries 2003 2003 DEPENDENT FAC FAC FAC FAC FAC TWO VARIABLE CBFA
Coefficient b2 - 0.94 - 0.93 - 0.60 - 0.44 - 0.92 Std. Error (0.23) (0.23) (0.20) (0.18) (0.23) P >z 0.00*** 0.00*** 0.00*** 0.01*** 0.00***
MvBdum
Coefficient b3 0.70 0.71 0.64 0.58 0.59 Std. Error (0.37) (0.37) (0.36) (0.36) (0.37) P >z 0.05* 0.05* 0.07 0.11 0.10
mcap
Coefficient b5 - 0.62 - 0.66 - 0.45 - 0.47 - 0.59 Std. Error (0.26) (0.27) (0.26) (0.26) (0.27) P >z 0.02** 0.01**** 0.07 0.06 0.02**
goodgov
Coefficient b6 0.88 0.88 0.86 0.47 0.74 Std. Error (0.22) (0.22) (0.21) (0.21) (0.21) P >z 0.00*** 0.00*** 0.00*** 0.00*** 0.00***
No of observations 68 67 69 69 68 LR chi2(5) 39.53 37.90 32.47 29.13 32.74 Prob>chi2 0.00 0.00 0.00 0.00 0.00 Pseudo R2 0.17 0.17 0.14 0.12 0.17 Log Likelihood -93.07 -92.16 -98.22 -98.92 -78.10
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
35 TABLE B: ORDERED LOGIT ESTIMATES: SUMMARY
VARIABLES 68 Without With With 68 countries UK Singapore Sing. & Ire. countries 2003 2003 DEPENDENT FAC FAC FAC FAC FAC VARIABLE CBFA
Coefficient b2 -1.61 -1.59 -1.14 -0.88 -1.55 Std. Error (0.43) (0.43) (0.39) (0.38) (0.42) P >z 0.00*** 0.00*** 0.00*** 0.02** 0.00*** MvBdum
Coefficient b3 1.39 1.39 1.31 1.21 1.18 Std. Error (0.66) (0.65) (0.64) (0.63) (0.66) P >z 0.03* 0.03* 0.04* 0.05* 0.07
mcap
Coefficient b5 -1.15 -1.21 -0.91 -0.86 -1.13 Std. Error (0.46) (0.47) (0.45) (0.44) (0.47) P >z 0.01*** 0.01*** 0.04* 0.05* 0.01***
goodgov
Coefficient b6 1.56 1.56 1.49 1.47 1.38 Std. Error (0.40) (0.40) (0.38) (0.38) (0.40) P >z 0.00*** 0.00*** 0.00*** 0.00*** 0.00***
No of observations 68 67 69 69 68 LR chi2(5) 40.46 38.86 34.59 30.99 33.46 Prob>chi2 0.00 0.00 0.00 0.00 0.00 Pseudo R2 0.17 0.17 0.15 0.13 0.17 Log Likelihood -92.60 -91.72 -97.16 -99.99 -77.74
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
36 TABLE C: ORDERED PROBIT ESTIMATES WITH CONTROL VARIABLES: SUMMARY
VARIABLES 68 Without With With 68 countries UK Singapore Sing. & countries 2003 Ire. 2003 DEPENDENT FAC FAC FAC FAC FAC TWO VARIABLE CBFA
Coefficient b2 -0.91 - 0.85 - 0.44 - 0.30 - 0.98 Std. Error (0.26) (0.26) (0.21) (0.20) (0.26) P >z 0.00*** 0.00*** 0.04* 0.14 0.00***
MvBdum
Coefficient b3 0.38 0.43 0.48 0.38 0.19 Std. Error (0.41) (0.41) (0.41) (0.41) (0.42) P >z 0.35 0.30 0.24 0.34 0.63
mcap
Coefficient b5 - 0.52 - 0.59 - 0.37 - 0.39 - 0.40 Std. Error (0.30) (0.30) (0.29) (0.29) (0.29) P >z 0.08 0.05* 0.19 0.17 0.18
goodgov
Coefficient b6 0.66 0.71 0.82 0.78 0.43 Std. Error (0.39) (0.39) (0.38) (0.38) (0.38) P >z 0.09 0.07 0.03* 0.03* 0.26
Gnpcapita Coefficient b -0.0000346 - 0.0000364 - 0.0000335 - 0.0000293 - 0.0000304 Std. Error (0.0000259) (0.0000260) (0.0000254) (0.0000254) (0.0000252) P >z 0.18 0.16 0.43 0.24 0.22
EU membership Coefficient b 0.79 0.67 0.31 0.37 1.02 Std. Error (0.43) (0.44) (0.40) (0.41) (0.43) P >z 0.07 0.16 0.43 0.36 0.01***
Anglo Saxon Law Coefficient b 1.05 0.91 0.59 0.68 1.15 Std. Error (0.55) (0.55) (0.52) (0.53) (0.55) P >z 0.05* 0.10 0.25 0.19 0.03**
French Law Coefficient b 0.96 0.93 .56 0.60 0.79 Std. Error (0.46) (0.46) (0.44) (0.44) (0.46) P >z 0.04* 0.04* 0.20 0.17 0.09
German Law Coefficient b 3.44 3.51 2.64 2.72 2.66 Std. Error (1.08) (1.09) (0.99) (1.00) (0.90) P >z 0.00*** 0.00*** 0.00*** 0.00*** 0.00***
37
Scandinavian Law 2.61 Coefficient b (0.87) 2.75 2.18 2.21 1.97 Std. Error 0.00*** (0.88) (0.84) (0.84) (0.80) P >z 0.00*** 0.01*** 0.00*** 0.01**
No of observations 68 67 69 69 68 LR chi2(5) 54.93 54.65 44.06 40.83 44.31 Prob>chi2 0.00 0.00 0.00 0.00 0.00 Pseudo R2 0.25 0.24 0.19 0.17 0.23 Log Likelihood -85.73 -83.82 -92.43 -93.07 - 72.31
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
38 TABLE D: ORDERED LOGIT ESTIMATES WITH CONTROL VARIABLES: SUMMARY
VARIABLES 68 Without With With 68 countries UK Singapore Sing. & Ire. countries 2003 2003 DEPENDENT FAC FAC FAC FAC FAC VARIABLE CBFA
Coefficient b2 -0.91 -1.48 -0.99 - 0.73 - 1.69 Std. Error (0.26) (0.47) (0.42) (0.43) (0.49) P >z 0.00*** 0.00*** 0.02** 0.07 0.00***
MvBdum
Coefficient b3 0.38 1.00 1.01 0.92 0.49 Std. Error (0.41) (0.75) (0.72) (0.77) (0.75) P >z 0.35 0.18 0.16 0.20 0.51
mcap
Coefficient b5 - 0.52 - 1.25 - 0.89 - 0.87 - 0.89 Std. Error (0.30) (0.56) (0.52) (0.51) (0.53) P >z 0.08 0.02** 0.08 0.09 0.09
goodgov
Coefficient b6 0.66 1.16 1.21 1.19 0.73 Std. Error (0.39) (0.66) (0.65) (0.65) (0.67) P >z 0.09 0.08 0.06 0.07 0.27
Gnpcapita Coefficient b -0.0000346 -0.0000521 - 0.0000469 - 0.0000422 - 0.0000476 Std. Error (0.0000259) (0.0000480) (0.0000452) (0.0000451) (0.0000451) P >z 0.18 0.27 0.29 0.34 0.29
EU membership Coefficient b 0.79 1.11 0.69 0.62 1.79 Std. Error (0.43) (0.79) (0.75) (0.75) (0.80) P >z 0.07 0.15 0.35 0.40 0.02**
Anglo Saxon Law Coefficient b 1.05 1.82 1.57 1.55 2.23 Std. Error (0.55) (1.01) (0.96) (0.96) (1.03) P >z 0.05* 0.07 0.10 0.10 0.03**
French Law Coefficient b 0.96 1.83 1.34 1.30 1.51 Std. Error (0.46) (0.83) (0.79) (0.79) (0.82) P >z 0.04* 0.02** 0.09 0.10 0.06
German Law Coefficient b 3.44 5.92 4.70 4.58 4.74 Std. Error (1.08) (1.94) (1.79) (1.79) (1.63) P >z 0.00*** 0.00*** 0.00*** 0.00*** 0.00***
39 Scandinavian Law 2.61 Coefficient b (0.87) 4.71 3.92 3.83 3.52 Std. Error 0.00*** (1.57) (1.51) (1.50) (1.45) P >z 0.00*** 0.01** 0.01*** 0.01***
No of observations 68 67 69 69 68 LR chi2(5) 54.93 54.64 46.10 42.30 44.86 Prob>chi2 0.00 0.00 0.00 0.00 0.00 Pseudo R2 0.25 0.24 0.20 0.18 0.23 Log Likelihood -85.73 -83.82 -91.41 - 92.34 - 72.04
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
40
7. Conclusions
The objective of this work was to determine whether there is a tendency toward the consolidation of powers of financial supervision into a single authority, so as to analyze its possible causes and effects.
The phenomenon does exist, especially if we consider the developed countries, and particularly those in Europe. Regarding the effects, this paper indicates that an increase in the degree of concentration may produce expected benefits but also expected costs, and the empirical estimate of those effects is arduous at this point, whether because the phenomenon has emerged only recently or because of the difficulty of identifying a satisfactory, exhaustive set of indicators of the possible consequences.
Furthermore, in methodological terms, precisely because any reform of the supervisory regime could produce expected benefits and costs, and the evaluation of these consequences is made by the policymakers who decide whether to maintain or reform their supervisory structure, we have adopted a political economy approach to the problem, so as to discern any common determinants of the decision to increase the degree of concentration of powers.
To do this, we first introduced a Financial Authorities’ Concentration Index (FAC Index), to have an indicator of the degree of concentration of powers country by country. The comparative analysis of 69 countries, based on the FAC Index, confirmed the qualitative impression that an increase in the degree of concentration of powers was evident in the developed countries, particularly in the European Union, considering both the current 15 member states and the prospective enlargement to 25 members. Then, in order to consider the nature of the institutions involved in the control responsibilities – i.e. what role the central bank plays - it is introduced an index of the central bank's involvement in financial supervision, the Central Bank as Financial Authority Index (CBFA Index).
Each national regime can be identified with the two above characteristics. Two the most frequent models: countries with a high concentration of powers with low central bank involvement (Single Financial Authorities Regime); countries with a low concentration of powers with high central bank involvement (Central Bank Dominated Multiple Supervisors Regime). The descriptive analysis signals at least two results. First, in the financial supervision arena, the policy makers around the world choose to delegate this policy, rather than implement it directly. Second, the political choice on how many agencies have to be involve in supervision is strictly intertwined with the role of central bank: the degree of supervision consolidation seems to be inversely correlated with the central bank involvement.
Finally, to empirically gauge the possible structural determinants of the degree of concentration of powers, it is performed an econometric analysis of the Probit and Logit types. The econometric results seem interesting.
First, the probability that the degree of concentration increases is inversely proportional to the central bank involvement in the supervisory regime. The political choice on how many agencies have to be involve in supervision seems to be strictly intertwined with the role of central bank: the degree of supervision consolidation seems to be inversely correlated with the central bank
41 involvement. How to explain – before to test it econometrically – these stylized facts? It has been argued that the reason of the trade off between the supervision consolidation and the central bank involvement is because of a fear that the safety net – central bank function of lender of last resort – might be spread to a wider set of institution than just banks if the central bank is also involved in supervising insurance and securities trading firm (blurring hazard effect). Furthermore, a political economy explanation could be add to this economic interpretation: in the country in which the central bank is deeply involved in supervision, the policy makers could fear the creation of a too much powerful bureaucratic agency, and therefore they prefer to have more supervision agency, and consequently a less consolidated supervisory regime (monopolistic bureau effect).
Second, the consolidation of financial supervision seems to be a more markedly European phenomenon, linked especially to the Germanic and Scandinavian roots of the legal institutions. The historical and institutional reasons that could explain the positive relationship between German and Scandinavian rules of law, on one side, and degree of supervision consolidation have to be further investigated.
42
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48
9. ANNEX I: THE FINANCIAL SUPERVISION ARCHITECTURES IN 69 COUNTRIES
COUNTRIES INSTITUTIONAL FEATURES 1 Albania The Central Bank of Albania, founded in 1992, is responsible of monetary policy – monetary stability goal and institutional independence were strengthened in 1997 - and it also regulates and supervises the banking system95. Financial markets are supervised by Albanian Securities Commission96, which grants investors’ standards of protection and purses financial market efficiency. Insurance sector, amended by an act of law in 1996, is supervised by the Supervisory Commission of Insurance97. Albania shows therefore a multiple supervisors model98. 2 Argentina The Central Bank of Argentina (Banco Central de la Repubblica Argentina), founded in 1935 is responsible of monetary policy – monetary stability goal and institutional independence were strengthened in 2003 -and it also regulates and supervises the banking system99. The supervision structure is a multiple agents one100: the Comision Nacional de Valores supervis es Financial sector (while the Buenos Aires Stock Exchange organizes the markets101, the Central Bank purses banking supervision, and the Superintendencia de Seguros de la Nacion Argentina, founded in 1938, monitors the insurance sector 102. 3 Australia The Central Bank of Australia (Reserve Bank of Australia) was founded in 1911 and reformed in 1959 to carry on better the monetary policy function, oriented to the stability of the currency, the maintenance of full employment and the economic prosperity and welfare. Since 1993 these goals have found practical expression in a target for inflation103. The Australian supervision’s – defined in 1998 - approach is based on the functional approach target: Australian Prudential Regulatory Authority104 (APRA) purses prudential supervision on regulated institutions in all the three sector, Australian Securities and Investment Commission (ASIC) monitors over the Conduct of business in security markets105. In 2003 the Council of Financial Regulators was established (members: Reserve Bank, APRA, ASIC, Treasury). Furthermore, in order to ensure the overall financial stability, institutional mechanisms of cooperation between Reserve Bank and APRA are established. 4 Austria The Central Bank of Austria (Oesterreichische Nationalbank), actually member of ESCB, was established in 1955. The Banking Law was emended in 1981 giving the Central Bank the objective of monetary stability (further amendments: 1993,2000, 2001)106. On 2002 the Austria supervision was committed to a single agency: the Financial Market Supervision Authority (FMA), that integrated the supervisory responsibility of several government authorities (the Minister of Finance Banking Supervisor, the Minister of Finance insurance Supervisor, the Securities Supervision Authority). The single supervisor substituted a regime with multiple
95 www.bankofalbania.org, November 2003. 96 http://www.asc.gov.al, November 2003. 97http://aeda.gov.al/insurance.htm; http://insig.com.al, November 2003. 98 See also http://www.lae.utoledo.edu. 99 www.bcra.gov.ar, November 2003. 100 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 101 http://www.bcba.sba.com.ar/bolsa, November 2003. 102 www.ssn.gov.ar, November 2003. 103 www.rba.gov.au, November 2003. 104 http://www.apra.gov.au , November 2003. 105 Barth et al. (2001), Llewellyn (2001). On the role of Reserve Bank of Australia see Jonk, Kremers and Schoenmaker,(2001). 106 http://www.oenb.at, November 2003.
49 supervisors without central bank involvement. The Minister of Finance retains the political responsibility on financial supervision107. 5 Belgium The Central Bank of Belgium, actually member of ESCB, was established in 1850108. Belgium is characterized by a unified supervision structure for banking system and financial sector109. The Banking and Financial Commission (BFC)110 – established in 2002 - is the authority that is responsible, in these two sectors, for all the goals of prudential supervision as well as of the conduct of business supervision. The Insurance Supervision Office (ISO) – established in 1975 and confirmed in its role on 2002 – supervises the insurance sector111. Regarding the governing bodies of these authorities, two or three members of the Central Bank Board of Directos shall, but on personal basis, have a seat in the Board of Directors of the BFC , and one or two members in that of the ISO 112. 6 Belarus The Central Bank of Belarus was founded in 1990. The monetary policy guidelines are annually approved by the President of Belarus on presentation of both the Government and the Central Bank. The monetary policy goals are: the monetary and financial stability, as well as the soundness of the payment system113. The supervisory architecture of Belarus is consistent with a sectoral approach: the Central bank is the banking supervisory agency, the Committee on Securities (Ministry of Finance) supervises the securities markets, while the Committee for Insurance Supervision (Ministry of Finance looks the insurance sector114. Belarus therefore shows a multiple supervisors model115. 7 Bosnia The Central Bank of Bosnia Erzegovina was founded in 1997. The monetary policy goal is to pursue monetary stability according to the Currency Board arrangement. The Central Bank supervises the payment system and coordinates the banking sector supervision116. The supervisory regime is consistent with a sectoral approach: the banking supervision is conducted by the Central Bank jointly with the Entities Banking Agencies. The Securities Commission of Federation of Bosnia and Herzegovina – established in 2002 - is responsible for the security markets supervision117 . Actually the insurance sector does not exist. A Federation Health Insurance Fund will be re-established as an arms – length agency, separate but reporting to the Federal Ministry of Health118. Bosnia therefore shows a multiple supervisors model. 8 Brasil The Central Bank of Brasil (Banco Central do Brasil) was created in 1964 and definitely reformed in 1988. The Central Bank goals are to ensure the monetary stability and the soundness of the national financial system, according to the guidelines given by the Federal Government119. The Brazilian supervision’s model is based on a multiple supervisors model120, with a joint control on the insurance sector. the Central Bank supervises the banking intermediaries, according to the regulation issued by the National Monetary Council (NMC) – the political responsible body – and the Central Bank itself. The Governor chairs the NMC121 . To Comissao de Valores Mobiliarios is committed the control of securities sector122, while to the Central Bank and to the Superintendencia de Seguros Privados is assigned the supervision on the insurance companies123. 9 Bulgaria In 1997 the law presently in force on the Bulgarian Central Bank was enacted. The main tasks of
107 http://www.dbj.co.at, November 2003. De Luna Martinez and Rose (2001). 108 www.bnbe.be, November 2003. 109 De Luna Martinez and Rose (2001). 110 http://www.cbf.be , November 2003. 111 http://www.cdv-oca.be , November 2003. 112 http://www.bnbe.be, November 2003.. 113 http://www.nbrb.by , November 2003. 114 http://www.belarurembassy.org , http://www.belarus.net , November 2003. 115 See also http://www.lae.utoledo.edu. 116 http://www.cbbh.gov.ba , December 2003. 117 http://www.komvp.gov.ba, November 2003. 118 http://Komvp.gov.ba , November 2003. 119 http://www.bcb.gov.br , November 2003. 120 De Luna Martinez and Rose (2001). 121 http://www.bcb.gov.br , November 2003. 122 http://www.bovespa.com , November 2003. 123 http://www.bcb.gov.br , November 2003.
50 the Central Bank are the maintenance of monetary and financial stability, as well as the efficiency of the payment system124. The Bulgarian supervisory regime is based on a multiple agents model125. The banking system is regulated and monitored by the Bulgarian Central Bank; the securities markets are supervised by the Financial Supervision Commission126, while the insurance sector is committed to the State Insurance Supervisory Agency (SISA)127. 10 Canada The Central Bank of Canada was founded in 1934. The goal of monetary policy is to contribute to the overall country performances by keeping inflation low, stable and predictable 128 . In Canada the supervision is based on a single authority (Office of Superintendent of Financial Institutions, established in 1986) that must look after two financial sectors (Banking and Insurance) with a strong autonomy from the Central Bank , which hasn’t any supervision power129. The authority to regulate securities rests with the provincial governments with the Canadian Federation. 11 Chile The Central Bank of Chile was founded in 1925, and the more recent constitutional central bank law was enacted in 1989. The main tasks of the Central Bank are the maintenance of monetary and financial stability, as well as the efficiency of the payment system130. Chile shows a unitary supervision with regards to securities and insurance sector131: the Superintendencia de Valores y Seguros (SVS) monitors both the industries132. The banking system is supervised by a specific authority: the Superintendencia de Bancos e Institutiones Financieras (SBIF) 133. A limited role is reserved to the Superintendencia de Administradoras de Pensiones (SAFP) which regulates pension funds134. The political responsible body of the overall financial regulations is the Capital Market Committee, participated by the Superintendents and by the Central Bank, and headed by the Deputy Minister of Finance135. 12 Cyprus The Central Bank of Cyprus was established in 1963, and a new central bank law was enacted in 2002, in order to ensures the consistency with the European Union laws. The primary monetary policy goal is the monetary stability136. Cyprus shows a typical multiple supervisors regime 137, with the Central Bank as banking supervisor and regulator. The securities markets are supervised by the Capital Market Commission (2003), while the insurance industry is committed to the Insurance Companies Supervisory Authority138. 13 Colombia The Central Bank of Colombia (Banco de la Repubblica) was established in 1923; in 1991 the new Constitution of Chile introduced a central banking reform, giving constitutional rank to the monetary stability goal. The President of the Central bank is the Minister of Finance139. Colombia shows a unitary supervision with regards to banking and insurance sector140: the Superintendencia Bancaria, an agency of the Ministry of Finance different from the Central Bank – which is in charge as banking regulator – supervises both industries141. The securities market is monitored by the Superintendencia de Valores142, an agency of the Ministry of Industry. On 2003 the Superintendents coordinate their actions as regulators in the accounting practices. 14 Croatia The Central Bank of Croatia was established in 1990, and a new central bank law was enacted in
124 http://www.bnb.bg , November 2003. 125 De Luna Martinez and Rose (2001), see also http://www.lae.utoledo.edu. 126 www.bse-sofia.bg , November 2003. 127 http://www.daon.government.bg, November 2003 128 http://www.bankofcanada.ca, November 2003. 129 http://www.iedm.org , De Luna Martinez and Rose (2001). 130 www.bcentral.cl , November 2003. 131 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 132 http://www.svs.cl , November 2003. 133 http://www.svs.cl, November 2003. 134 Ibidem. 135 Ibidem. 136 http://www.centralbank.gov.cy , November 2003. 137 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 138 http://www.centralbank.gov.cy , November 2003. 139 http://www.banrep.gov.co , November 2003. 140 De Luna Martinez and Rose (2001); http://www.lae.utoledo.edu. 141 www.superbancaria.gov.co , November 2003. 142 http://www.bolsabogota.com.co , November 2003.
51 1991, in order to ensures the consistency with the European Union laws. Croatia has a sectoral supervision regime: the Croatian Securities and Exchange Commission (CROSEC) – established in 1996 – supervises the capital market143; the Central Bank regulates and supervises the banking system144, while the Insurance Supervisory Directorate (ISD) is the supervisory agency of the insurance sector 145. Croazia therefore shows a multiple supervisors model146. 15 Czech Republic The Central Bank of Czech Republic was founded in 1993, and its main task is to maintain the monetary stability147. Czech Republic has a sectoral supervision regime 148: the Central Bank regulates and supervises the banking system, the Czech Securities Commission (CSC) – established in 1998 – supervises the capital market149, while the Ministry of Finance takes care of the insurance sector150.
16 Denmark The Central Bank of Denmark was definitely established in 1936, and its main task is the monetary stability151. Denmark has chosen in 1988 the single supervisor model152: the Financial Supervisory Authority (SFA) regulates and supervises all three sectors - banking, securities and insurance – in order to maintain confidence in the financial sector153. The SFA was established merging the Supervisory Authority for Banks and Savings Banks and the Insurance Supervisory Authority 154. The single supervisor substituted a regime with multiple supervisors without central bank involvement. 17 Egypt The Central Bank of Egypt was founded in 1961; in 2003 a new central banking law was enacted, strengthening its independence in order to pursue monetary stability155. Egypt has a sectoral supervision regime156: the Central Bank takes care of banking system, the Capital Market Authority of securities sector157 and the Egyptian Insurance Supervisory Authority of insurance companies158. Egypt therefore shows a multiple supervisors model. 18 Ecuador The Central Bank of Ecuador (Banco Central del Equador) was founded in 1948; in 1989 the structure of the monetary and banking control resembled a three - tiered pyramid, with the Monetary Board at the apex and the Central Bank and the Bank Superintendence occupied the next tier. The Central Bank goal is the economic stability in order to promote the country development159. Ecuador shows a unitary supervision agency with regards to banking and insurance sector 160: the Bank Superintendence (Superintendencia de Bancos)161. Regulation and supervision of securities market is provided by the Superintendencia de Companias162. 19 Estonia The Central Bank of Estonia was founded on 1919 and then, after 50 years of occupation by German troops and Soviet Army, it was re-established in 1990. The monetary policy goal is the price stability163. Estonia has chosen in 1999 the single supervisor model164: the Financial
143 http://www.zse.hr , November 2003. 144 http://www.hnb.hr , November 2003. 145 http://www.hgk.hr , November 2003. 146 See also http://www.lae.utoledo.edu. 147 http://www.cnb.cz , November 2003. 148 See also http://www.lae.utoledo.edu. 149 http://www.sec.cz , November 2003. 150 http://www.whitecase.com , November 2003. 151 http://www.nationalbanken.dk , November 2003. 152 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 153 http://www.ftnet.dk , November 2003. 154 Ibidem. 155 http://www.cbe.org , November 2003. 156 De Luna Martinez and Rose (2001), p.5, classified Egypt both as a case of multiple supervisors and as an example of country with an agency supervising two types of intermediaries (securities firms and insurers). On the basis of the official data source (see notes 55,57 and 58), the first classification is correct; see also http://www.lae.utoledo.edu. 157 http://www.cma.gov , November 2003. 158 http://www.eisa.com , November 2003. 159 http://www.bce.fin.ec , http://www.1upinfo.com , November 2003. 160 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 161 http://www.bce.fin.ec , http://www.1upinfo.com , November 2003. 162 http://www.supercias.gov.ec , October 2003. 163 http://www.eestipank.info , November 2003. 164 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu.
52 Supervision Authority (FSA) (Finantsinspektsioon) supervises all the three sectors (banking, securities and insurance)165. The Central Bank regulates the banking sector. The FSA can ask advice to the previous securities, banking and insurance authorities: the Tallin Stock Exchange, the Central Bank and the Estonian Insurance Supervisory Authority166. 20 Finland The Central Bank of Finland, actually member of ESCB, was established in 1811 167. The financial supervision in Finland is committed to a single authority for banking and securities sectors168: the Financial Supervisory Authority, established in 1993. The insurance market is supervised by the Ministry of Social Affairs and Health169. 21 France The Central Bank of France (Banque de France), actually member of ESCB, was established in 1800170. France adopted a multiple supervisors approach171. On 1984 the Banking Act divided the banking supervisory duties between three agencies: the Banking Regulatory Committee (Comitè de la reglementation bancarie), the Credit Institutions Committee (Comitè des etablissements de credit) and the Banking Commission. In 1996 the Banking Commission supervision has also extended to investment firms. The Banking Commission is chaired by the Governor of the Central Bank; the Central Bank provides the Commission with agents and material support172. The banking and financial regulation is also provided by the Banking and Financial Regulatory Committee, chaired by the Minister of Finance and participated by the Governor of the Central Bank, acting after consultation with the Financial Market Council. In the securities market regulation and supervision are provided by the Commission des Operations de Bourse (COB), established in 1967. The Central Bank supervises the markets for negotiable debt securities173. The insurance sector is supervised by the Commission de controle des assurances 174. 22 Georgia The Central Bank of Georgia was founded in 1991 and reformed in 1995; its tasks are the monetary stability and the soundness of the banking system175. Georgia has a sectoral supervision regime: the Central Bank regulates and supervises the banking industry, the Securities Commission monitors the capital markets176, while the State Insurance Supervision Service is committed to the insurance sector177. Both the Securities Commission and the Insurance Service are independent agencies. Georgia therefore shows a multiple supervisors model. 23 Germany The Deutsche Bundesbank, the Central Bank of the Federal Republic of Germany, actually member of ESCB, was established in 1957178. Germany has chosen in 2002 the single supervisor model179: the Federal Financial Supervisory Authority (FFSA) regulates and supervises all the three sectors: banking, securities and insurance180. The FFSA was established merging the Federal Banking Supervisory Office, the Federal Supervisory Office for Securities Trading and the Federal Supervisory Office for Insurance Enterprises181. The single supervisor substituted a regime with multiple supervisors without central bank involvement. On the basis of 2002 Integrated Supervision of Financial Service Act, the FFSA and the Bundesbank signed an agreement on the cooperation in day-to-day supervision, to avoid duplication of work and boost cost effectiveness, given in particular the activities of the Bundesbank’s Regional Offices182.
165 http://www.hex.ee , October 2003. 166 http://www.abll.ee , October 2003. 167 http://www.bof.fi , November 2003. 168 De Luna Martinez and Rose (2001). 169 http://www.vn.fi , November 2003. 170 http://www.banque-france.fr , November 2003. 171 De Luna Martinez and Rose (2001). 172 http://www.banque-france.fr , November 2003. 173 http://www.cob.fr , November 2003. 174 http:// www.minefi.gouv.fr , November 2003. 175 http://www.bng.gov.ge , November 2003. 176 http://www.gse.org.ge , November 2003. 177 http://www.insurance.caucasus.net , November 2003. 178 http://www.bundesbank.de, November 2003. 179 De Luna Martinez and Rose (2001). 180 http://www.zurich.com/zfs , November 2003. 181 http://www.bundesbank.de, November 2003. 182 http://www.bundesbank.de, Novemb er 2003.
53 24 Greece The Central Bank of Greece, actually member of ESCB, was established in 1928, and its statute was amended in 1997, in order to safeguard the central bank independence as well as the monetary stability goal183. Greece has a multiple supervisors regime 184: the Central Bank regulates and supervises the banking system, the Capital Market Commission (CMC) supervises the securities market185, while the insurance companies are monitored by the Insurance Companies’ Supervisory Authority, an agency of the Ministry of Development 186. 25 Hong Kong The Hong Kong Monetary Authority is the Central Bank, which was established in 1993, merging the Office of the Exchange Fund with the Commissioner of Banking, in order to promote the monetary stability and the soundness of the banking system187. Hong Kong has a multiple supervisors regime 188: the Central Bank regulated and supervises the banking system, the Securities and Futures Commission regulates and supervises the capital market189, while the insurance companies are monitored by the Office of the Commissioner of Insurance, established in 1990190. 26 Hungary The first national Central Bank of Hungary was established in 1924; in 1991 a Central Bank Act safeguarding the authority independence as well as the monetary stability goal was enacted191 . Hungary has chosen in 2000 the single supervisor model192: the Hungarian Financial Supervisory Authority (HFSA) regulates and supervises all the three sectors: banking, securities and insurance193. The HFSA was established merging the Hungarian Banking and Capital Market Supervision, the State Insurance Supervision and the State Pension Fund Supervision194. The single supervisor substituted a regime with multiple supervisors without central bank involvement. 27 Iceland The Central Bank of Iceland (Seðlabanki Íslands) was founded in 1961; on 2001, a new Central Bank Act entered in force, safeguarding the authority independence as well as the monetary stability goal195. Iceland has chosen in 1988 the single supervisor model196: the Iceland Financial Supervisory Authority (IFSA) (Fjármálaeftirlitsins) regulates and supervises all the three sectors: banking, securities and insurance197 28 India The Central Bank of India was founded in 1911, with the goals of maintaining monetary stability and ensuring adequate flow of credit to productive sectors198. India shows a multiple supervisors model199, with the presence of two specific authorities in the banking sector: the Central Bank and the Department of Banking Supervision. The capital market is supervised by the Securities and Exchange Board of India 200, while the insurance sector is monitored by the Insurance Regulatory and Development Authority (IRDA)201. 29 Ireland The Central Bank of Ireland, actually member of ESCB, was established in 1943202. Up to May 2003, the Central Bank supervised both the banking sector and the securities markets. Before the 2000 the insurance sector was monitored by a government department, but the Insurance Act
183 http://www.bankofgreece.gr , November 2003. 184 De Luna Martinez and Rose (2001). 185 http://www.mof-glk.gr , November 2003. 186 http://www.norden.org, November 2003. 187 http://www.info.gov.hk, November 2003. 188 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 189 http://www.hksfc.org.hk , November 2003. 190 http://www.info.gov.hk , November 2003. 191 http://english.mnb.hu, November 2003. 192 De Luna Martinez and Rose (2001). 193 http://www.pszaf.hu , November 2003. 194 Ibidem. 195 http://www.sedlabank.is , November 2003. 196 De Luna Martinez and Rose (2001). 197 http://www.fme.is , November 2003. 198 http://www.rbi.org.in , November 2003. 199 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 200 http://www.sebi.gov.in , November 2003. 201 http://www.irdaindia.org , November 2003. . 202 http://www.centralbank.ie , November 2003.
54 conferred to the Central Bank also the supervision of insurance intermediaries. Finally, Ireland has chosen in May 2003 the single supervisor model203: the Irish Financial Services Authorities, a department of the Central Bank204. 30 Israel The Central Bank of Israel was officially established in 1954205. Since 1992 the goal of monetary policy is to achieve the inflation target set by the Government. Israel shows a multiple supervisor model206 : the Central Bank regulates – from the mid-2003 with a specific Financial Stability – and supervises the banking system, the securities market is supervised by the Israel Securities Authority207, while the insurance sector is monitored by the Commissioner of the Capital Market, Insurance and Savings of the Ministry of Finance208. The Central Bank is responsible for the banking stability, while the Commissioner has the responsibility for the stability of the other financial institutions. 31 Italy The Central Bank of Italy (Banca d’Italia), actually member of ESCB, was founded in 1893209. Italy shows a multiple supervisors model210, with the presence of the Central Bank in two sectors, due the Banking and Financial Law enacted in 1993. The Central Bank regulates and supervises banking and non banking intermediaries; securities market is monitored by an independent agency, the Commissione Nazionale per le Società e la Borsa (CONSOB)211, while the insurance sector is supervised by a sectoral authority, the Istituto per la Vigilanza sulel Assicurazioni Private (ISVAP) 212. 32 Jamaica The Central Bank of Jamaica was established in 1960. The monetary policy shall to be aimed at promoting the economic growth, without undermining the price stability 213. Jamaica shows a unitary supervision with regards to securities market and insurance sector214: while the Central Bank regulates and supervises the banks – due the 1985 Financial Sector Reform Program – and – after the 1999 Law – also the credit unions , the Financial Service Commission monitors non banking and insurance companies215. 33 Japan The Central Bank of Japan was established in 1877216. The Central Bank’s missions are to maintain price stability and to ensure the financial stability. Japan has chosen in 2001 the single supervisor model217: the Japan Financial Supervisory Authority (JFSA) regulates and supervises all the three sectors: banking, securities and insurance218. The Central Bank, given its role as lender of last resort, may conduct examinations of banks, but in coordination by the JFSA219. 34 Jordan The Central Bank of Jordan was established in 1959220. The monetary policy goals are to maintain the monetary stability, to ensure the currency convertibility and to promote the economic growth. Jordan shows a multiple supervisors model221: the Central Bank regulates and supervises the banking system, the Jordan Securities Commission (JSC) monitors the capital market222, while the Insurance Commission – an agency chaired by the Minister of Industry and Trade - monitors insurance companies223. 35 Latvia The Central Bank of Latvia was founded in 1768 and then, after 50 years of occupation by
203 De Luna Mart inez and Rose (2001). 204 http://www.ifsra.ie , November 2003. 205 http://www.bankisrael.gov.il , November 2003. 206 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 207 http://www.isa.gov.il , November 2003. 208 Ibidem. 209 http://www.bancaditalia.it , November 2003. 210 De Luna Martinez and Rose (2001). 211 http://www.consob.it , November 2003. 212 http://www.isvap.it , November 2003. 213 http://www.boj.org.jm , November 2003. 214 See also http://www.lae.utoledo.edu. 215 http://www.fscjamaica.org , November 2003. 216 http://www.boj.org , November 2003. 217 De Luna Martinez and Rose (2001). 218 http://www.fsa.go.jp , November 2003. 219 Ibidem. 220 http://www.cbj.gov.jo , November 2003. 221 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 222 http://www.jsc.gov.jo , November 2003. 223 http://www.jrc.gov.jo , November 2003.
55 German troops and Soviet Army, it was re -established on 1990. The monetary policy goal is the price stability224. Latvia has chosen in 1998 the single supervisor model225: the Financial and Capital Market Commission (FCMC) regulates and supervises all the three sectors (banking, securities and insurance)226. 36 Lithuania The Central Bank of Lithuania was founded in 1918 and then, after 50 years of occupation by German troops and Soviet Army, it was re-established on 1990; a new Central Bank Law was enacted in 2001, in order to grant greater independence. The monetary policy goal is the price stability227. Lithuania shows a multiple supervisors model228: the Central Bank regulates and supervises the banking system, the Lithuania Securities Commission (LSC), established in 1992, regulates and monitors the capital market229, while the State Insurance Supervisory Authority at the Ministry of Finance monitors insurance companies230. 37 Luxembourg The Central Bank of Luxembourg, actually member of ESCB, was founded in 1998, after the Luxembourg Monetary Institute experience – created in 1983 – and the establishment in 1945 of the Banking Supervision Commissioner231. Luxembourg is characterized by a unified supervision structure for banking system and financial sector232. The Banking and Financial Commission (Commission de Surveillance du Secteur Financier)233, established in 1999, is the authority that is responsible, in these two sectors, for all the goals of prudential supervision as well as of the conduct of business supervision. The Central Bank regulates the banking sector. The Insurance Supervision Office (Commission de Surveillance du Secteur Financier) supervises the insurance companies234.
38 Macedonia The Central Bank of Macedonia was founded in 2002. The monetary policy goal is the price stability235. Macedonia shows a multiple supervisors model236: the Central Bank regulates and supervises the banking system, while the Macedonia Securities and Exchange Commission (MSEC), established in 1992, regulates and monitors the capital market, while no supervision exist on the insurance sector 237. 39 Malaysia The Central Bank of Malaysia (Bank Negara Malaysia) was established in 1959. The monetary policy goals shall be to maintain the monetary and financial stability and to promote the economic growth238. In Malaysia the supervision is based on a single authority, the Central Bank, that must look after two financial sectors239 (Banking and Insurance) 240, while the regulation and the supervision of the capital market is guaranteed by the Securities Commission of Malaysia, established in 1993241. 40 Malta The Central Bank of Malta was established in 1968, and its main task is the monetary stability242. Malta has chosen in 2002 the single supervisor model243: the Malta Financial Service Authority (MSFA) regulates and supervises all three sectors - banking, securities and insurance244. The
224 http://www.bank.lv, November 2003. 225 De Luna Martinez and Rose (2001); http://www.lae.utoledo.edu. 226 http://www.fktk.vl , October 2003. 227 http://www.bank.lv, November 2003. 228 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 229 http://www.lsc.lt , November 2003. 230 http://www.vdpt.lt November 2003. 231 http://www.bcl.lu, , November 2003. 232 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 233 http://www.cssf.lu , November 2003. 234 http://www.commassu.lu, November 2003. 235 http://www.nbrm.mk , November 2003. 236 See also http://www.lae.utoledo.edu. 237 http://sec.gov.mk , November 2003. 238 http://www.bnm.go.my , November 2003. 239 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu 240 Ibidem, http://www.tradepartners.go.uk , November 2003. 241 http://www.sc.com.my , November 2003. 242 http://www.centralbankmalta.com , November 2003. 243 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 244 http://www.mfsc.com.mt , , November 2003.
56 MSFA was established merging the functions previously carry out by Malta Financial Services Centre and the Central Bank245. The single supervisor substituted a regime with mult iple supervisors with central bank involvement. 41 Mauritius The Central Bank of Mauritius was established in 1959. The monetary policy goals are to maintain the monetary stability, to ensure the currency convertibility and to promote the economic growth 246. Mauritius shows a unitary supervision with regards to securities market and insurance sector247: while the Central Bank regulates and supervises the banks – under the 1988 Banking Act, the Financial Service Commission, established in 2001, monitors non banking and insurance companies248. 42 Mexico The Central Bank of Mexico was founded in 1925. The monetary policy goals are to maintain the monetary stability and to promote a sound financial system 249. Mexico is characterized by a unified supervision structure for banking system and securities sector250. The National Banking and Securites Commission (Comision Nacional Bancaria y de Valores)251, established in 1994, is the authority that is responsible, in these two sectors, for all the goals of prudential supervision as well as of the conduct of business supervision. The National Insurance Commission (Comision National de Seguros y Finanza) supervises the insurance companies252. 43 Moldova The Central Bank of Moldova was founded in 1991. The mo netary policy goal is the price stability253. Moldova shows a multiple supervisors model254: the Central Bank – under the 1991 National Bank Law and the 1995 Financial Institutions Law - regulates and supervises the banking system, while the National Securities Commission, established in 1992, regulates and monitors the capital market, while no specific supervision agency exist on the insurance sector 255. 44 Netherlands The Central Bank of Netherlands, actually member of ESCB, was founded in 1948 256. Netherlands shows a multiple supervisors model257, with the presence of the Central Bank in two sectors. The Central Bank regulates and supervises banking and non banking intermediaries; securities market is monitored by an independent agency, the Netherlands Authority for the Financial Markets (AFM)258, while the insurance sector is supervised by a sectoral authority, the Pensions and Insurance Supervisory Authority (PVK) 259. 45 New Zealand The Central Bank of New Zealand (Reserve Bank) was founded in 1989, and its statute was amended in 2003. The monetary policy goal is the price stability 260. New Zealand shows a multiple supervisors model261: the Central Bank regulates and supervises banking intermediaries; capital market is monitored by an independent agency, the Securities Commission, established in 1978262, while the insurance sector is supervised by a self regulatory authority 263. 46 Norway The Central Bank of Norway (Norges Bank) was established in 1985 as independent agency, and
245 Ibidem. 246 http://www.cbj.gov.jo , November 2003. 247 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 248 http://www.fscmauritius.org , November 2003. 249 http://www.banxico.org.mx , November 2003. 250 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 251 http://www.cnbv.gob.mx , November 2003. 252 http://www.cnsf.gob.mx , November 2003. 253 http://www.bnm.org , November 2003. 254 See also http://www.lae.utoledo.edu. 255 http://www.moldse.md , November 2003. 256 http://www.dnb.nl , November 2003. 257 De Luna Martinez and Rose (2001). 258 http://www.autoriteit-fm, , November 2003. 259 http://www.pvk.nl , November 2003. 260 http://www.rbnz.govt.nz , November 2003. 261 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 262 http://www.sec-com.govt.nz , November 2003. 263 http://www.icnz.org.nz , November 2003. 264 http://www.norges-bank.no , November 2003.
57 its main task is the monetary stability264. Norway was the first country to choose - in 1986 - the single supervisor model265: the Norway Financial Service Authority (Kredittilsynet) regulates and supervises all three sectors - banking, securities and insurance266. 47 Pakistan The Central Bank of Pakistan was established in 1948; the 1956 Central Bank Act, with subsequent amendments (1974,1994,1997) forms the legal basis of the monetary policy action, The monetary policy shall to be aimed at promoting the monetary stability and the economic growth 267. Pakistan shows a unitary supervision with regards to securities market and insurance sector: while the Central Bank regulates and supervises the bank and non bank intermediaries, in fact the Pakistan Securities and Exchange Commission, established in 1997, regulates and monitors the securities market and the insurance sectors268. 48 Peru The Central Bank of Peru was founded in 1922. From 1931 the monetary policy goal is to maintain the monetary stability269. Peru is characterized by a unified supervision structure for banking system and insurance sector270. The Superintendencia de Banca y Seguoros 271 is the authority that regulate and supervise the banking and the insurance companies and , since 2000, also the pension system fund. The securities market is supervised by the Comision Nacional Supervisora deValores y Seguros.272 49 Philippines The Central Bank of Philippines (Bangko Sentral Philipinas) was founded in 1949; in 1993 the New Central Bank Act was enacted. The primary goal of the Central Bank is the price stability273. Philippines shows a multiple supervisors model274, with the presence of the Central Bank in two sectors. The Central Bank regulates and supervises banking and non banking intermediaries; securities market is monitored by the Securities and Exchange Commission, that in 1998 granted the Philippine Stock Exchange a self regulatory organization (SRO)275, while the insurance sector is supervised by a sectoral authority, the Insurance Commission 276. 50 Poland After the Second World War, the Central Bank of Poland was established in 1945. The primary goal of the central bank is the monetary stability277. Poland shows a multiple supervisors model278, with more than three authorities and with the presence of an agency in two sectors.. The Commission for Banking Supervision monitors banks and, from 2002, non banking financial firms 279. The Polish Securities and Exchange Commission supervises the capital markets280; the State Office for Insurance Supervision (PUNU) and the Insurance Department of the Ministry of Finance supervise the insurance companies281. 51 Portugal The Central Bank of Portugal (Banco de Portugal), actually member of ESCB, was founded in 1846282. Portugal shows a multiple supervisors model283, with the presence of the Central Bank in two sectors. The Central Bank regulates and supervises banking and non banking intermediaries; securities market is regulated and monitored by an independent agency, the Portuguese Securities Market Commission (CMVM)284, established in 1991, while the insurance
265 De Luna Martinez and Rose (2001); http://www.lae.utoledo.edu. 266 http://www.kredittilsynet.no , November 2003. 267 http://www.sbp.org.pk , November 2003. 268 http://www.secp.gov.pk , November 2003. 269 http://www.bcrp.gob.pe , November 2003. 270 De Luna Martinez and Rose (2001), see also http://www.lae.utoledo.edu. 271 http://www.sbs.gov.pe , November 2003. 272 Ibidem. 273 http://www.bsp.gov.ph , November 2003. 274 De Luna Martinez and Rose (2001). 275 http://www.pse.com.ph , November 2003. 276 http://www.ic.gov.ph November 2003. 277 http://nbp.pl , November 2003. 278 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 279 Ibidem. 280 http://www.kpwig.gov.pl , November 2003. 281 http://english.piu.com.pl , Octobe 2003. 282 http://www.bportugal.pt , November 2003. 283 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 284 http://www.cmvm.pt , November 2003. 285 http://www.isp.pt , November 2003.
58 sector is supervised by a sectoral authority, the Security Institution of Portugal (ISP) 285. 52 Romania The Central Bank of Romania was founded in 1998. The monetary policy goal is the price stability 286. Romania shows a multiple supervisors model287: the Central Bank regulates and supervises banking intermediaries; capital market is monitored by the Romanian National Securities Commission288, while the insurance sector is supervised by the Insurance Supervisory Commission289. 53 Russia The Central Bank of Russia was founded in 1990. The monetary policy goal is the price stability 290. Romania shows a multiple supervisors model291: the Central Bank regulates and supervises banking intermediaries, due the Banking and Financial Laws enacted in 1994-5; capital market is monitored by the Federal Commission for the Securities Market292, established in 1994, while the insurance sector is supervised by the Department of Insurance Supervision of Minister of Finance293. 54 Singapore The Monetary Authority of Singapore (MAS) was established in 1971, in 1977 the Authority became also responsible of insurance regulation and supervision; the Security Industry Act transferred in 1984 the security regulatory and supervisory responsibilities to MAS. Finally, following its merger with the Board of Commissioner of Currency on 2002, the MAS assumed the status of central bank294. Therefore Singapore can be considered a case of single supervisor regime 295. 55 Slovakia The Central Bank of Slovakia was established in 1992, and its statute was amended in 2001. The monetary policy goal is to maintain the monetary stability296. Slovakia shows a unitary supervision with regards to securities market and insurance sector297: while the Central Bank regulates and supervises the banks, the Financial Market Authority , established in 2002, monitors non banking and insurance companies298. 56 Slovenia The Central Bank of Slovenia was founded in 1991. The monetary policy goal is the price stability 299. Slovenia shows a multiple supervisors model300: the Central Bank regulates and supervises banking intermediaries; capital market is monitored by the Slovenian Securities Market Agency 301, while the insurance sector is supervised by the Authority for Insurance Supervision302.
57 South Africa The Central Bank of South Africa was established in 1921. The monetary policy goal is to maintain the monetary and financial stability303. South Africa shows a unitary supervision with regards to securities market and insurance sector304: while the Central Bank regulates and supervises the banks, due the 1990 Banks Act and the 1993 Mutual Banks Act, the Financial Service Board , established in 1990, monitors non banking and insurance companies305. 58 South Korea The Central Bank of South Korea was founded in 1950. The monetary policy goal is the price
286 http://www.bnro.ro , November 2003. 287 See also http://www.lae.utoledo.edu. 288 http://www.cnvm.rdsnet.ro , November 2003. 289 http://www..csa-isc.ro , November 2003. 290 http://www.cbr.ru , November 2003. 291 De Luna Martinez and Rose (2001). 292 http://www.fcsm.ru , November 2003. 293 http://www.lae.utoledo.edu , November 2003. 294 http://www.mas.gov.sg , November 2003. 295 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 296 http://www.nbs.sk , November 2003. 297 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 298 http://www.uft.sk , November 2003. 299 http://www.bsi.si , November 2003. 300 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 301 http://www.issanet.org , November 2003. 302 http://www.sigov.si , November 2003. 303 http://www.reservebank.co.za , November 2003. 304 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 305 http://www.fsb.co.za , November 2003. 306 http://www.bok.or.kr , November 2003.
59 stability306. South Korea has chosen in 1999 the single supervisor model307: the Financial Supervisory Service (FSS) supervises all the three sectors (banking, securities and insurance)308. The FSS was established merging four existing authorities: the Banking Supervisory Authority, the Securities Supervisory Board, the Insurance Supervisory Board and the Non-Bank Supervisory Authority 309. The single supervisor substituted a regime with multiple supervisors without central bank involvement. 59 Spain The Central Bank of Spain (Banco de Espana), actually member of ESCB, was founded in 1782310. Spain shows a multiple supervisors model311, with more than three authorities and with the presence of the Central Bank in two sectors. The Central Bank regulates and supervises banks and any other financial institution or market it has been called on to oversee, but without prejudice to the prudential supervision of Comunitades Autonomas in their area of responsibility312. The securities market is monitored by the Comision National del Mercado de Valores (CNMV)313, while the insurance sector is supervised by the Direccion General de Seguros y Fondos de Pensiones of the Ministry of Economy 314. Recent financial structure laws – as the 2002 Financial Sector Reform Act – have not change the multiple supervisor model. 60 Sri Lanka The Central Bank of Sri Lanka was founded in 1950; its statute was amended in 2002. The monetary policy goal is the monetary and financial stability 315. Sri Lanka shows a multiple supervisors model316: given the regulations enacted by the Minister of Finance, the Central Bank supervises banking intermediaries; capital market is monitored by the Securities and Exchange Commis sion (SEC) 317, while the insurance sector is supervised by the Insurance Board. The Insurance Board is composed by representatives of the Ministry of Finance (1), of the Central Bank (1), of the SEC (1) and four other members appointed by the Minister318. 61 Sweden The Central Bank of Sweden (Sveriges Riksbank) was founded in 1857. The monetary policy goal is the price stability319. Sweden has chosen in 1990 the single supervisor model320: the Financial Supervisory Authority (FSA) supervises all the three sectors (banking, securities and insurance)321. 62 Switzerland The Central Bank of Switzerland was founded in 1906; its statute was amended in 2000. The monetary policy goal is the price stability 322. Luxembourg is characterized by a unified supervision structure for banking system and financial sector323. The Swiss Federal Banking Commission (SFBC)324 is the authority that is responsible, in these two sectors, for all the goals of prudential supervision as well as of the conduct of business supervision. The Central Bank regulates the banking sector. The Federal Office of Insurance Supervision Office (FOPI) supervises the insurance companies325. 63 Thailand The Central Bank of Thailand was founded in 1942. The monetary policy goal is the monetary stability 326. Thailand shows a multiple supervisors model327: given the regulations enacted by the Minister of Finance and the Central Bank, the latter supervises banking intermediaries;
307 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 308 http://www.english.korcham.net , October 2003. 309 Ibidem. 310 http://www.bde.es , November 2003. 311 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 312 http://www.bde.es , November 2003. 313 http://www.cnmv.es , November 2003. 314 http://www.dgsfp , November 2003. 315 http://www.lanka.net/centralbank/ , November 2003. 316 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 317 http://www.ibsl.gov.lk , November 2003. 318 http://www.sigov.si , November 2003. 319 http://www.riksbank.se , November 2003. 320 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 321 http://www.fi.se , October 2003. 322 http://www.snb.ch , November 2003. 323 De Luna Martinez and Rose (2001). 324 http://www.ebk.admin.ch , November 2003. 325 http://www.bvp.admin.ch November 2003. 326 http://www.bot.or.th , November 2003. 327 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu.
60 capital market is monitored by the Securities and Exchange Commission (SEC) (with the Governor of the Central Bank as member of the SEC) 328, while the insurance sector is supervised by the Department of Insurance of the Ministry of Commerce329.. 64 Trinidad The Central Bank of Trinidad and Tobago was established in 1964. The monetary policy goals Tobago are to promote the economic growth and to maintain the monetary and financial stability 330. Trinidad and Tobago shows a multiple supervisors model331: the Central Bank, under the 1993 Financial Institutions Act, regulates and supervises banking intermediaries; capital market is monitored by the Trinidad and Tobago Securities and Exchange Commission 332, while the insurance sector is supervised by the Office of Supervisor of Insurance 333.
65 Tunisia The Central Bank of Tunisia was established in 1958. The monetary policy goal is to maintain the monetary stability 334. Tunisia shows a multiple supervisors model: the Central Bank, under the 1994 Banking Law, regulates and supervises banking intermediaries; capital market is monitored by the Financial Market Board (Conseil du March Financier CMF), established in 1994 335, while the insurance sector is supervised by the Department of Insurance of the Ministry of Finance 336. 66 Turkey The Central Bank of Turkey was establis hed in 1931. The monetary policy goal is to maintain the monetary stability 337. Turkey shows a multiple supervisors model338: the Banking Regulation and Supervision Agency regulates and supervises banking intermediaries339; securities market is monitored by the Capital Markets Board340, while the insurance sector is supervised by the Insurance Supervisor Office, established in 1963 341. 67 Ukraine The Central Bank of Ukraine was founded in 1991, and its statute was amended in 1999. The monetary policy goal is the price stability342. Ukraine shows a multiple supervisors model343: the Central Bank regulates and supervises the banking system, while the Ukraine Securities and Stock Market State Commission regulates and monitors the capital market, while no specific supervision agency exist on the insurance sector 344. 68 UK The Central Bank of UK was founded in 1694. The monetary policy goal is the price stability345. UK has chosen in 1997 the single supervisor model346: the Financial Service Authority (FSA) supervises all the three sectors : banking, securities and insurance. The FSA was established merging the supervisory responsibility of eight existing authorities: the Central Bank, the Securities and Investment Board, the Building Societies Commission, the Friendly Societies Commission, the Investment Management Regulatory Organisation, the Personal Investment Authority, the Register of Friendly Societies, the Securities and Futures Authority347. The single supervisor substituted a regime with multiple supervisors with central bank
328 http://www.sec.or.th , November 2003. 329 http://www.thaigov.go , November 2003. 330 http://www.cerntal-bank.org.tt , November 2003. 331 see also http://www.lae.utoledo.edu. 332 http://www.ttsec.gov.tt , November 2003. 333 http://www.lae.utoledo.edu , November 2003. 334 http://www.bct.gov.tn , November 2003. 335 http://www.imf.org/external/np/rosc/tun , November 2003. 336 Ibidem. 337 http://www.tcmb.gov.tr , November 2003. 338 De Luna Martinez and Rose (2001). 339 http://www.bddk.org.tr , November 2003. 340 http://www.ise.org , November 2003. 341 http://www.hazine.gov.tr, November 2003. 342 http://www.bank.gov.ua , November 2003. 343 see also http://www.lae.utoledo.edu. 344 http://www.pension.kiev.ua , November 2003. De Luna Martinez and Rose (2001) , classified Ukraine as a case of country with an agency supervising two types of intermediaries (securities firms and insurers). 345 http://www.bankofengland.co.uk , November 2003. 346 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 347 http://fsa.gov.uk , November 2003.
61 involvement. 69 USA The Federal Reserve System (FED), the central bank of the United States, was founded in 1913, in order to provide a sound and flexible money348. US shows a complex multiple supervisors model349, with two level – state and federal - for each sector. The main federal authorities are: the FED for the banking sector, the Securities and Exchange Commission (SEC)350 for the capital markets, the National Association of Insurance Commissioners (NAIC)351.
348 http://federalreserve.gov , November 2003. 349 De Luna Martinez and Rose (2001); see also http://www.lae.utoledo.edu. 350 http://www.sec.org , November 2003. 351 http://www.naic.org , November 2003.
62
10. ANNEX II: THE DETERMINANTS OF FINANCIAL SUPERVISION CONSOLIDATION WITH DIFFERENT SAMPLES AND INDEXES
TABLE 8: ORDERED PROBIT AND LOGIT ESTIMATES WITHOUT UK
VARIABLES probit Logit DEPENDENT VARIABLE FAC FAC CBFA
Coefficient b2 - 0.93 -1.59 Std. Error (0.23) (0.43) P >z 0.00*** 0.00***
MvBdum
Coefficient b3 0.71 1.39 Std. Error (0.37) (0.65) P >z 0.05* 0.03*
mcap
Coefficient b5 - 0.66 -1.21 Std. Error (0.27) (0.47) P >z 0.01**** 0.01***
goodgov
Coefficient b6 0.88 1.56 Std. Error (0.22) (0.40) P >z 0.00*** 0.00***
No of observations 67 67 LR chi2(5) 37.90 38.86 Prob>chi2 0.00 0.00 Pseudo R2 0.17 0.17 Log Likelihood -92.16 -91.72
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
63 TABLE 9: ORDERED PROBIT AND LOGIT ESTIMATES WITH SINGAPORE 2003
VARIABLES Probit Logit
DEPENDENT VARIABLE FAC FAC CBFA
Coefficient b2 - 0.60 -1.14 Std. Error (0.20) (0.39) P >z 0.00*** 0.00***
MvBdum
Coefficient b3 0.64 1.31 Std. Error (0.36) (0.64) P >z 0.07 0.04*
mcap
Coefficient b5 - 0.45 -0.91 Std. Error (0.26) (0.45) P >z 0.07 0.04*
goodgov
Coefficient b6 0.86 1.49 Std. Error (0.21) (0.38) P >z 0.00*** 0.00***
No of observations 69 69 LR chi2(5) 32.47 34.59 Prob>chi2 0.00 0.00 Pseudo R2 0.14 0.15 Log Likelihood -98.22 -97.16
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
64
TABLE 10: ORDERED PROBIT AND LOGIT ESTIMATES WITH SINGAPORE 2003 AND IRELAND 2003
VARIABLES Probit Logit DEPENDENT VARIABLE FAC FAC CBFA
Coefficient b2 - 0.44 -0.88 Std. Error (0.18) (0.38) P >z 0.01*** 0.02**
MvBdum
Coefficient b3 0.58 1.21 Std. Error (0.36) (0.63) P >z 0.11 0.05*
mcap
Coefficient b5 - 0.47 -0.86 Std. Error (0.26) (0.44) P >z 0.06 0.05*
goodgov
Coefficient b6 0.47 1.47 Std. Error (0.21) (0.38) P >z 0.00*** 0.00***
No of observations 69 69 LR chi2(5) 29.13 30.99 Prob>chi2 0.00 0.00 Pseudo R2 0.12 0.13 Log Likelihood -98.92 -99.99
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
65 TABLE 11A : CBFA INDEX: ORDERED PROBIT AND LOGIT ESTIMATES
VARIABLES Logit Probit DEPENDENT VARIABLE CBFA CBFA MvBdum
Coefficient b3 -0.28 -0.54 Std. Error (0.39) (0.43) P >z 0.46 0.42
mcap
Coefficient b5 0.06 0.10 Std. Error (0.28) (0.48) P >z 0.83 0.82
goodgov
Coefficient b6 -0.29 -0.64 Std. Error (0.21) (0.37) P >z 0.16 0.08
No of observations 68 68 LR chi2(5) 4.17 6.44 Prob>chi2 0.24 0.09 Pseudo R2 0.03 0.05 Log Likelihood -59.24 -58.10
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
66
TABLE 11B : CBFA INDEX: ORDERED PROBIT AND LOGIT ESTIMATES WITH FAC
VARIABLES Probit Logit DEPENDENT VARIABLE CBFA CBFA FAC
Coefficient b2 - 0.44 - 0.80 Std. Error (0.09) (0.18) P >z 0.00*** 0.00***
MvBdum
Coefficient b3 0.30 0.67 Std. Error (0.44) (0.83) P >z 0.50 0.41
mcap
Coefficient b5 - 0.35 - 0.73 Std. Error (0.31) (0.58) P >z 0.27 0.20
goodgov
Coefficient b6 0.34 0.52 Std. Error (0.26) (0.49) P >z 0.19 0.29
No of observations 68 68 LR chi2(5) 30.62 33.75 Prob>chi2 0.00 0.00 Pseudo R2 0.24 0.27 Log Likelihood - 46.02 - 44.45
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
67 TABLE 12: FAC TWO INDEX: ORDERED PROBIT AND LOGIT ESTIMATES
VARIABLES probit logit DEPENDENT VARIABLE FAC FAC CBFA
Coefficient b2 - 0.92 -1.55 Std. Error (0.23) (0.42) P >z 0.00*** 0.00***
MvBdum
Coefficient b3 0.59 1.18 Std. Error (0.37) (0.66) P >z 0.10 0.07
mcap
Coefficient b5 - 0.59 -1.13 Std. Error (0.27) (0.47) P >z 0.02** 0.01***
goodgov
Coefficient b6 0.74 1.38 Std. Error (0.21) (0.40) P >z 0.00*** 0.00***
No of observations 68 68 LR chi2(5) 32.74 33.46 Prob>chi2 0.00 0.00 Pseudo R2 0.17 0.17 Log Likelihood -78.10 -77.74
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
68 TABLE 13 : ORDERED PROBIT AND LOGIT ESTIMATES WITH CONTROL VARIABLES: SAMPLE WITHOUT UK
VARIABLES probit logit DEPENDENT FAC FAC VARIABLE CBFA
Coefficient b2 - 0.85 -1.48 Std. Error (0.26) (0.47) P >z 0.00*** 0.00***
MvBdum
Coefficient b3 0.43 1.00 Std. Error (0.41) (0.75) P >z 0.30 0.18
mcap
Coefficient b5 - 0.59 - 1.25 Std. Error (0.30) (0.56) P >z 0.05* 0.02**
goodgov
Coefficient b6 0.71 1.16 Std. Error (0.39) (0.66) P >z 0.07 0.08
Gnpcapita Coefficient b - 0.0000364 -0.0000521 Std. Error (0.0000260) (0.0000480) P >z 0.16 0.27
EU membership Coefficient b 0.67 1.11 Std. Error (0.44) (0.79) P >z 0.16 0.15
Anglo Saxon Law Coefficient b 0.91 1.82 Std. Error (0.55) (1.01) P >z 0.10 0.07
French Law Coefficient b 0.93 1.83 Std. Error (0.46) (0.83) P >z 0.04* 0.02**
German Law Coefficient b 3.51 5.92 Std. Error (1.09) (1.94) P >z 0.00*** 0.00***
Scandinavian Law Coefficient b 2.75 4.71
69 Std. Error (0.88) (1.57) P >z 0.00*** 0.00***
No of observations 67 67 LR chi2(5) 54.65 54.64 Prob>chi2 0.00 0.00 Pseudo R2 0.24 0.24 Log Likelihood -83.82 -83.82
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
70 TABLE 14 : ORDERED PROBIT AND LOGIT ESTIMATES WITH CONTROL VARIABLES: SAMPLE WITH SINGAPORE 2003
VARIABLES probit logit DEPENDENT FAC FAC VARIABLE CBFA
Coefficient b2 - 0.44 -0.99 Std. Error (0.21) (0.42) P >z 0.04* 0.02**
MvBdum
Coefficient b3 0.48 1.01 Std. Error (0.41) (0.72) P >z 0.24 0.16
mcap
Coefficient b5 - 0.37 - 0.89 Std. Error (0.29) (0.52) P >z 0.19 0.08
goodgov
Coefficient b6 0.82 1.21 Std. Error (0.38) (0.65) P >z 0.03* 0.06
Gnpcapita Coefficient b - 0.0000335 - 0.0000469 Std. Error (0.0000254) (0.0000452) P >z 0.43 0.29
EU membership Coefficient b 0.31 0.69 Std. Error (0.40) (0.75) P >z 0.43 0.35
Anglo Saxon Law Coefficient b 0.59 1.57 Std. Error (0.52) (0.96) P >z 0.25 0.10
French Law Coefficient b .56 1.34 Std. Error (0.44) (0.79) P >z 0.20 0.09
German Law Coefficient b 2.64 4.70 Std. Error (0.99) (1.79) P >z 0.00*** 0.00***
Scandinavian Law Coefficient b 2.18 3.92
71 Std. Error (0.84) (1.51) P >z 0.01*** 0.01**
No of observations 69 69 LR chi2(5) 44.06 46.10 Prob>chi2 0.00 0.00 Pseudo R2 0.19 0.20 Log Likelihood -92.43 -91.41
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
72 TABLE 15 : ORDERED PROBIT AND LOGIT ESTIMATES WITH CONTROL VARIABLES ; SAMPLE WITH SINGAPORE AND IRELAND 2003
VARIABLES probit logit DEPENDENT FAC FAC VARIABLE CBFA
Coefficient b2 - 0.30 - 0.73 Std. Error (0.20) (0.43) P >z 0.14 0.07
MvBdum
Coefficient b3 0.38 0.92 Std. Error (0.41) (0.77) P >z 0.34 0.20
mcap
Coefficient b5 - 0.39 - 0.87 Std. Error (0.29) (0.51) P >z 0.17 0.09
goodgov
Coefficient b6 0.78 1.19 Std. Error (0.38) (0.65) P >z 0.03* 0.07
Gnpcapita Coefficient b - 0.0000293 - 0.0000422 Std. Error (0.0000254) (0.0000451) P >z 0.24 0.34
EU membership Coefficient b 0.37 0.62 Std. Error (0.41) (0.75) P >z 0.36 0.40
Anglo Saxon Law Coefficient b 0.68 1.55 Std. Error (0.53) (0.96) P >z 0.19 0.10
French Law Coefficient b 0.60 1.30 Std. Error (0.44) (0.79) P >z 0.17 0.10
German Law Coefficient b 2.72 4.58 Std. Error (1.00) (1.79) P >z 0.00*** 0.00***
Scandinavian Law Coefficient b 2.21 3.83
73 Std. Error (0.84) (1.50) P >z 0.00*** 0.01***
No of observations 69 69 LR chi2(5) 40.83 42.30 Prob>chi2 0.00 0.00 Pseudo R2 0.17 0.18 Log Likelihood -93.07 - 92.34
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
74 TABLE 16 : FAC TWO INDEX: ORDERED PROBIT AND LOGIT ESTIMATES WITH CONTROL VARIABLES
VARIABLES probit logit DEPENDENT FAC FAC VARIABLE CBFA
Coefficient b2 - 0.98 - 1.69 Std. Error (0.26) (0.49) P >z 0.00*** 0.00***
MvBdum
Coefficient b3 0.19 0.49 Std. Error (0.42) (0.75) P >z 0.63 0.51
mcap
Coefficient b5 - 0.40 - 0.89 Std. Error (0.29) (0.53) P >z 0.18 0.09
goodgov
Coefficient b6 0.43 0.73 Std. Error (0.38) (0.67) P >z 0.26 0.27
Gnpcapita Coefficient b - 0.0000304 - 0.0000476 Std. Error (0.0000252) (0.0000451) P >z 0.22 0.29
EU membership Coefficient b 1.02 1.79 Std. Error (0.43) (0.80) P >z 0.01*** 0.02**
Anglo Saxon Law Coefficient b 1.15 2.23 Std. Error (0.55) (1.03) P >z 0.03** 0.03**
French Law Coefficient b 0.79 1.51 Std. Error (0.46) (0.82) P >z 0.09 0.06
German Law Coefficient b 2.66 4.74 Std. Error (0.90) (1.63) P >z 0.00*** 0.00***
Scandinavian Law Coefficient b 1.97 3.52
75 Std. Error (0.80) (1.45) P >z 0.01** 0.01***
No of observations 68 68 LR chi2(5) 44.31 44.86 Prob>chi2 0.00 0.00 Pseudo R2 0.23 0.23 Log Likelihood - 72.31 - 72.04
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
76
TABLE 17: CBFA TWO INDEX: ORDERED PROBIT AND LOGIT ESTIMATES
VARIABLES probit logit DEPENDENT VARIABLE FAC FAC CBFA TWO
Coefficient b2 - 0.47 -0.80 Std. Error (0.11) (0.21) P >z 0.00*** 0.00***
MvBdum
Coefficient b3 0.70 1.39 Std. Error (0.37) (0.66) P >z 0.05* 0.03**
mcap
Coefficient b5 - 0.62 -1.15 Std. Error (0.26) (0.46) P >z 0.02** 0.01***
goodgov
Coefficient b6 0.88 1.56 Std. Error (0.22) (0.40) P >z 0.00*** 0.00***
No of observations 68 68 LR chi2(5) 39.53 40.46 Prob>chi2 0.00 0.00 Pseudo R2 0.17 0.17 Log Likelihood -93.07 -92.60
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
77
TABLE 18 : CBFA TWO INDEX: ORDERED PROBIT AND LOGIT ESTIMATES WITH CONTROL VARIABLES
VARIABLES probit logit DEPENDENT FAC FAC VARIABLE CBFA
Coefficient b2 - 0.45 - 0.78 Std. Error (0.13) (0.23) P >z 0.00*** 0.00***
MvBdum
Coefficient b3 0.38 0.91 Std. Error (0.41) (0.74) P >z 0.35 0.22
mcap
Coefficient b5 - 0.52 - 1.11 Std. Error (0.30) (0.55) P >z 0.08 0.04*
goodgov
Coefficient b6 0.66 1.08 Std. Error (0.39) (0.66) P >z 0.09 0.10
Gnpcapita Coefficient b - 0.0000346 - 0.0000500 Std. Error (0.0000259) (0.0000468) P >z 0.18 0.28
EU membership Coefficient b 0.79 1.32 Std. Error (0.43) (0.78) P >z 0.07 0.09
Anglo Saxon Law Coefficient b 1.05 2.05 Std. Error (0.55) (1.01) P >z 0.05* 0.04*
French Law Coefficient b 0.96 1.85 Std. Error (0.46) (0.83) P >z 0.04* 0.02**
German Law Coefficient b 3.44 5.76 Std. Error (1.08) (1.91) P >z 0.00*** 0.00***
78 Scandinavian Law Coefficient b 2.61 4.45 Std. Error (0.87) (1.55) P >z 0.00** 0.00***
No of observations 68 68 LR chi2(5) 54.93 54.84 Prob>chi2 0.00 0.00 Pseudo R2 0.24 0.24 Log Likelihood - 85.37 - 85.41
Note:*** indicates statistical significance at one percent; :** indicates statistical significance at three percent; :* indicates statistical significance at five percent
79