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Regulation of the Regulation of the Capital MarketCapital Market**
Avi Ben-Bassat, Sharon Blei, Avi Ben-Bassat, Sharon Blei, and Asher Blassand Asher Blass
* The full report in Hebrew, including a detailed * The full report in Hebrew, including a detailed abstract in English, is available at abstract in English, is available at http://www.idi.org.il/hebrew/catalog.asp?pdid=574&did=85
The CriterionsThe Criterions The CriterionsThe Criterions
The goals.
The authorities and independence needed.
For and against locating supervision of banks in the central bank.
Conflicts of interest in the activity of regulators under the MOF.
The global trend.
Israel’s financial market structure.
The goals.
The authorities and independence needed.
For and against locating supervision of banks in the central bank.
Conflicts of interest in the activity of regulators under the MOF.
The global trend.
Israel’s financial market structure.
The 5 Supervisors and the supervised bodies
Anti-Trust Anti-Trust AuthorityAuthority
Banking Banking DepartmentDepartment
Capital Market, Capital Market, Insurance & Savings Insurance & Savings
DivisionDivision
SavingsSavingsInsuranceInsurance
ProvidenceFunds
Insurance Companies
Pension Funds Insurance
agents Money
Changers
BankingInstitutions
Securities Securities AuthorityAuthority
Listed Companies
Stock Exchange
Underwriters Mutual Funds Investment
Advisors & Portfolio Managers
Competition in the
various markets
The Goals of Regulation & SupervisionThe Goals of Regulation & SupervisionThe Goals of Regulation & SupervisionThe Goals of Regulation & Supervision
Protection of consumers’ interests
Intermediate Goals:
1.Financial stability
2.Market efficiency
3.Competition
4.Reducing conflicts of interest
Protection of consumers’ interests
Intermediate Goals:
1.Financial stability
2.Market efficiency
3.Competition
4.Reducing conflicts of interest
Regulators’ Independence Index, 2005
%BanksSecuritie
s
Capital Market & Savings Division
Anti-Trust
CapitalInsuranc
e
1. Source of Authority15554552. Managerial
Independence204.63.2111.8
3. Licensing and
Regulation1554550
4. Enforcement:
a. Information17.51.94.31.31.35 b. Feedback17.554.25535. Punishment Power1543.12.82.83.7Average Grade4.24.03.13.23.6
Banking Departme
nt
Securities Authority
Capital Market & Savings Division
Anti-Trust Authority
Supervisors1521217360Budget(in Million NIS)
81.470.522.217.8Employees supervised (in thousands)
401423-
Assets supervised (in Billion NIS)
443404424
Inputs and output, 2003
Capital Market & Savings Division
Banking Department
Securities Authority
Supervisors/Assets supervised1.001.991.74Supervisors/Employees supervised1.001.192.73Labor Input/Assets supervised1.003.393.18Labor Input/Employees supervised1.002.024.98Budget/Assets supervised1.003.513.33Budget/Employees supervised1.002.085.23
Input-Output Ratios, 2003
The Benefits of Locating the The Benefits of Locating the Bank Supervision in the Bank Supervision in the
Central BankCentral Bank
The Benefits of Locating the The Benefits of Locating the Bank Supervision in the Bank Supervision in the
Central BankCentral Bank
May benefit from the prestige and
reputation of the CB.
May solve financial crises faster, since
the CB is the lender of last resort.
Both monetary policy and banks’
supervision may benefit from exchange
of information .
May benefit from the prestige and
reputation of the CB.
May solve financial crises faster, since
the CB is the lender of last resort.
Both monetary policy and banks’
supervision may benefit from exchange
of information .
Separating the Bank Separating the Bank Supervision Department from Supervision Department from
the BOIthe BOI
Separating the Bank Separating the Bank Supervision Department from Supervision Department from
the BOIthe BOI Conflicts of interest between the banks’ stability
and competition.
It also impairs the transmission mechanism of the
monetary policy, and therefore its effectiveness.
The Bank Supervision Department hasn’t benefited
from being located in the BOI in managing financial
crises.
Israel belongs to the developed countries. Most of
them have separated the banks’ supervision from
the central bank.
Conflicts of interest between the banks’ stability
and competition.
It also impairs the transmission mechanism of the
monetary policy, and therefore its effectiveness.
The Bank Supervision Department hasn’t benefited
from being located in the BOI in managing financial
crises.
Israel belongs to the developed countries. Most of
them have separated the banks’ supervision from
the central bank.
The location of Banks’ supervision (70 countries, 2004)
Per Capita Income($, PPP)
Only in the CB
Outside the CB
Only in the
Monetary Institutio
n
Outside the
Monetary Institution
+30,000112013
29,900 – 20,50010257
20,400 – 10,30086410
10,200 – 6,0008686
2,700 – 5,9007777
Total34332443
Conflicts of interest between Conflicts of interest between economic policy and financial economic policy and financial
supervision in the MOFsupervision in the MOF
Conflicts of interest between Conflicts of interest between economic policy and financial economic policy and financial
supervision in the MOFsupervision in the MOF
The stability of pension funds versus labor market policy.
The stability of insurance companies versus cross subsidization policy.
The stability of financial institutions versus the price of financing government debt.
The stability of pension funds versus labor market policy.
The stability of insurance companies versus cross subsidization policy.
The stability of financial institutions versus the price of financing government debt.
The share of independent authorities2004 vs. 1984 (percent)
29
44 51
61
76
84
0
10
20
30
40
50
60
70
80
90
100
Banks Insurance Securities
1984
2004
Alternative Regulatory Alternative Regulatory StructuresStructuresAlternative Regulatory Alternative Regulatory StructuresStructures
Multiple authorities by industry:
Banks ; Securities ; Insurance
Multiple authorities by function:
1. Prudential supervision
2. Conduct of business
A single regulatory authority
Multiple authorities by industry:
Banks ; Securities ; Insurance
Multiple authorities by function:
1. Prudential supervision
2. Conduct of business
A single regulatory authority
The Advantages The Advantages of a Multiple Authorityof a Multiple Authority
The Advantages The Advantages of a Multiple Authorityof a Multiple Authority
Greater specialization
Competition among supervisors
Prevention of excess power
Avoidance of risk inherent in the
reform process
Greater specialization
Competition among supervisors
Prevention of excess power
Avoidance of risk inherent in the
reform process
The Advantages The Advantages of the Unified Authorityof the Unified Authority
The Advantages The Advantages of the Unified Authorityof the Unified Authority
A comprehensive view of the regulated institution.
Equality in the regulation & supervision of similar activities.
Flexibility in regulation and ease of coordination.
Economics of scale and efficiency.
Focusing of responsibility and accountability.
A comprehensive view of the regulated institution.
Equality in the regulation & supervision of similar activities.
Flexibility in regulation and ease of coordination.
Economics of scale and efficiency.
Focusing of responsibility and accountability.
3030 Countries has reduced the number of Countries has reduced the number of authoritiesauthorities
From 3From 3 to 1to 1
From 2From 2 to 1to 1
From 3From 3 to 2to 2
Czech Rep.
England
Estonia
Germany
Hungary
Kazakhstan Latvia
Liechtenstein
Malta
Norway
Poland Singapore
Slovakia
South Korea
Taiwan
Austria
Belgium
Bermuda
Denmark
Gibraltar
Ireland
Iceland
Sweden
Australia
Bulgaria
Canada
Luxemburg
Mauritius
Mexico
Netherlands
15158877
Single regulatory authority
Two regulatory authoritiesSeveral
Regulatory
authoritiesBanks &
SecuritiesBanks &
InsuranceSecurities &Insurance
CurrentSituation30510*628
Beforethereform
788749
Source: Courtis (2004) and the Israel Democracy Institute.
Regulatory Structure in 79 CountriesRegulatory Structure in 79 CountriesPre and Post ReformPre and Post Reform
Regulatory Structure in 79 CountriesRegulatory Structure in 79 CountriesPre and Post ReformPre and Post Reform
*The Netherland is classified by prudential and conduct of business supervision.
The Main problems in The Main problems in Israel’s StructureIsrael’s Structure
The Main problems in The Main problems in Israel’s StructureIsrael’s Structure
Considerable variance in regulatory and
supervisory authorities.
Significant differences in managerial independence.
Marked differences between regulators’ resources.
Potential conflicts of interest between monetary
policy as well as competition and bank supervision.
Potential conflicts of interest between MOF policy
and the activity of the regulator located in the MOF.
Similarity of financial institutions and scale of
activities increased after Bachar’s reform.
Considerable variance in regulatory and
supervisory authorities.
Significant differences in managerial independence.
Marked differences between regulators’ resources.
Potential conflicts of interest between monetary
policy as well as competition and bank supervision.
Potential conflicts of interest between MOF policy
and the activity of the regulator located in the MOF.
Similarity of financial institutions and scale of
activities increased after Bachar’s reform.
Financial Services Authority
Financial Services Authority
The BOI shall be responsible for the The BOI shall be responsible for the
stability of the financial markets.stability of the financial markets.
The BOI shall be responsible for the The BOI shall be responsible for the
stability of the financial markets.stability of the financial markets.
Insurance Insurance UnitUnit
Securities Securities UnitUnit
Banking Banking UnitUnit
ChairmanChairman
Unification AlternativesUnification AlternativesUnification AlternativesUnification Alternatives
A federative authority composed of
3 industries departments.
A single authority like the FSA in
GB.
Twin Peaks Model:
1.Prudential supervision department
2.Conduct of business department
A federative authority composed of
3 industries departments.
A single authority like the FSA in
GB.
Twin Peaks Model:
1.Prudential supervision department
2.Conduct of business department
Thank you!Thank you!
* The full report in Hebrew, including a detailed * The full report in Hebrew, including a detailed abstract in English, is available at abstract in English, is available at http://www.idi.org.il/hebrew/catalog.asp?pdid=574&did=85