Financial Market Financial Market DevelopmentsDevelopments

Howard DaviesHoward Davies

DirectorDirector

The London School of EconomicsThe London School of Economics

Mumbai - IndiaMumbai - India 23rd January 2006

Five Questions

1. Liquidity in the financial system 2. Financial stability in an emerging

economy 3. The globalisation of financial markets 4. Should India follow the UK’s example

in setting up a single regulator? 5. Financial reforms in India and the

road ahead

Indian Rupee (INR) to 1 US Dollar (USD) 1996 - 2006

30

35

40

45

50

55

02-Jan-96

02-Jan-97

02-Jan-98

04-Jan-99

03-Jan-00

02-Jan-01

02-Jan-02

02-Jan-03

02-Jan-04

03-Jan-05

02-Jan-06

Stockmarkets % change Dec 31st 2004-Dec 30th 2005, $ terms

0 20 40 60 80 100 120 140

Egypt

Russia

India

Germany

Britain

United States

%

Composition of financial stock, 2003 $ Trillions; percent

Source : McKinsey Global Institute Global Financial Stock Database; Global Insight

Weak link between financial depth and wealth

Regional differences in financial stock composition, 2003$ Trillions: percent

Three dimensions of change of the Bank of England

• Independence on interest rates

• Removal of banking supervision and debt management

• Monetary Policy Committee

Structure of Financial Regulation in 1997

Ministry Regulator(s)

Banking HMT Bank of England

Building Societies etc

HMT / DTI Registry of Friendly Societies (3)

Securities Markets HMT / DTI Securities and Investments Board (SIB), plus•Securities and Futures Authority (SFA)•London Stock Exchange

Fund Management

HMT SIB, plus•Investment Management Regulatory Organisation (IMRO)

Insurance DTI DTI Insurance DirectorateLloyds

Personal Investments

HMT / DTI DTISIB, plus•Personal Investments Authority (PIA)

Occupational Pensions

DWP Occupational Pensions Regulatory Authority (OPRA)

Financial centres ranking in terms of regulatory environment

Source: Survey done by Corporation of London

Countries with Integrated Countries with Integrated RegulatorsRegulators

1986

1990

1991

1998

2000

2001

2002 2004

KredittilsynetKredittilsynet ( (Norway - March Norway - March 1986)1986)Finanstilsynet (Finanstilsynet (Denmark - January 1990)Denmark - January 1990)

Finansinspektionen (Finansinspektionen (SwedenSweden - July 1991) - July 1991)

Financial Supervisory Commission (Korea - April 1998)Financial Supervisory Commission (Korea - April 1998)

Financial Services Agency (Japan - July 2000)Financial Services Agency (Japan - July 2000)Fjármálaeftirlitið (FME) (Iceland - June 1998)Fjármálaeftirlitið (FME) (Iceland - June 1998)

FSA (UK - December 2001)FSA (UK - December 2001)**

BaFin (Germany - May BaFin (Germany - May 2002)2002)

Finanzmarktaufsicht (Austria - April Finanzmarktaufsicht (Austria - April 2002)2002)

Finantsinspektioon (Finantsinspektioon (EstoniaEstonia - May 2001) - May 2001)

CBFA (Belgium - August CBFA (Belgium - August 2002)2002)Agency of Financial Supervision (Kazakhstan - April Agency of Financial Supervision (Kazakhstan - April

2004)2004)

* FSA fully * FSA fully integrated in 2001, integrated in 2001, but has existed but has existed since October 1997since October 1997

Financial Reporting Council

• Audit regulation

• Accounting standards

• Corporate Governance Codes

EU Takeover Directive

• Common (supposedly) rules across the EU on takeovers

• Statutory authorities in each member state

• In UK, reform of the Takeover Panel with new powers

Self-Regulation

• Not as effective in highly competitive and diverse markets

• Can complement statutory regulation in some areas

• Cannot ensure comprehensive coverage, because of competition problems, so,

• Becoming less significant in developed markets