Economics
Financial Supervision
Financial supervision refers to the regulatory oversight and monitoring of financial institutions and markets to ensure their stability, integrity, and compliance with laws and regulations. It involves the supervision of activities such as lending, investment, and risk management to safeguard the interests of consumers and maintain the overall health of the financial system.
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10 Key excerpts on "Financial Supervision"
eBook - PDFFinancial Markets and Institutions
A European Perspective
- Jakob de Haan, Dirk Schoenmaker, Peter Wierts(Authors)
- 2020(Publication Date)
- Cambridge University Press(Publisher)
Part IV Policies for the Financial Sector CHAPTER 12 Financial Regulation and Supervision OVERVIEW This chapter reviews the reasons for regulating and supervising the financial services industry. Regulation refers to the process of rule making and the legislation underlying the supervisory framework, while supervision involves monitoring the behaviour of individual firms and enforcing legislation. The case for government intervention is based on market failures. A first market failure is rooted in asymmetric information: financial institutions are generally better informed than their customers. A second market failure involves external- ities: the failure of a financial institution may affect the stability of the entire financial system. A third market failure occurs when certain players in the market exert undue market power. The chapter distinguishes between prudential supervision and conduct-of-business super- vision. Prudential supervision aims to protect consumers by ensuring the safety and soundness of financial institutions. For instance, information provisions are designed to ensure that consumers get the right information about financial products. In addition, there are guidelines for objective and high-quality advice to protect customers’ interests. Conduct-of-business supervision focuses on how financial institutions deal with their customers and how financial institutions behave in markets. Conduct-of-business rules also promote fair and orderly markets. Finally, the chapter discusses Financial Supervision in the EU, including whether national- based supervision is appropriate in an integrating market. The European supervisory structure and the Banking Union are explained, followed by a discussion of several challenges that supervisors face. LEARNING OBJECTIVES After you have studied this chapter, you should be able to: • explain the main market failures in the financial system and the role of government intervention in remedying these failures 379
eBook - PDFGlobal Financial Development Report 2013
Rethinking the Role of the State in Finance
- World Bank(Author)
- 2012(Publication Date)
- World Bank(Publisher)
2 The State as Regulator and Supervisor G L O B A L F I N A N C I A L D E V E L O P M E N T R E P O R T 2 0 1 3 45 • Financial sector regulation and supervision are areas where the role of the state is not in dispute; the debate is about how to ensure that the role is carried out well. • A key challenge of regulation is to better align private incentives with public interest, without taxing or subsidizing private risk taking. Supervision is meant to ensure the implementation of rules and regulations. It needs to harness the power of market dis -cipline and address its limitations. • The financial crisis underscored limitations in supervisory enforcement and market dis-cipline. It emphasized the importance of combining strong, timely, anticipatory super -visory enforcement with better use of market discipline. It also highlighted the impor -tance of basics—solid and transparent legal and institutional frameworks to promote financial stability. In many developing economies that means that building supervisory capacity needs to be a priority. • Useful lessons can be learned by analyzing regulation and supervision in economies that were at the epicenter of the global financial crisis and those that were not. A new World Bank global survey, presented in this chapter, suggests that economies that suf-fered from the crisis had weaker regulation and supervision practices as well as less scope for market incentives than the rest. • This chapter reviews progress on regulatory reforms at the global and national levels, and identifies advances made so far. Tracking changes during the crisis reveals that countries have stepped up efforts in the area of macroprudential policy, as well as on issues such as resolution regimes and consumer protection. However, the survey sug-gests that there is further scope for improving market discipline, namely disclosures and monitoring incentives.
eBook - PDFGlobal Financial Development Report 2019/2020
Bank Regulation and Supervision a Decade after the Global Financial Crisis
- World Bank(Author)
- 2020(Publication Date)
- World Bank(Publisher)
1 Banking Regulation and Supervision: Conceptual Framework and Stylized Facts G L O B A L F I N A N C I A L D E V E L O P M E N T R E P O R T 2 0 1 9 / 2 0 2 0 19 BANK REGULATION AND SUPERVISION: FOUNDATIONS AND RATIONALES Bank regulation refers to the rules that reg-ulate the establishment and operations of banks. Bank supervision refers to the imple-mentation of those rules and regulations. 1 Bank regulations cover entry into banking, ownership, the definition and holding of capi-tal, types of permitted activities, information disclosure, corporate governance, the finan-cial safety net, accounting, bank failure, bank resolution, and consumer protection. Super-visory or counterparty discipline is needed to create the incentives for regulated parties to obey the rules. Without oversight and penal-ties, rules have no teeth. Supervision also en-tails monitoring the overall banking system, including identifying potential issues outside the current regulatory perimeter. This supervi-sory monitoring can also be beneficial for the regulatory process (for example, it may in-form policy makers), and it provides informa-tion that enables market participants to moni-tor banks. The more skilled and informed the supervisory workforce, the more effective this monitoring can be. The goals of bank regulation and super-vision are to provide for the stability of the overall financial system, protect consumers and investors, and ensure adequate competi-tion in the provision of banking services. Fi-nancial stability is indispensable to having a banking sector that funds a variety of risks, allocates capital efficiently, protects consum-ers and investors from being victims of fraud and of their own limited understanding of fi-nancial products, and provides broad access to financial services.
- Y. Avgerinos(Author)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
4 Risk is central to the whole process of investing, and that should always be the primary concern of supervisors. Elroy Dimson, a British finance theorist, once remarked, ‘if projects were riskless, there would be no problem (…) Risk means that more things can happen than will happen’. 5 In response to a clear need to tackle risk, invest- ment services have been regulated for a long time in Europe. The need to protect covers both the investors, to whom the services are rendered, and the financial intermediaries, from which services are provided. A second theoretical underpinning for public intervention in economic matters is traditionally based on the need to correct market anomalies. The financial system itself needs protection, for inadequate regulation and supervision can jeopardise the stability of the financial system and hamper innovation. Recent financial crises fully justify the rationale for supervision of the financial sector, while public interest is recognised as superior in qual- ity and importance, and therefore privileged, in respect of the legitimate interests of other market participants. 6 In turn, economics of securities reg- ulation and supervision must try to find a manageable trade-off between effectiveness with reference to the objectives analysed in the following paragraphs and efficiency in terms of costs imposed directly or indirectly on financial firms and other market participants. In defining a manageable trade-off the institutional structure of Financial Supervision within Europe plays a major role. Usually, a distinction is drawn between prudential supervision of finan- cial firms, such as capital adequacy rules, and supervision of financial mar- kets, such as disclosure rules. Prudential supervision involves the imposition of controls designed to ensure that investors do not lose their money.
eBook - ePubInvestment and Portfolio Management
A Practical Introduction
- Ian Pagdin, Michelle Hardy(Authors)
- 2017(Publication Date)
- Kogan Page(Publisher)
Authorization of companies or individuals will involve an element of thorough research into the background and history and may be dependent upon reaching a minimum level of qualifications or prescribed standards of conduct. The precise method and intensity of monitoring will depend upon the level of risk posed by the company or individual, the perceived likelihood of breaching the rules/regulations, the potential consequences of a breach in the rules/regulations and the supervising agency’s resources. Any enforcement procedures may occur for a variety of reasons including the supervisor’s monitoring activities, or a complaint by a customer or another market participant. Enforcement procedures would usually involve some form of investigation to determine exactly what has occurred, the root cause and if further action or sanction is required. The supervising agency may employ the use of enforcement officers with powers to investigate and to gather information. It may be that there is an agency which is appointed with the responsibility for monitoring compliance and the identification of suspected rule breaking, but a separate agency has the responsibility to determine if the suspicion is proven and if so, to apply an appropriate penalty, sanction or impose compensation.Regulation in financial markets
It is generally accepted that the operations of the financial markets are pivotal in the development of any economy and the financial sector is the mechanism which facilitates the exchange of goods and services in the economy and to transfer the savings of an economy into investments. A sound, efficient and well-managed financial sector will accomplish this process, encouraging more savings and therefore more investment in the process. This should result in faster economic growth, improved levels of income and therefore the end result should be the improvement of well-being domestically, within the economy. Strong and efficient domestic financial markets may also be of significant benefit to global growth in the form of investment capital movement from wealthier, more developed economies, to emerging and developing economies.It has been mentioned earlier in the chapter that one of the reasons for robust regulatory regimes being so important is the issue that information asymmetry exists, within the finance sector, between the sellers of financial products and the buyers. Generally, most markets work well when there is a high frequency of repeat purchases of a given product, because in these market circumstances, it is quite straightforward for an individual to determine the inherent quality of the product. It is also easy for the individual to switch away from a poor quality product to a product of better quality and not to make the same error in the future.
eBook - PDF- D. Mayes, L. Halme, A. Liuksila(Authors)
- 2001(Publication Date)
- Palgrave Macmillan(Publisher)
4 Principles of Good Financial Supervision The fundamental premise of this chapter is that the legal and supervisory frame- work of the financial industry matters as a precondition for stability. An effective and workable regulatory and supervisory regime is forward-looking and anticipa- tory, so that those responsible for financial system stability ensure that the regime is adapted to forthcoming, or at least current, changes in the surrounding economy and can react flexibly. These aspects have often been given too little weight – if not forgotten entirely – during the regime shifts that preceded banking crises in many countries. As Llewellyn (1999) points out, when planning regime shifts, the author- ities need to ensure that they have a supervisory system in place that can cope with the inevitable mistakes that financial institutions will make as they learn how to operate in the new regime. 1 The framework required for the transition is likely to be different both from that required for the old regime and from that for the new. An analysis of how the financial infrastructure may have contributed to bank- ing crises is complicated and politically unattractive to domestic policy makers. It is always easier to discuss somebody else’s problems rather than one’s own. It is certainly difficult to discuss the problems when they are emerging for fear of making them worse and causing just the crisis that one hopes to avoid. However, while the state of a country’s financial infrastructure may not be the trigger for a banking crisis it is clear from past experience that it may affect the scope, depth and length of a crisis. But what constitutes an effective regulatory and supervisory framework? Increasingly, global integration and the development of financial markets have put pressure on supervisors to focus their attention on the role of incentives alongside rules, as supervisory authorities struggle to keep up with the financial world they are supposed to safeguard.
eBook - PDFRegulating the Financial Sector in the Era of Globalization
Perspectives from Political Economy and Management
- Z. Mikdashi(Author)
- 2003(Publication Date)
- Palgrave Macmillan(Publisher)
44 The institutional design of Financial Supervision is, in the end, a compromise of political economy, and is subject to the evolution of habits and customs. Banks in the USA are free to choose the regulatory regime under which they would operate: state- versus federal-chartered, regulated and supervised banks. Many people see in the dual banking system ‘a competition in laxity’ – as put by a former Federal Reserve Board chairman, Arthur Burns. Others see in the dual system a reflection of US ‘national value of competition, federalism and freedom of choice’, and a source of innovation – to quote the US Comptroller of the Currency, John D. Hawke. 45 The USA has five federal regulatory–super- visory authorities for banks: the Board of Governors of the Federal Reserve System, FDIC, OCC, the Office of Thrift Supervision (OTS), and the National Credit Union Administration – in addition to the Banking Department in each of the fifty states – with some responsibilities over- lapping among the different supervisory agencies. Moreover, wide discrepancies exist with respect to supervisory charges, since ‘national banks pay on average two and a quarter times more in supervisory fees than do state banks’. 46 Other specialized state and federal supervisory Effective Supervision and Enforcement 79 agencies cater for insurance companies, pension funds and financial markets (with a few major submarkets having the benefit of self- regulatory bodies). The fragmentation of the regulatory–supervisory system for the banking sector in particular, and for the financial sector in general, is a potential source of multiple problems already men- tioned above. Among these are notably the following: the costly dupli- cation of work, gaps in oversight, dysfunctional ‘turf wars’, and a delayed response to solving problems. 47 There are some who question the role of a central bank in carrying out bank supervision.
- Gerard Caprio, Jonathan L. Fiechter, Robert E. Litan, Gerard Caprio, Jonathan L. Fiechter, Robert E. Litan, Michael Pomerleano(Authors)
- 2010(Publication Date)
- Brookings Institution Press(Publisher)
Each supervising agency should possess operational independence and resources commensurate with its appointed duties. A suitable legal framework would specify ongoing supervisory responsi-bilities and would include the legal powers to obtain information and address prudential compliance issues and other safety and soundness concerns. The supervisor should provide periodic public reports regarding its assessment of the institution’s safety, soundness, and financial performance and issue special reports when appropriate. Adequate legal protections for the supervisor would be neces-sary. Arrangements for sharing information both with the public and between supervisors, as well as precautions for protecting the confidentiality of sensitive information, should be in place. The supervisor should be empowered in a monitoring role to ensure that the supervised financial institutions are run efficiently while minimizing the risk to the taxpayers of any unexpected (unbudgeted) direct costs for the inevitable losses that may occur in the normal course of business operations. The costs of independent supervision may be reduced through economies of scale if supervision of multiple organizations is combined into one entity. The move toward unified financial sector supervision makes it possible that some authorities may empower the independent financial sector supervisor with responsibility for the supervision of state-owned financial institutions. If this approach is adopted, it is important that the supervisor receive adequate addi-tional funding and that the culture of prudential supervision be consistent with the culture used to supervise commercial banks.
eBook - PDFFinancial Boom and Gloom
The Credit and Banking Crisis of 2007–2009 and Beyond
- D. Chorafas(Author)
- 2009(Publication Date)
- Palgrave Macmillan(Publisher)
All this can be added up in one concept: the inability of all established regulatory agencies to control a highly changed financial environment, which ranged from short-term influences on inflation and money supply to long-term effects which affect market risk, credit risk, liquidity risk, and the pro- motion of new bubbles. 7. The global need for new financial regulation Whether it exercises a regulatory function in commodities or in finan- cial markets, a supervisory authority is charged with assuring safety, stability, and the observance of rules aimed to ascertain that partici- pants are adequately and appropriately behaving as well as protected. But since the advent of globalization and the stellar rise of derivatives, there has been a great deal of concern regarding: The heterogeneity of Financial Supervision in global financial markets, ● The too rapid pace of growth in derivative instruments and their ● unknowns, The increasing sophistication and complexity in instrument design ● and trading, and The policy of rewarding bank traders and executives by compensa- ● tion mechanisms encouraging risk-taking at the expense of financial stability. In spite of their lavish compensation, or because of it, many senior bank executives are falling behind in their knowledge of how their banks deal, Responsibilities of Financial Regulation 203 or they are even unaware of the risk involved in structures created by high-powered trading desks that are under their watch. Additionally, few board members appreciate that the bank’s clients are being sold financial instruments that they do not understand, and therefore cannot manage. Evidence that a new regulatory system is required to assure orderly and secure markets, as well as appropriate use of new financial prod- ucts, has been provided time and again – most of all by the 2007 credit crisis.
eBook - PDFTransitional Economies
Banking, Finance, Institutions
- Y. Kalyuzhnova, M. Taylor, Y. Kalyuzhnova, M. Taylor(Authors)
- 2001(Publication Date)
- Palgrave Macmillan(Publisher)
Thus in a transition economy context there are a number of import- ant considerations, especially concerning independence of the regula- tory function, that support the combination of banking supervision with monetary policy within the central bank. This is the model that most transition countries have adopted: with relatively few exceptions (Hungary being the most prominent) the central bank is also the bank- ing supervisor. However, one question that remains is how the other financial sectors should be supervised, given that the discussion so far has concentrated only on banks. As a non-bank financial sector begins to emerge in these economies, there is also a need for these markets and institutions to be adequately supervised. If banking supervision is located in the central bank, both for the reasons usually cited and to provide a stronger guarantee of regulatory independence, then one option might be for the central bank to assume these other regulatory functions as well. This would mean that it took responsibility for the supervision of securities firms and markets, insur- ance companies and also pension funds in addition to banks. The benefits of this approach are that it ensures that these regulatory func- tions will also be performed with the same independence as banking supervision and that regulatory capacity-building will be facilitated by the central bank's prestige and access to resources on which we have already remarked. Moreover, in countries with small financial systems, especially ones in which the non-bank financial sector remains rela- tively undeveloped, it may be difficult for separate specialist agencies to provide cost-effective regulation given their comparatively small size. Combining all financial regulation within the central bank thus permits 236 Supervision and Regulation of Markets significant scale economies to be realized by using its IT, data collection and human resource functions.
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