A. Possible Benefits of Integrated Supervision
An increase of financial conglomerates questioned us how to supervise them efficiently and effectively. As agencies have difficulties in arranging new financial products under the categories of banking, securities or insurance. Fragmented supervision may raise concerns about the ability of supervisors to assess the overall risk the conglomerate is taking, on a consolidated basis as well as the ability to ensure that supervision is consistent and free of gaps. There are also the assessments of group-wide risks that may not exist at a lower level addressed by specialist regulators.
An integrated supervision can generate economies of scale as a big organization recruits specialized of labor and a more intensive utilization of inputs. Moreover, it can save cost in terms of infrastructure, administration and support systems. Unification may also allow acquisition of information technologies which become cost-effective only beyond a certain scale of operations and can disallow duplication of research and information-gathering efforts.
The last argument for an integrated supervision is that it strengthens the accountability of supervisors. Under a system of multiple regulatory agencies, it may be more difficult to hold supervisors to account for their performance against their statutory objectives, for the costs of regulation, for their disciplinary policies and for regulatory failures.
A unified supervisory agency can be more benefited than multiple supervisors in monitoring risks across the financial system and asking to possible threats to the stability of the financial system. The integrated supervision:
' Can better recognize and observe risk transfers among different financial intermediaries and market segments.
' Can better charge the real and potential force, on all sectors, of industry and market-wide issues affecting the financial system, for example turbulence in markets and economies, and the development of e-commerce.
' Can better understand the cross-sector nature of the business of financial corporations.
' Is better prepared to develop policies to address the risks affecting a financial conglomerate as well as its single supervisors.
' Is better prepared to develop a constant supervisory approach to supervise similar financial products and services effectively regardless of what type of financial institution carries them out.
An integrated supervisory system seems to be better prepared to moderate regulatory arbitrage,
because it is better prepared to develop and apply rules and supervisory processes
consistently. In addition, the information available to the integrated supervisor can be more
quickly and effectively utilized. Moreover, by becoming the only contact point for entities for all regulatory and supervisory issues, a single regulator becomes responsible in preventing gaps in rule and supervision. Furthermore, a unified supervisor becomes accountable for its statutory objectives. The blame cannot be passed from one supervisor to another if supervisory failure occurs.
B. Possible Benefits of Integrated Supervision
Objectives of an integrated supervisor may be rather large, for example to balance systemic stability in the banking sector to protecting customers of insurance companies. In addition, if the objectives are not clearly specified and communicated to all stakeholders, the administrator may not be able to distinguish among different types of institutions, accountability of the supervisor may be inferior, and the supervisor may struggle in the event of conflict between different objectives.
Some critics argue that the synergy gains from unification will not be very large, such as, economies of scope are likely to be much less significant than economies of scale. The cultures, focus and skills of the various supervisors vary markedly. For example, it had been argued that the sources of risks at banks are on the assets side, while most of the risks at insurance companies are on the liability side.
A single unified regulator may also suffer from some diseconomies of scale. Very large organizations are likely to become more routine and rigid, compared to smaller sectoral supervisors. If the operations suit too broad-based, managers may not be able to know the full range of responsibilities of the organization, lowering its efficiency and effectiveness. This issue, however, is likely to be very much country-specific, as an integrated supervisor may be a smaller organization than sectoral supervisors in large countries, sometimes called 'Christmas-tree effect'.
The public could tend to assume that all creditors of the institutions supervised by a given supervisor will receive equal protection generating 'moral hazard'. Financial market participants may believe that all creditors of all institutions supervised by an integrated supervisor will receive the same protection. For example, the creditors of other financial institutions may expect and demand through a political process in case of financial problems that they will be given the same protection as the depositors in banks. This could implicitly extend the banking safety net to other parts of the financial sector for which such safety net may not be appropriate.
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