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