Towards an integrated supervisor:
experiences from The Netherlands
Aerdt Houben
Head Supervisory Strategy department
De Nederlandsche Bank
Washington D.C., 6 June 2006
Outline
1. What determines the structure of financial supervision?
•
•
•
2.
International trend towards integrated supervision
Advantages of integrated supervision
Alternative cross-sectoral models: one size does not fit all
Why did The Netherlands reform, and how?
•
•
•
Background
Steps towards the new framework
The Twin Peaks model: merger and reorganization
3. What have we accomplished so far?
•
•
Early experiences
First results
1. International trend towards
integrated supervision
1971
1985
Norway
1987
1988
1992
1999
2000
Denmark
2002
2003
2004
2006
Austria
Germany
Estonia
Australia
Iceland
Ireland
Canada
Singapore
Sweden
UK
Japan
Hungary
Czech R.
Slovakia
Belgium
The Netherlands
AFM: CONDUCT
DNB: PRUDENTIAL
1. Advantages of integrated
supervision
Enhances the overall quality of supervision:
1. Promotes cross-sectoral consistency of supervision
2. Facilitates better monitoring of the financial system
3. Allows rapid policy responses
4. Reduces scope for regulatory overlap or white spots
5. Maximizes economies of scale and scope in supervision
6. Strengthens accountability
1. Alternative cross-sectoral models:
one size does not fit all
Prudential and Conduct-of-Business
supervision integrated?
yes
yes
Integrated with
Central Bank?
“One Peak”
Singapore, Ireland,
Czech Republic,
Slovakia
no
“Twin Peaks”
The Netherlands
Germany, Austria
no
“FSA”
UK, Japan, Canada
Scandinavia,
Belgium and more
“Three Peaks”
Australia
Outline
1. What determines the structure of financial supervision?
•
•
•
2.
International trend towards integrated supervision
Advantages of integrated supervision
Alternative cross-sectoral models: one size does not fit all
Why did The Netherlands reform, and how?
•
•
•
Background
Steps towards the new framework
The Twin Peaks model: merger and reorganization
3. What have we accomplished so far?
•
•
Early experiences
First results
2. Background
•
Need for change: Increasing demands on supervisor’s effectiveness
and accountability
•
Key consideration (1): Interwoven financial sector (products and
institutions)
•
Key consideration (2): Concentrated financial sector
•
Path dependence: Central Bank with
1. established reputation
2. extensive financial sector and supervisory expertise
3. autonomous administrative authority
2. Steps towards the new framework
•
Removal of barriers to financial conglomerates (1990)
•
Council of Financial Supervisors established (1999)
•
New supervisory structure: establishment AFM (2002)
•
Merger between DNB and PVK (2004)
2. Supervisory landscape before merger
DNB-PVK and establishment AFM
Sectoral
Systemic
Prudential
Conduct of business
Not typical securities
Per sector
Credit
institutions
Cross sector
DNB
Per sector
Typical
securities
Cross sector
DNB
Mutual funds
Insurance
companies
DNB
PVK
RFT
PVK
Pension funds
Securities firms
STE
STE
RFT
STE
2. Supervisory landscape after merger
DNB-PVK and establishment AFM
Functional
Systemic
Prudential
Conduct of business
Per sector
Cross sector
Per sector
Cross sector
Credit
institutions
Mutual funds
Insurance
companies
Pension funds
Securities
firms
DNB
AFM
2. The Twin Peaks model
Before
DNB (banks,
2004 investment firms)
PVK (insurers,
STE/AFM (securities
pension funds)
firms,exchanges)
Conduct supervision
Conduct supervision
Conduct supervision
Prudential supervision
Prudential supervision
Prudential supervision
Lender Of Last Resort
Systemic Stability
DNB
Prudential
Supervision
After
2004
Systemic Stability
Lender Of Last Resort
AFM
Market Conduct
Supervision
Conduct-of-
Business
Supervision
2. Merger and internal reorganization
required more than 2 years
Dec
2002
phase 1
6 months
June
2003
Strategy:
behind the
integration
phase 2
4 months
Oct
2003
Planning:
Integration process
phase 3
5 months
April
2004
Implementation
:
from day 1
phase 4
12 months
Completion:
full integration
Formulate strategy
and logic behind
integration
Develop detailed
structure of
organisational model
Implement
organizational structure
and processes
Implement
organizational structure
and processes
Identify synergy
targets
Identify and implement
quick wins
Monitor synergies and
cost savings
Monitor synergies and
use replacement policy
Determine main new
modes of operation
Develop broad
implementation
planning
Develop plan of action
for phase 4
Resolve outstanding
issues
Develop criteria for the
implementation
process
Develop new main
organisational model
Determine monitoring
parameters and
process for monitoring
Outline
1. What determines the structure of financial supervision?
•
•
•
2.
International trend towards integrated supervision
Advantages of integrated supervision
Alternative cross-sectoral models: one size does not fit all
Why did The Netherlands reform, and how?
•
•
•
Background
Steps towards the new framework
The Twin Peaks model: merger and reorganization
3. What have we accomplished so far?
•
•
Early experiences
First results
3. Early experiences
• Increase in effectiveness and efficiency of supervision
• Better view of overarching financial stability risks
• Simultaneous integration/reorganization proved efficient
• Institute specific labour agreement proved practical
• Employees need time to adjust
3. First results
• IMF FSAP 2004
• Palmnet
• FIRM
• FTK
• Vision on Supervision
2006-2010
More risk-oriented and
transparent supervisory
framework
Wrap-up
Three propositions:
1. Supervisory structures are made-to-measure
2. Twin Peaks is optimal model for The Netherlands
3. Because of supervisory overlap, DNB and AFM
need to cooperate closely
Towards an integrated supervisor:
experiences from The Netherlands
René Geskes
Head Conduct of Business Supervision
Authority for the Financial Markets
Washington D.C., 6 June 2006
Agenda
• Covenant DNB and AFM
• Supervision in action: how does it work?
• Regulation, policy and domestic and international
consultations
• Coordination on top level
• Overlap in supervision
Covenant DNB and AFM
• The new covenant between the AFM and the DNB was signed
in 2004
• Agreement about
• Licensing process
• Investigations
• Regulatory measures
• Information exchange
• Illegal financial institutions
•
and how to avoid getting in each other’s way
Covenant DNB and AFM
• Functional division of supervisory responsibilities, distinguishing
between general, market conduct and prudential aspects of
business
•
and how to avoid getting in each other’s way
General aspects
of operations
Organizational structure, strategy, reporting lines, proper
management and internal (ICT) controls
Market conduct-specific
aspects of operations
Client administration, separation of assets, complaint
handling, client relations and supplying information to
(prospective) clients, Chinese walls, insider dealing, price
rigging and conflict of interest and compliance
Prudential aspects of
operations
Solvency risk management (credit-, market-, operational-,
liquidity- and insurance risk), financial guarantees, capital
and large exposure reporting and prudent management in
outsourcing activities
Covenant DNB and AFM
credit institutions and
insurers
securities institutions
and collective
investment schemes
General aspects
of operations
AFM
DNB
Market conduct-specific
aspects of operations
AFM
DNB
Prudential aspects of
operations
Agenda
•Covenant DNB and AFM
•Supervision in action: how does it
work?
•Regulation, policy and domestic and
international consultations
•Coordination on top level
•Overlap in supervision
Supervision in action: licensing
DNB (prudential)
Authorizes banks and insurance
companies
Opinion on:
• fit and properness
of managers
• operational
management
(including AO/IC)
AFM (Market
Conduct)
Sharing of information
Authorizes securities institutions and
collective investment schemes
Supervision in action: Investigations
• Planned investigations
Sharing of planning and interim
reports (each quarter)
Prior to investigation request for
relevant information
Special wishes must be addressed!
If suspected failing falls in field of
other regulator: information request!
• Unplanned investigations
Notification of other regulator
• Reporting
Joint reporting or sharing of results
with due observance of statutory
secrecy provisions
Supervision in action: Information
exchange
Both supervisors must, either by request or on their won initiative,
exchange information on institutions under their supervision!
• Standard information
All data which supervised entities are
required to supply (standard legal
obligations)
Examples: annual statements,
management letters, auditor’s reports
Exchange without notification to
supervised entity
• Other information
Is specific. Notification of exchange of
such information unless undesirable in
the interest of an ongoing investigation
or other circumstances
•
Supervision in action: Supervisory
measures
General measures
• “Radical’ measures
Can be taken autonomously by each
supervisor after – if possible consultation of the other supervisor
(unless impossible)
Power is confined to authorizing
supervisor
First – if possible – consultation of
the other supervisor
Non-authorizing supervisor may
initiate a radical measure by issuing
a substantiated advice to the
authorizing supervisor!!!
Authorizing supervisor assesses
the advice against the principals of
sound management – no fact
finding!
Supervision in action: Illegal
institutions
• Covenant applies equally to actions against an institution that is
unregistered yet requires authorization
Agenda
• Covenant DNB and AFM
• Supervision in action: how does it work?
• Regulation, policy and domestic and international
consultations
• Coordination on top level
• Overlap in supervision
Regulation, policy and domestic and
international consultations
• Co-ordination and mutual attuning promote the adequate
arrangements of policies and regulations
• Jointly advise of the Minister of Finance
• Inform each other concerning current issues addressed within
international co-operative bodies
Agenda
• Covenant DNB and AFM
• Supervision in action: how does it work?
• Regulation, policy and domestic and international
consultations
• Coordination on top level
• Overlap in supervision
Coordination on top level
• Appointment of coordinators:
Supervision
Policy and regulation
Domestic and international consultation
• Board level meetings 4 times a year
• Standing committees/temporary working groups if necessary
Agenda
•
•
•
•
•
Covenant DNB and AFM
Supervision in action: how does it work?
Lawmaking, policy and (inter)national coordination
Coordination on top level
Overlap in supervision
Overlap in supervision
Supervision Coordination Bureau
• Aim: limit the burden for supervised institutions
• Register and resolve complaints concerning overlap in
operational supervision by the AFM and DNB
• Highlight problems where the pattern of complaints
points to potential shortcomings in regulations, policy or
implementation, that in turn call for longer-term solutions
• Decision and take measures. The institution concerned
will be notified of the position of the supervisory
authorities