INTERVENTION DE M. NOYER AU COURS DE LA SESSION ”GOVERNING THE GLOBAL ECONOMIC AND FINANCIAL SYSTEM

Description

¾¾¾FINANCE FORUM AMBROSETTI, 11 ET 12 MARS 2005 INTERVENTION DE M. NOYER AU COURS DE LA SESSION ”GOVERNING THE GLOBAL ECONOMIC AND FINANCIAL SYSTEM” A SPECIALISED, DECENTRALISED AND COOPERATIVE APPROACH FOR FINANCIAL SECTOR SUPERVISION IN EUROPE Introduction Ladies and gentlemen, Let me start by expressing my gratitude for having been invited to participate in this forum. I am greatly honoured to have been asked to address a number of critical economic and financial issues, which are of particular importance nowadays given the key role supervisory authorities play in promoting financial stability.. This session, entitled “Governing the global economic and financial system”, raises a fundamental question: “What is the most effective supervisory framework for financial stability?”. As Governor of the Banque de France and Chairman of the Commission bancaire, I would like to start by addressing the three issues that are of particular interest to supervisors and that underpin our attempts to achieve a coherent approach to financial stability: How to capture all material risks arising from the financial sector, which is characterised by its capacity for innovation? What are the conditions for ensuring prompt and appropriate reactions from the supervisory authorities in the event of financial turbulence? How to deal with the increasing globalisation of financial groups? 1¾¾¾ Let me say right away that there is no ...

Informations

• Publié par: Viej
• Nombre de lectures: 27
• Langue: English

Extrait

FINANCEFORUMAMBROSETTI,11 ET 12 MARS 2005 INTERVENTION DE M . NOYER AU COURS DE LA SESSION

” GOVERNING THE GLOBAL ECONOMIC AND FINANCIAL SYSTEM ”

A SPECIALISED , DECENTRALISED AND COOPERATIVE APPROACH FOR FINANCIAL SECTOR SUPERVISION IN E UROPE Introduction Ladies and gentlemen, Let me start by expressing my gratitude for having been invited to participate in this forum. I am greatly honoured to have been asked to address a number of critical economic and financial issues, which are of particular importance nowadays given the key role supervisory authorities play in promoting financial stability.. This session, entitled “Governing the global economic and financial system”, raises a fundamental question: “What is the most effective supervisory framework for financial stability?”. As Governor of the Banque de France and Chairman of the Commission bancaire, I would like to start by addressing the three issues that are of particular interest to supervisors and that underpin

our attempts to achieve a coherent approach to financial stability: ¾How to capture all material risks arising from the financial sector, which is characterised by its capacity for innovation? ¾What are the conditions for ensuring prompt and appropriate reactions from the supervisory authorities in the event of financial turbulence?

¾How to deal with the increasing globalisation of financial groups?

1

Let me say right away that there is no single answer to these questions, and therefore no single theoretical supervisory framework for addressing them. However, one important lesson I have drawn from my experience and knowledge of financial sectors is that financial sector supervision should be underpinned by three mutually reinforcing pillars in order to be efficient: ¾Specialisation (I) ¾Proximity (II) ¾Co-operation (III) I would now like to outline these three pillars:

I.

S PECIALISATION
SUPERVISORY AUTHORITIES MUST FOCUS ON THE RISKS TAKEN BY EACH CATEGORY OF FINANCIAL INSTITUTION

As you know, banking, insurance and securities activities - which lie at the heart of the financial sector - are in the hands of three different types of undertakings: credit institutions, insurance companies and investment firms.

I will leave aside the issue of market supervision although this is not a trivial one, as illustrated by the recent spate of large corporate failures. However, the rationale behind market regulation clearly differs from the prudential supervision applied to financial corporations. Whereas market authorities chiefly seek to ensure market transparency and integrity, the prudential supervision of financial institutions is aimed at ensuring their solvency and liquidity. I would like to point out that the objectives of insurance company supervision differ from those of credit institution supervision; this difference is too often underestimated. Although these two sectors share common concerns, such as the need for financial stability, insurance and banking supervisors will not always choose the same course of action given that their objectives and tasks are different.

2

€One major reason for adopting different approaches with regard to credit institutions and insurance companies is the location of their risks. For banks and investment firms, risks tend to appear on the assets side of the balance sheet, whereas for insurance companies, the main financial risks appear on the liabilities side of the balance sheet (i.e. the main risk is unanticipated claims by policyholders). €This difference is also reflected in the European regulatory framework. Each sector is governed by specific sectoral directives. We could sum up the difference as follows: ¾Banks are free to determine the nature, horizon and composition of assets. However, the level of their capital must reflect the risks attached to these assets. ¾Insurance companies have to comply with directives on the composition and horizon of assets. They must also respect a solvency margin to ensure that their liabilities are properly valued. Given these differences between insurance and banking regulations, it is not obvious that a global supervisory approach could be adopted. It can be argued that a variety of factors, including regulatory liberalisation, disintermediation, financial innovation, technological progress and even cross-sector risk transfers, have blurred the traditional distinctions between different markets, products and intermediaries within the financial sector. I do not deny this. But in reality, the magnitude of this trend towards the emergence of financial conglomerates and the blurring of distinctions between banks, investment firms and insurance companies should not be overestimated, since it is still fairly limited. Groups remain concentrated on their principal activity: they are either largely bank-oriented or insurance-oriented. The specificity of each financial sector should lead to a tailored supervisory approach, which is easier to implement for specialised supervisory structures than for integrated ones.

3

€Banking and insurance are distinct financial sectors with specific risks. Each sector is subject to specific rules - i.e. accounting standards, taxation, and safety nets - that are organised at a sectoral and national level. Given these differences, it is quite difficult to achieve a full consolidation of banking and insurance activities, even at a national level for supervisory purposes. Co-operation between all sectoral supervisors is more effective for assessing the potential weaknesses of financial groups or conglomerates. For instance, the different French financial authorities work in close co-operation, and this co-operation is, in practice,

facilitated by organic links.

€A specialised co-operative supervisory approach enables the supervisory authorities to cover the whole range of financial groups’ activities, while the different types of activity can be clearly identified, by means of dedicated legal entities for instance. There is thus an incentive for the group’s risk management to clearly separate its different financial activities. This separation helps strengthen the fire walls between the different activities in order to limit intra-group exposures and thus reduce the risk of contagion.

€Moreover a specialised organisation answers the increasing need for enhancing financial authorities’ expertise. To put it simply, in a context of increasingly complex financial markets, specialisation fosters the development of human skills within the authorities. Let me now turn to my second pillar: proximity or decentralisation.

4

. €

€

€

II.

D ECENTRALISATION
T HE GEOGRAPHICAL PROXIMITY BETWEEN SUPERVISORY

AUTHORITIES AND THE INSTITUTIONS THEY SUPERVISE IS A KEY FACTOR OF EFFICIENCY

The issue of an integrated European financial supervisory authority is being increasingly debated. Let me say right away that I am strongly in favour of a European and international convergence of supervisory practices and I will outline this in the third part of my presentation. Yet I believe that the creation of a single authority may raise more practical issues than it will solve real problems. The point is not to think about new institutional arrangements but rather to look for an effective supervisory approach for financial sector supervision. From this point of view, the proximity between supervisory authorities and the institutions they supervise is a key factor.

First, geographical proximity between banks and their supervisors makes it possible to acquire an in-depth knowledge of the financial institutions and of the markets on which they operate. Would a supervisory authority be able to monitor institutions effectively if it were located thousands of kilometres away? If the supervisory team did not speak the same language as the bank staff? If the supervisors did not know the specificities of the domestic market? Frankly speaking, I have strong doubts about the ability of a “remote supervisor” to perform effective and in-depth supervision.

Second, proximity between banks and supervisors provides a privileged access to information and constitutes a good framework for on-site inspections. Problems within financial institutions are rapidly detected and supervisors are able to take prompt corrective action

Finally, the European level is not the most appropriate level for banking supervision. Indeed, apart from a few exceptions - Banco Santander-Abbey National or Dexia for instance - most of the European banks have a strong domestic feature. Furthermore, a large number of banks are not confined to the European market, but are of international dimensions.

5

€

It is not surprising that strengthening the co-operation between supervisors both on a cross- border and a cross-sector basis appears to be the best way to respond to the challenge of financial sector globalisation. Let me now outline the third pillar, enhanced co-operation.

III.

CO - OPERATION
G REATER CO - OPERATION BETWEEN AUTHORITIES ENSURES AN EFFECTIVE SUPERVISION OF LARGE FINANCIAL GROUPS AND CONGLOMERATES

The reality of the international dimension of financial groups and of the expansion of financial groups with cross-border activities is not called into question. First of all, I would like to stress that supervisors are not lagging behind financial groups. For decades they have dealt with the process of globalisation by establishing a dynamic co-operation both at the European and the international level. This fruitful co-operation has not been confined to the banking sector but has also covered cross-sectoral issues. In my opinion, strengthening concrete co-operation is most promising than banking on a hypothetical integration. I do not need not emphasise how the work of international fora, such as the Joint Forum, the Basel Committee on Banking Supervision or the IOSCO, has contributed to promoting a comprehensive oversight of financial sectors. These bodies have published many studies, guidelines or core principles which provide an answer to some of the major cross-sectoral questions raised by financial sectors (solvency rules, corporate governance, anti-money laundering, etc.). I will not list all of the documents published by these institutions. Instead, I would like to highlight the new impetus given to European supervision by the Lamfalussy process. Indeed, with 25 States, it had become essential to set up a new platform for co-operation. The establishment of three sectoral Level 3 Committees (CEIOPS for insurance, CESR for securities and CEBS for banking) has created strong incentives for enhanced co-operation in st the area of supervision. Common European regulations have existed for decades (1 banking st directive in 1977 and 1 insurance directive in 1979) but the value added of this approach is to promote a common and effective implementation of these regulations.

6

For instance, the CEBS is currently working on the concrete implementation of the revised Capital Adequacy Directive (CAD 3). Crucial issues, such as co-operation between the home country supervisor and the host country supervisors are being discussed. Clear and balanced rules are needed to allocate tasks between the different national authorities. The revised directive solves this problem by setting clear principles for the “supervisor on a consolidated basis”. However, the directive does not offer any solutions as regards the practical implementation of the directive’s provisions. In this context, the CEBS has drawn up some guidelines on this issue and is about to publish a paper which clarifies a number of points in the directive, such as the “planning and coordination of supervisory activities in going concern, as well as in emergency situations”. €It can be argued that these Lamfalussy Level 3 Committees are sector-specific and are therefore not suited to deal with cross-sectoral groups such as financial conglomerates. In order to tackle cross-sectoral issues, one must not ignore the various interactions between them. ¾The joint meetings of the three secretariats in the framework of the “three Level 3 Committees” ensure an active and consistent approach to financial issues. They are in charge of issues of common concern, such as the supervision of financial conglomerates or guidelines on outsourcing.

¾Moreover, the presence of observers from other committees in certain CEBS, CESR and CEIOPS working groups also contributes to strengthening the consistency of financial supervision. For instance, CEBS observers were present in CESR working groups on credit rating agencies. In return, the CEBS invited a CESR member to participate in its working groups on external credit assessment institutions. This “cross-fertilisation” is a crucial factor for furthering European convergence. €Last but not least, this active and daily co-operation should not be restricted to the European level. As the experts in charge of assessing the European Financial Services Action Plan have pointed out, international co-operation between supervisors must be further developed. That is why I am in favour of reinforcing the transatlantic dialogue. I was in the United States last week to meet monetary and financial authorities as well as representatives from the private sector. In return, the Commission bancaire welcomed a delegation of US Congressmen in mid- February.

7

We could illustrate this transatlantic co-operation by referring to the issue of financial conglomerate supervision. Indeed, for the past few weeks, we have been having active discussions with the US authorities on the issue of financial conglomerates. European Member States have made assessments and established parallels between US regulations and the recent Financial Conglomerate Directive. This dialogue has enabled us to sign information-sharing agreements with a number of US authorities and to define a comprehensive supervisory monitoring process of international groups. It should not only lead to the removal of all divergences in terms of supervision - either between sectors or between countries - but also to the creation of a competitive level playing field and to the promotion of financial stability. €Let me also remind you that “when there is a will, there is a way”. I would like to mention, for example, the work carried out by the CEBS, notably on the definition of a Common European Reporting (COREP) framework for the new solvency ratio. Within this framework, all EU Member States will use the same templates and the same method for computing the ratio, including the use of common “prudential filters” for calculating the level of regulatory capital. This common reporting framework is a great achievement as it will considerably speed up the convergence of supervisory practices and significantly reduce the regulatory burden for financial institutions. It is a clear illustration of an effective and efficient co-operation between supervisors. Finally, I would like to stress that co-operation has not only been strengthened with banks but also across a whole range of sectors. It has enabled supervisory authorities to cover the whole spectrum of a group’s activities, while retaining an in-depth knowledge of each of its activities. Conclusion Let me conclude my presentation by reminding you of my introductory question: “What is the most effective supervisory framework for financial stability?”. What I have tried to do in my short presentation today is to show that the institutional framework is not in itself a guarantee of effective supervision and that, at the end of the day, different ways of addressing institutional issues may lead to the same satisfactory results.

8

However, I am convinced that the specialisation of supervisory authorities and their proximity with financial institutions, together with strengthened co-operation between supervisors on a cross-border and cross-sector basis, are key factors for ensuring effective financial sector supervision and therefore contributing to financial stability. Thank you very much for your attention.

9