Types of Unified Supervision
The decision on the type of unified supervision agencies—whether based on limited objectives or cross-sectoral unification of all objectives—also gives rise to complex trade-
offs. In principle, a supervisory framework could be organized in line with basic policy objectives (or functions), regardless of the type of financial business (banking, insurance, securities trading, and non-bank financial business). The objectives (or functions) to be accommodated include prudential regulation, systemic stability, consumer or investor protection, and competition. Although the multiplicity of objectives and institutional types gives rise to a matrix of potential regulatory arrangements by objective and type of business, the normal approach in creating integrated supervisors has been (as seen in table F.1) to adopt cross-sectoral unification of all objectives and related functions (with the exception of competition objective) in a single agency.
Australia and the Netherlands are, however, unusual among integrated supervisors because they created two separate integrated supervisors: one focused on prudential supervision and one focused on the conduct-of-business supervision. Thus, each agency focuses on a specific objective of supervision. If the objectives of supervision were few and very distinct, it would be fairly straightforward to design a framework in which each institution was charged with achieving a distinct objective. In reality, a major complication is the fact that the various supervisory norms and instruments underpinning the objectives of supervision are not fully distinct. In general, the various supervisory domains will contain shared elements as well as inconsistent elements.
Consequently, the practical design of a supervision framework will face tradeoffs between maximizing synergies among the common elements and minimizing conflicts among the inconsistent elements. Because the importance of the various tradeoffs will vary across countries with different financial systems and legal arrangements, if follows that the appropriate arrangement of objective or functionally oriented supervision will vary across countries. For example, the Netherlands model differs from other cross-sectoral supervision frameworks in many ways: (a) consolidation of both microprudential and macroprudential supervision into a single body within the central bank (DNB-PVK); (b) the consolidation of all conduct-of-business supervision within a separate body, the Authority for Financial Markets (AFM); and (c) the establishment of agreements or “covenants” between main supervisors to ensure good coordination and cooperation. A council of financial supervisors (RFT) offers the two supervisors (DNB-PVK and AFM) a platform for the coordination and mutual fine-tuning of regulation and policy, especially on integrity supervision issues.
Consolidation of macroprudential and microprudential supervision in a single agency distinguishes the Netherlands model from cross-sectoral approaches in other countries. In both the United Kingdom and Australia, for example, macroprudential surveillance is conducted by the central bank, but microprudential surveillance has been taken over by separate agencies.4 The combination of both aspects of prudential supervision in the Netherlands largely reflects the fact that its financial system is dominated by a handful of large, complex financial institutions. That being the case, the distinction between microprudential and macroprudential issues is blurred, at least in the case of the largest institutions.
There are both pros and cons associated with such consolidation. On the positive side, consolidation is likely to encourage taking greater account of macroeconomic and systemic stability considerations in microprudential analysis. Macroeconomic analysis is also likely to benefit by taking better account of the structure and characteristics of the
financial system at the microlevel. A single macroprudential and microprudential supervisor also is seen as advantageous in the event of a financial crisis, because it would facilitate rapid assembly of essential prudential information and facilitate speedy decision making.
At the same time, it is recognized that combining macroprudential and microprudential supervision under one roof could lead to conflicts between objectives. A particular concern is that microprudential considerations could put increased pressure on the central bank to provide generous lender-of-last-resort facilities and that knowledge of this support could encourage less-prudent behavior by banks. In principle, this concern is valid. However, in practice, it may not be a very significant issue in the Netherlands because the DNB is authorized to lend—including in emergency circumstances—only against acceptable collateral. In practical terms, the moral hazard is that the DNB might be willing to offer slightly better terms on offered collateral than it might otherwise do. That probability is unlikely to promote significantly riskier behavior by financial institutions.
An additional issue in relation to the consolidation of macroprudential and microprudential supervision is whether this supervisory role should be located within the central bank. The fact that the DNB is no longer responsible for conducting an independent monetary policy undercuts one of the traditional arguments in favor of locating prudential supervision outside the central bank, because the scope for conflict of interest between monetary policy and prudential policy objectives is largely eliminated.