The Single Supervisor, the Hungarian Case

1
The Single Supervisor,the Hungarian Case

• László Balogh,
• Hungarian Financial Supervisory Authority
• Conference at the World Bank, Washington D.C,
• December 4-5, 2003

2
Agenda

• Introduction
• Specificities of Hungary
• Aims of Supervisory Integration
• Steps taken
• Results - Unresolved items
• Practical challenges
• Conclusions

3
Introduction

• There is no optimal and exclusive structure
• A single structure is not an aim itself, rather a
  tool to achieve effective consolidated
  supervision
• While harmonizing supervision, sectoral
  specificities should be treated

• Clear strategy and good managerial skills are
  important to handle the transition
• Legal, cultural, and historical environment
  should not be disregarded

4
Features of the Sector in Hungary

• Open financial markets
• Substantial foreign participation
• 70 foreign capital in banking sector
• 80 in the insurance sector
• less than 15 public sector participation
• Universal banking, since 1999
• Dominance of financial groups (cca. 80)
• Expansion of cross-sectoral products

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Historical Background in Hungary

• No long lasting supervisory history, starting the
  late 1980s
• Central Bank has never had a banking supervisory
  function
• 3 predecessor institutions since 1990s
• Banking and Capital Market Supervision - through
  the merger of (1996)
• Banking Supervision
• Securities and Exchange Supervision
• Insurance Supervision
• Pension Fund Supervision

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Features of Supervision before 1999

• Fragmented supervisory structures
• Diverging level of operative independence
• Different approach and regulatory background to
  off-site and on-site examinations
• Poor and slow supervisory co-operation among
  institutions
• Low impact on regulation MoF responsibility
• Low international profile low level of
  co-operation
• Supervision remained on solo basis untill the end
  of the 1990s

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Aims of Supervisory Integration

• KEY OBJECTIVE TO PROMOTE EFFICIENT
  CONSOLIDATED SUPERVISION
• Conditions thereof
• good and rapid information exchange,
• good co-operation among supervisors,
• approximating supervisory approach,
• appropriate legal background
• improved operative independence

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Aims of supervisory integration (2)

• Channelling all available information into one
  supervisory body
• Grouping all supervisory knowledge at one place
• Making benefit of synergies
• Consolidated supervision of groups
• Following evolving market structure
• Expected economies of scale

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Aims of supervisory integration(3)

• Strengthening the operative independence of all
  three former supervisory structures
• More in line with relevant international
  standards and tendencies
• Prepare the supervision for the EU role
• To avoid market captures

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Setting up the Single Supervisor

• Policy decision in September 1999
• Government decision in October 1999
• Relevant law adopted in December 1999
• Interim management of the transition
• Establishment of the merged supervisory authority
  in April 2000

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Functional set-up
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International road map

• Permanent International Monitoring/ Compliance
  with standards
• IMF-World Bank FSAP pilot project (2000 and
  2002)
• Basle Core Principles self-assessment exercise
• IAIS self-assessment exercise
• IOSCO self-assessment exercise
• OECDRegulatory Reform Project (2000)
• Country Review, Structural Chapter (2001)
• EU Peer Review (2001 and 2003)

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Issues

• Financial groups, consolidated supervision
• Improving effective supervision
• Harmonizing supervisory approach
• Improve regulatory responsivness
• Upgrading supervision vs.industry groups to
  avoid industry capture
• Better cost efficiency
• Independent regulatory agency new type of
  entity
• EU perspectives

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New place for the supervisory institution

• INSTITUTIONAL AUTONOMY
• Growing level of overall independence
• President elected by the parliament for fixed six
  year term (nomination) - renewable
• Supervisory decisions are final, they cannot be
  appealed at higher administrative body
• Right of appeal with the court only

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New place for the supervisory institution 2

• INSTITUTIONAL AUTONOMY
• HFSA cannot be instructed, it should only act
  under rules and regulations
• Ring-fencing of daily supervisory
  responsabilities vis-avis the possible political
  influence
• Internal operational rules are not approved any
  longer by the Minister of Finance

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New place for the supervisory institution 3

• BUDGETARY AUTONOMY Key issue
• No contribution from Governement Budget
• Self financing authority - fees paid by the
  industry BUT
• Fines cannot be used for covering operational
  costs!
• Fees to be paid by the sector established by law
• The HFSAs budget part of the public finances
• However autonomy in deciding the allocations of
  expenses according to needs
• The budget cannot be centralised by the Ministry
  of Finance

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New place for the supervisory institution 4

• ADMINISTRATIVE AUTONOMY
• Supervisors are civil servants
• Supervisory liability is with the President of
  the Authority
• Income level of the staff is over civil servants
  but much lower than the market level limits the
  power of the HFSA to obtain the best experts on
  the market!
• New step getting closer to the market in income
  level, some exemptions from civil service payment
  scheme

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New place for the supervisory institution 5

• REGULATORY AUTONOMY
• Individual supervisory decisions are enforceable
• Sanctioning power is ensured
• Secondary regulations issued by the Government or
  the Minister of Finance in the form of decrees
• Active involvment of the HFSA
• Process is slow, rigid, burdensome
• Supervisory Guidelines are issued -legally not
  binding, but followed by the industry
• Unresolved Power for the Supervision to
  regulate!

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New place for the supervisory institution 6

• ACCOUNTABILITY AND TRANSPARENCY
• Accountability to the Government
• Controll by the State Audit Office
• Regular reporting to the Government
• New Step Regular reporting to the competent
  parliamentary commission
• Establishment of the Supervisory Council
  Advisory body for the President

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New place for the supervisory institution 7

• ACCOUNTABILITY AND TRANSPARENCY
• Accountability to the industry dialogue!
• Individual supervisory resolutions are made
  public matter of policy
• Reporting back to the industry- market analysis
  reports etc.
• Supervisory recommendations for the industry
• Predictability- sanctioning policy is published

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Practical Challenges

• Managerial skills for transition
• Identification of the new institution
• Mission statement
• Elaborated widely within the institution
• Positioning within the public institutions
• Communication to market participants about
  renewed supervisory policy

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Practical Challenges 2

• Financing the supervisory institution from the
  market
• Retaining experienced staff
• Salary levels close to market levels
• Dilemma
• Strict prudential rules versus
• International competitivness
• Co-operation with the Central Bank - systemic
  stability

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Practical Challenges 3

• Raising public awarness
• Transposition of intl supervisory standards
• Building international network
• Unification of IT systems
• Finding a single headquarter
• Revision and redefinition of supervisory policy
• Revision of sectoral regulatory framework

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Experience

• Better overview of the industry
• Better overview of regulatory deficiencies and
  inconsistencies
• Better positioned to initiate legislative
  modifications
• Better level of consolidated supervision
• More interaction between sectoral experts
• Better understanding of cross sectoral market
  attitude and risks
• Over time in function of results improving
  investment climate

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Conclusions

• Well prepared decision is needed
• Once decision is made, quick implementation
• Appropriate time needed, not an overnight
• Determined, devoted and skillful managment of
  transition
• Timing is key a relatively stable period
• Sequencing of steps

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Conclusions 2

• Clear, upgraded, convincing objectives
• For the staff
• For the market
• For the public, for the politicians
• Public communication and awareness raising
• No perfect, predefined development track
• Need of flexibility, reevaluation during the
  process
• Learning by doing
• Cross fertilization of divergent supervisory
  experience

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Conclusions 3

• IT system integration good opportunity to
  reassess overall data quality and data need
• International experience sharing
• Bilateral
• Clearing houses
• Effective implementetion builds up credibility
  internally and internationally
• Contributes to good investment climate

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Possible Conflicts

• Larger independence, but
• Independence is not automatic!
• One has to live with and protect it!
• De jure and de facto independence
• Independence and accountability hand in hand!
• Overdominance of banking, to counterbalance!

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Possible Conflicts 2

• Eventual overlooking of sectoral aspects
• Lack of regulatory power
• Continueos professional debates with the MoF
• Rigid, time consuming, inefficient regulatory
  responses
• Harmonising data provision
• Focusing data provision
• Streamlining data provision

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Instead of a Happy End

• After 4 years reassassment of the HFSA by policy
  makers new restrictive legislation is underway
• Independence substantially cut back
• Accountability to be replaced by direct
  ministerial controll
• Early removal of top management in the middle of
  their tenure
• Non observance of
• internationally recognized supervisory standards
• World Bank - IMF FSAP recommendations
• Salary scales to be pushed back to civil service
  level
• Consequences..?