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Regulation of the Capital Market *

Regulation of the Capital Market *. Avi Ben-Bassat, Sharon Blei, and Asher Blass. * The full report in Hebrew, including a detailed abstract in English, is available at http://www.idi.org.il/hebrew/catalog.asp?pdid=574&did=85. The Criterions. The goals.

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Regulation of the Capital Market *

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  1. Regulation of the Capital Market* Avi Ben-Bassat, Sharon Blei, and Asher Blass * The full report in Hebrew, including a detailed abstract in English, is available at http://www.idi.org.il/hebrew/catalog.asp?pdid=574&did=85

  2. The 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.

  3. Insurance Savings • Insurance Companies • Pension Funds • Insurance agents • Money Changers The 5 Supervisors and the supervised bodies Banking Department Securities Authority Anti-Trust Authority Capital Market, Insurance & Savings Division • Listed Companies • Stock Exchange • Underwriters • Mutual Funds • Investment Advisors & Portfolio Managers Competition in the various markets Banking Institutions Providence Funds

  4. The Goals of Regulation & Supervision • Protection of consumers’ interests • Intermediate Goals: • Financial stability • Market efficiency • Competition • Reducing conflicts of interest

  5. Regulators’ Independence Index, 2005

  6. Inputs and output, 2003

  7. Input-Output Ratios, 2003

  8. The Benefits of Locating the Bank Supervision in the Central 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 .

  9. Separating the Bank Supervision Department from the 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.

  10. The location of Banks’ supervision (70 countries, 2004)

  11. Conflicts of interest between economic policy and financial supervision 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.

  12. The share of independent authorities 2004 vs. 1984 (percent)

  13. Alternative Regulatory Structures • Multiple authorities by industry: Banks ; Securities ; Insurance • Multiple authorities by function: • Prudential supervision • Conduct of business • A single regulatory authority

  14. The Advantages of a Multiple Authority • Greater specialization • Competition among supervisors • Prevention of excess power • Avoidance of risk inherent in the reform process

  15. The Advantages of 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.

  16. 30 Countries has reduced the number of authorities

  17. Regulatory Structure in 79 CountriesPre and Post Reform *The Netherland is classified by prudential and conduct of business supervision. Source: Courtis (2004) and the Israel Democracy Institute.

  18. The Main problems in Israel’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.

  19. Financial Services Authority • The BOI shall be responsible for the stability of the financial markets. Chairman Banking Unit Securities Unit Insurance Unit

  20. Unification Alternatives • A federative authority composed of 3 industries departments. • A single authority like the FSA in GB. • Twin Peaks Model: • Prudential supervision department • Conduct of business department

  21. Thank you! * The full report in Hebrew, including a detailed abstract in English, is available at http://www.idi.org.il/hebrew/catalog.asp?pdid=574&did=85

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