Institutional arrangements for financial sector supervision

Executive summary

This paper reports the main findings of a survey of institutional arrangements for financial sector supervision recently undertaken by the Financial Stability Institute (FSI). The survey's goals included gaining a better understanding of the evolution and current state of institutional arrangements for financial sector supervision globally, and identifying the predominant features of supervisory structures at year-end 2006. The results of the survey highlight that there are a variety of approaches to structuring financial sector supervision and, therefore, national jurisdictions should determine what best suits the characteristics of their own financial systems.

The FSI survey confirms that the last 20 years, and especially the last decade, have been a period of change in institutional arrangements for financial sector supervision in many jurisdictions. About half of the 125 responding jurisdictions experienced a change in either the domicile of their banking supervision authority or the level of integration of supervisory functions across major sectors of the domestic financial system, or both.

Central banks have been, and continued to be at year-end 2006, the dominant domicile for banking supervision across the jurisdictions surveyed. Central banks are responsible for banking supervision in 83 of the 125 (66%) responding jurisdictions. Institutional changes over the last 20 years, particularly during the last decade, show a significant decline in the number of banking authorities domiciled within a department of the government (eg Ministry of Finance) and an increase in the number of banking authorities domiciled in a separate supervisory agency.

The survey results indicate that in some regions the direction of change is towards greater integration of financial sector supervisory authorities. This has been particularly true in Europe and Latin America. While there has been a meaningful movement towards more integrated supervisory structures, it should be noted that slightly more than half of the jurisdictions responding to the survey have supervisory structures that are neither partially nor fully integrated. Non-integrated authorities were the dominant category in 1987 and remained the dominant category in 2006.

The number of jurisdictions in which a partially or fully integrated financial sector supervisory authority is domiciled within the central bank has increased over the last 20 years. The survey results indicate, however, that the shift towards greater integration of financial sector supervision has often coincided with a decision to move the banking supervision authority outside the central bank. A related finding is that when supervisory authorities are domiciled outside the central bank there is a higher propensity to create a financial stability department within the central bank. Most central banks that have created a financial stability department did so during the last decade.

Ad hoc meetings were cited most frequently as a technique for dealing with both cross-sectoral and cross-border issues during both normal times and times of financial system stress. Supervisors also make use of memoranda of understanding (MOUs) and informal contacts to deal with cross-sectoral and cross-border issues.

As regards supervisory challenges, harmonising supervisory approaches across financial sectors (74% of respondents) and creating a consistent regulatory framework across financial sectors (69% of respondents) were identified as key among the challenges supervisors face.