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Unformatted text preview: Module 3. Regulatory bodies Learning Goals: To know the description, the structure, the duties and the roles of the different regulatory bodies ‐ Spanish, European and international ‐ in the financial system. Context: You have joined one of the regulatory bodies. You must be able to explain to your colleagues what they are and how the different regulatory bodies of the financial system work. Format: 1. Introduction 2. Comisión Nacional del Mercado de Valores (SEC) 3. General Directorate of Insurance and Pensions (DGSFP) 4. Bank of Spain 5. European Central Bank and the Eurosystem 6. Bank of International Settlements Continuous assessment: Together with your team, must prepare a overview (maximum 2 pages) of one of the regulatory bodies (Spanish or not) highlighting the aspects that you find most interesting (Comisión Nacional del Mercado de Valores, General Directorate of Insurance and Pensions, Bank of Spain, European Central Bank, Bank of International Settlements) 1 1. Introduction Why have specific regulation and supervision for the financial system? We could offer two kinds of reason: 1. Macroeconomic reasons: To maintain the stability of the financial system (banking regulation). 2. Microeconomic reasons: To protect the users of financial services (banking regulation and regulation of financial markets). In spite of these two reasons we are faced with a dilemma when choosing between regulation and supervision. Regulation involves drawing up regulations while Supervision is monitoring to ensure compliance with these regulations (in deed and in spirit) It is important to note that for the system to develop properly we must work at both. Within regulation and supervision we must distinguish between two areas of application: national and supranational. For each of these areas we must also distinguish between the legislative and general political institutions, which formulate regulations affecting the financial system and are therefore regulatory bodies, and institutions responsible for regulating and supervising some parts of the financial system, such as Monetary Policy, institutions that operate in the system or the markets where securities are traded. Supranational regulation: 1. General political institutions a. European parliament: Regulations b. Council of the EU: Directives c. European Commission: Decisions 2. Monetary Policy: a. Eurosystem and European Central Bank: Regulations and Decisions 3. The ESCB and the Eurosystem The European System of Central Banks (ESCB), established under the Maastrict Treaty (TEU), is made up of the European Central Bank and the National Central Banks of all the EU member states, regardless of whether or not they have adopted the euro. The Eurosystem, on the other hand, comprises the European Central Bank and the National Central Banks of the member states that have actually adopted the euro. Therefore, so long as there are member states that have not adopted this currency, it will be necessary to maintain the distinction between Eurosystem and ESCB. 4. The European Central Bank 2 The ECB is a supranational organism, with judicial authority according to public international law and constitutes the heart of the Eurosystem and of the ESCB. It was created on 1st June 1998 in Frankfurt and took over the duties of the European Monetary Institute. From 1st January 1999 it took charge of the implementation of Monetary Policy in the eurozone. 5. The National Central Banks The National Central Banks (NCB) have judicial authority in accordance with the national legislation of their respective countries. The central banks of the countries that make up the eurozone constitute the Eurosystem, and as such carry out the duties assigned them according to regulations established by the ECB. 6. International monetary and financial cooperation organizations a. The Bank for International Settlements (BIS). They can also carry out duties outside of the Eurosystem under their own responsibility, unless the Governing Body considers that such duties interfere with the aims and tasks of the Eurosystem. National Regulation: 1. General political institutions a. Cortes Generales (General Courts): Laws b. Government: Decrees c. Ministry of Economy: Orders and Resolutions 2. Specialist supervisors: a. Bank of Spain : Circulars, implementing Monetary Policy, supervision of some markets and operators b. Comisión Nacional Mercado Valores: Circulars, supervision of some markets and operators c. Dirección General de Seguros y Pensiones (General Directorate of Insurance and Pensions) supervision of some markets and operators 3 2. Comisión Nacional del Mercado de Valores http://www.cnmv.es/index.htm Duties of the CNMV: The Comisión Nacional del Mercado de Valores (CNMV) is the organism responsible for the supervision and inspection of the Spanish securities markets and the activity of those who operate in them. It was created under the Law 24/1988, covering the Stock market, which constituted a thorough reform of this part of the Spanish financial system. Laws 37/1998 and 44/2002 were updates to this law, establishing a Regulatory Framework adapted to the demands of the European Union, to facilitate the development of the Spanish securities markets in a European framework, and incorporated new measures for investor protection. The aim of the CNMV is to ensure transparency in the Spanish securities markets and the proper establishment of prices, as well as investor protection. The CNMV, in the course of its duties, receives a large volume of information from and about market operators, much of which is contained in their Official Records and is public domain. The Commission's activity is focused mainly on companies which issue or offer securities for public placement in the secondary markets, and on companies which provide Investment Services and collective investment institutions. The CNMV carries out prudential supervision of these and of the secondary securities markets, guaranteeing the security of transactions and the solvency of the system. The CNMV, via the National Securities Numbering Agency, assigns ISIN and CFI codes for international use to all securities issues carried out in Spain.1 Main functions and responsibilities • Supervision, inspection and sanctions on the Stock market and securities operators (collective investment institutions, Investment Services Organisations, Portfolio Management Companies). • To guarantee freedom of information and transparency, in order for prices to be established fairly. • Investor protection • To advise the central and regional Governments and Ministry of Economy on the securities markets At the European level, CESR (Committee of European Securities Regulators) is the independent Committee in charge of regulation of Financial Markets. The role of CESR is to : 1 Source: http://www.cnmv.es/portal/quees/Funciones/Funciones.aspx?lang=en 4 • Improve co‐ordination among securities regulators: developing effective operational network mechanisms to enhance day to day consistent supervision and enforcement of the Single Market for financial services • Act as an advisory group to assist the EU Commission • Work to ensure more consistent and timely day‐to‐day implementation of community legislation in the Member States (MiFID) 3. General Directorate of Insurance and Pensions http://www.dgsfp.meh.es/direcciongeneral/index.asp ‐ It is a General Directorate under direct control of the Secretary of State for the Economy ‐ In contrast with the above which are autonomous organisms Duties: Area of intervention The General Directorate of Insurance and Pensions is an administrative body under the control of the Secretary of State for the Economy, assigned to the Ministry of Economy and Finance in accordance with Spanish Royal Decree 1127/2008 dated 4th July 2008, which outlines the basic organigram of the Ministry. Its duties are as follows:2 Ensure compliance with the exact requirements for access to and extension of private insurance and reinsurance activity, ordinary supervision of this activity, monitoring the requirements for management and partners of the entities that carry out this activity, as well as other persons covered by the revised Law of Regulation and Supervision of private insurance, approved in Spanish Royal Decree 6/2004, dated 29th October 2004. Monitor mergers, associations, portfolio transfers, transformations, company break‐ups and other operations between insurers, and initiatives covering measures and operations that lead to an improvement in the structure of the sector or one of its sub‐divisions, without interfering with the responsibilities of the National Competition Commission (Comisión Nacional de Competencia). Evaluation before allowing access to the activity of insurance broking, ordinary supervision of this activity and carrying out other supervisory duties covered by Law 26/2006, dated 17th July, covering private insurance and reinsurance broking. Ensure compliance with the exact requirements for pension fund management entities to begin their activity, ordinary supervision of this activity, as well as ensuring compliance with the requirements for pension plans and funds in accordance with the revised Law of 2 Source: http://www.dgsfp.meh.es/direcciongeneral/ladgsfp.asp 5 Regulation of Pension Plans and Funds, approved by Spanish Royal Decree 1/2002, dated 29th November. The prudential supervision and inspection of the activity for the entities and persons mentioned above. Analysis of the documentation which insurers and reinsurers, private insurance and reinsurance brokers and pension fund management entities must send to the General Directorate of Insurance and Pensions to monitor their solvency. Prepare regulatory projects in terms of the duties of the coordinating centre. Carry out studies on the private insurance and reinsurance sectors, insurance brokers and pension plans and funds. Coordinate relations in the areas of private insurance and reinsurance, insurance and reinsurance broking and pension plans and funds with the insurance and retirement pensions committees and other European Union institutions, with other States and with international bodies, according to the Ministry of Foreign Affairs and Cooperation. Administrative protection for the insured, beneficiaries, affected third parties and pension plan stakeholders, attending to and resolving complaints and claims presented against the entities and persons under its supervision, monitoring the transparency of the market and other duties assigned it under the guidelines on the protection of financial services customers. respond to queries regarding private insurance and reinsurance, private insurance and reinsurance broking and pension plans and funds. Regarding solvency, Solvency II is the updated set of regulatory requirements for insurance firms that operate in the European Union. It is scheduled to come into effect on 31 Dec 2012. The rationale for European Union insurance legislation is to facilitate the development of a Single Market in insurance services in Europe, whilst at the same time securing an adequate level of consumer protection. Solvency II will be based on economic principles for the measurement of assets and liabilities. It will also be a risk‐based system as risk will be measured on consistent principles and capital requirements will depend directly on this.3 4. Bank of Spain http://www.bde.es/webbde/es/ Duties as a member of the ESCB/Eurosystem More information on SolvencyII http://ec.europa.eu/internal_market/insurance/solvency/index_en.htm 3 6 From 1st January 1999 the Bank of Spain has participated in the development of the following basic duties attributed to the ESCB/Eurosystem: • Define and implement Monetary Policy in the eurozone, with the main aim of maintaining price stability throughout the zone. • Carry out foreign exchange operations coherent with the content of Article 109 of the Maastricht Treaty, as well as hold and manage the official State currency reserves. • Promote proper operation of the eurozone payments system. • Issue notes for legal tender. The Bank of Spain can carry out duties outside of the Eurosystem under its own responsibility, unless the Governing Body considers that such duties interfere with the aims and tasks of the Eurosystem. Duties as National Central Bank Whilst respecting the duties which arise from its integration in the ESCB, the Law of Autonomy assigns the Bank of Spain the following duties: Hold and manage the currency and precious metals reserves not transferred to the European Central Bank. Promote the proper operation and stability of the financial system, and without interfering with the duties of the ECB, of national payments systems. Supervising the solvency and compliance with specific regulations by loan entities, other entities and financial markets whose supervision has been assigned to it by current legislation. Put coins into circulation and carry out the other related duties assigned by the State. Draw up and publish statistics related with their duties and assist the ECB in compiling the necessary statistical information. Provide Treasury and financial agency services for Public Debt. Advise the Government, as well as producing relevant reports and studies. The governing bodies of the Bank of Spain, established in the Law of Autonomy of the Bank of Spain, are: The Governor The Sub‐governor The Governing Body The Executive Committee The Governor Runs the Bank, presides over its Governing Body and the Executive Committee, and represents it legally before those international institutions and bodies in which it is expected to participate. 7 Named by the King, at the proposal of the President of the Government. The Governor and Sub‐governor have a simultaneous mandate, with a duration of six years and without possible renovation. The Sub‐governor Substitutes for the Governor during absences or vacancies and takes on the duties which the regulations for the Bank stipulate or the Governor delegates. Named by the Government, at the proposal of the Governor. The Governor and Sub‐ governor have a simultaneous mandate, with a duration of six years and without possible renovation. The Executive Committee, subject to the guidelines of the Governing Body: Implements Monetary Policy; Makes decisions on administrative authorizations the Bank should provide; Formulates recommendations and requirements for loan entities; Initiate disciplinary action and other intervention measures, whose responsibility has been assigned by law to the Bank of Spain. The two Directors are designated by the Governing Body, at the proposal of the Governor, from among the members not already included. 8 5. European Central Bank and the Eurosystem http://www.ecb.int/ecb/welcome/html/index.es.html European Central Bank The legal foundation of the single monetary policy was established in the constitutional Treaty for the European Community, and in the Statute of the European System of Central Banks and of the European Central Bank. The Statute details the formation of the ECB and of the European System of Central Banks (ESCB) as of 1st June 1998. The ECB was created as the heart of the Eurosystem and of the ESCB. The ECB and the National Central Banks jointly carry out the tasks assigned them. The ECB has judicial authority according to public international law and constitutes the heart of the Eurosystem. The ECB is subject to the principle of decentralization, in accordance with the Statute of the ESCB. Each of the NCBs has judicial authority in accordance with the national legislation of their respective countries. Nonetheless, the eurozone NCBs form an integral part of the Eurosystem, and as such carry out the duties assigned them in accordance with the regulations established by the ECB. The fundamental aim which the Treaty assigns to the ECB (in fact the Eurosystem) is that of maintaining price stability (inflation <2%), and without interfering with this duty it will "support the general economic policies of the Community". With this aim in mind, the key duties it performs are as follows: Define and implement single monetary policy; Carry out operations in currencies coherent with the exchange policy established; Hold and manage the official currency reserves of the member states ‐ without interfering with the holding and management of official foreign exchange reserves on the part of the Governments of member states‐; Promote proper operation of the eurozone payments systems. Contribute to the proper management of policies for the prudential supervision of loan entities and to the stability of the financial system. Authorise the issue of bank notes in the eurozone. In addition, the ECB must be consulted on European proposals or national initiatives which infringe on its areas of responsibility, and in particular, must be consulted by the European Council ‐ the EU's inter‐governmental governing body ‐ on all matters concerning the Community's foreign exchange policy. In terms of foreign exchange policy, ultimate sovereignty remains in the hands of governments, and therefore the European Council is responsible for defining 9 foreign exchange policy and drawing up any specific agreements in this area. Nonetheless, the ECB must be consulted on these issues, so that foreign exchange policy is compatible with the fundamental aim of price stability. As for the supervision of loan entities, the Treaty establishes that the European Council, after consulting the ECB, may assign the latter specific tasks in this area, in addition to contributing to proper management of the prudential supervision mentioned above. Organisational structure of the ECB The organisational units of the ECB are areas of activity (Directorate General [DG], and Directorates [D]) made up of Divisions and Sections. The general responsibility for ordinary management lies with the Executive Committee. The Organisational structure of the ECB reflects the tasks it performs, which can be divided into key activities, closely related with the duties established in the Treaty, and support activities. Activities key D of Banknotes DG of Economics D of Financial Stability and Supervision DG of Statistics DG of Research DG of Market Operations DG of International and European Relations DG of Legal Services DG of Payments and Market Infrastructure Permanent ECB Representation in Washington, D.C. Governing bodies The Governing Body, oversees the ECB, and is made up of all the members of the Executive committee and the governors of the NCBs of member states which have adopted the euro. Responsibilities: Implement the guidelines and decisions necessary to guarantee compliance with the duties assigned to the ESCB Formulate Monetary Policy in the eurozone, including, where applicable, decisions relating to intermediate monetary targets (base rates and the supply of liquidity to the Eurosystem) and the guidelines necessary to achieve them. The Governing Body meets every two weeks at the ECB headquarters (Frankfurt). However, meetings can also be held by teleconference. In addition, the Governing Body meets twice a year in another eurozone country. 10 The Executive committee is made up of the president, the vice‐president and four other members appointed by common consent by the Governments of the participating member states, represented by their Head of State or Government. Responsibilities: Prepare the meetings of the Governing Body, Implement Monetary Policy in accordance with the guidelines and decisions taken by the Governing Body, and in doing so, give the necessary instructions to the Eurosystem NCBs. Manage the daily activity of the ECB, Certain powers delegated to it by the Governing Body, including some of a regulatory nature. The Executive committee meets at least once a week, to decide on the implementation of Monetary Policy, prepare the meetings of the Governing Body and resolve internal ECB issues. The General Council is made up of the president and vice‐president of the ECB and all the governors of the NCBs of both participating and non‐participating member states. It has taken charge of those tasks carried out by the European Monetary Institute, which owing to the fact that not all member states have adopted the euro the ECB must continue to carry out in the third phase of Economic and Monetary Union. It is fundamentally responsible for reporting on progress made by non‐participating member states toward convergence, as well as advising on the preparations necessary to fix their currency exchange rates irrevocably. In addition, the General Council collaborates with advisory tasks and collecting statistical information. European System of Central Banks The ESCB is made up of the ECB and the National Central Banks (NCB) of all EU member states (section 1 of article 107 of the Treaty), regardless of whether or not they have adopted the euro. Eurosystem The Eurosystem is made up of the ECB and the NCBs of the member states which have adopted the euro. The Eurosystem and the ESCB will continue to coexist so long as there are still EU member states which do not belong to the eurozone: 11 Bélgica Alemania Irlanda Grecia España Francia Italia Chipre Luxemburgo Malta Paises Bajos Austria Portugal Eslovenia Eslovaquia Finlandia It constitutes the monetary authorities of the Eurozone. Aims: maintain price stability preserve financial stability promote European financial integration. National Central Banks The NCBs of the U.K., Denmark, Sweden and the other 11 countries which make up the European Union also constitute the ESCB. However, as they have not adopted the euro, they continue to implement their national monetary policies. The Maastricht Treaty established that the ESCB would be the monetary authority in the EU. However, when it was drawn up the U.K., Denmark and Sweden's decision not to opt in and later expansions were not taken into account. That is why the unofficial term “Eurosystem” was coined. The Eurosystem is independent and must be credible. Its fundamental aim is to maintain price stability, and to achieve this the Eurosystem: carries out economic and monetary analysis adopts and applies the appropriate policies. responds correctly and effectively to changes in the monetary and financial situation. Closely monitors transformations that affect the money and financial markets, and takes into account the public interest and the needs of the markets. 12 6. Bank of International Settlements The Bank for International Settlements (BIS) was founded in 1930, has its headquarters in Basel and is the main centre of Central Bank cooperation, which has been achieved through regular meetings at the BIS between governors and experts from these banks. The BIS is also known such as the “Central Bank of Central Banks” because it is made up of representatives of the Central Banks of more than 100 member countries, including the Bank of Spain. Roles of the BIS: As a forum to promote debate and facilitate decision‐making processes both among the Central Banks and in the heart of the international financial community: this forum has served to reach the Basel global agreement on the minimum solvency requirements for financial bodies: that part of the risk taken by the Banks must be covered with equity (capital, reserves, etc.). Centre for economic and monetary research Counterparty for Central Banks' financial transactions Depositary agent for guarantees or trustee for international financial operations Governing Bodies of the BIS: General Assembly: The 55 shareholding Central Banks are represented. Meets once a year. Algeria, Argentina, Australia, Austria, Belgium, Bosnia and Herzegovina, Brazil, Bulgaria, Canada, Chile, China, Croatia, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hong Kong SAR, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Korea, Latvia, Lithuania, the Republic of Macedonia, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Slovakia, Slovenia, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, the United Kingdom and the United States, plus the European Central Bank. Board of Directors: made up of 17 members. Meets at least six times a year. Chaired by Jean‐Pierre Roth of the Swiss National Bank, it is made up of 20 members. The six board members are the Governors of the Central Banks of Germany, Belgium, France, Italy and the United Kingdom and the President of the Board of Governors of the U.S. Federal Reserve, each of which can name another member of their own nationality. The Statutes of the BPI also take into account the election of up to nine Governors of other members' Central Banks 13 as board members, which are currently Canada, the People's Republic of China, Japan, Mexico, the Netherlands, Sweden and Switzerland, and the President of the European Central Bank. Advisory board: prepare the Board's debates Auditory committee: a link between the Bank's external and internal auditors and the Board of Directors. The most important committees: Basel Committee on Banking Supervision: Supervisory regulations. The most important: Basel Capital Accord (1988). Now reviewed: Basel II. Committee on Payment and Settlement Systems Committee on the Global Financial System Markets Committee Supervision Committee the Financial Stability Institute: contribute to improving and strengthening financial institutions and systems worldwide. 14 ...
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This note was uploaded on 02/03/2011 for the course ECON 101 taught by Professor Flora during the Spring '11 term at Universidad Carlos III de Madrid.
- Spring '11