Organization of Financial Sector Supervision
This database captures the development of institutional structures for prudential and business conduct supervision of financial services over the past decade for 98 economies in 1999–2010. The dataset illustrates the changes from sectoral (institutional) to integrated (functional) supervisory structures, with an emphasis on the role of the central banks in the supervision. Institutional regulations envisage different rules and different supervisors for each type of intermediary, i.e. banks, insurance or capital market (we thus abstract from other possibly relevant subsectors that could have separate supervisors such as pension funds, non-bank credit institutions or other non-bank financial institutions.) Functional regulation model has common rules for similar financial activities regardless of which intermediary carries them out. The database contains two sets of data on financial sector supervisory structures, one for prudential supervision and the other for business conduct supervision. The underlying source of the data are the 1999-2010 editions of How countries supervise their banking, insurers and securities markets and online official information from country authorities related to the supervisory institutions.
The 98 economies consist of 40 high-income, 34 upper-middle income, and 24 lower middle income economies. For illustrative purposes, these economies are sub-divided into two subgroups according to their financial depth.
The two datasets on prudential and business conduct supervision consist of discrete variables, where the values of the variables represent a distinct type of a supervisory structure. The prudential supervision dataset distinguishes among the following structures:
- 1. Sector-by-sector (institutional) supervision, with the bank supervision located in an agency other than the central bank;
- 2. Sector-by-sector (institutional) supervision, with the bank supervision in the central bank;
- 3. Partial integration, where two financial sectors are supervised by the same institution, either the central bank or an agency outside of the central bank;
- 4. Integration of the main financial subsectors’ supervisions in an “FSA” (Financial Supervisory Authority, Financial Supervision Authority, Financial Services Authority, or Financial Services Agency), a supervisory agency separate from the Central Bank;
- 5. Integration of the main financial subsectors’ supervisions into the central bank. (The main financial subsectors that we consider are: the banking sector, the insurance sector and the capital markets sector.)
Compilation of the business conduct supervision dataset required a more judgmental approach. Although many countries have in place the legislative framework concerning transparency of operations and consumer protection, some of them lack the enforcement mechanism, especially in regards to financial consumer protection. Pursuing transparency and disclosure is on the agenda of many prudential supervisors. The Codes of Banking Practices often set the standards for financial consumer protection. However, the investigation, resolution, and arbitration of customer complaints (in particular banking customers) are pursued only in some countries. We include in the group of countries which pursue business conduct supervision, all those that have in place, in addition to directives on the pursuit of transparency and consumer protection, also an enforcement mechanism for financial consumer regulation and dispute resolution. When considering these criteria, we account for (i) countries that have specialized agencies looking after all aspects of the business conduct across financial subsectors (i.e. the “twin peak” model, or prudential supervisors that are assigned also business conduct supervision), as well as for (ii) countries where there are no institutions with statutory responsibility for overall business conduct supervision of the banking sector, but they have set important steps towards an adequate consumer protection in all financial subsectors and established institutions, such as a Financial Consumer Protection (FCP) Agency, Financial Ombudsman, or special departments for consumer finance within the Consumer Protection Agency.
Following the outlined approach, the business conduct supervisory structures are classified as follows:
- 1. No business conduct supervision—not all financial sectors have assigned business conduct supervision. Typically, the prudential supervisors of the insurance sector and capital markets are mandated to oversee business conduct in the respective sectors. Hence, in our data set, in most cases, no business conduct is assigned due to the lack of business conduct supervision for the banking sector. (In this way, we stress the importance of business conduct in the banking sector, given the predominance of the banking sectors in the financial sectors of most countries.)
- 2. Separate institution(s) for financial consumer protection— this category comprises those countries in which there is no agency with statutory responsibility for business conduct supervision of the banking sector. However there exist institutions or specialized departments in the national consumer protection agency that oversee the protection of the financial consumers, including banking product consumers. Typically, these agencies look after the FCP in one or two financial subsectors. More specifically, this category includes those countries in which the prudential supervisors do not have statutory responsibility for FCP but there exist either a FCP Agency (e.g., Canada or Mexico), or specialized complaint boards within an economy-wide consumer agency (e.g., Denmark), or a Financial Ombudsman Bureau (e.g. Greece).
- 3. Sectoral supervision—where each financial sector’s prudential supervisor is assigned with the business conduct supervision in addition to the prudential supervision;
- 4. The business conduct supervision is assigned either to the central bank or to the FSA, which act as an integrated supervisor;
- 5. The “twin peak” model—where there exists an institution exclusively supervising business conduct in provision of all financial services.