Integrated Financial Supervision: Lessons from Northern European Experience

Abstract

In the past, financial supervision tended to be organized around specialist agencies for the banking, securities, and insurance sectors. In recent years, several countries have moved toward integrating these different supervisory functions in a single agency.

Drawing on Northern European experience - where three Scandinavian countries have practiced integrated supervision for the past 10 years - Taylor and Fleming address three policy-related issues associated with the integrated model: - Under what conditions should (or should not) a country consider moving toward an integrated model of financial supervision?

Clearly, for a small transition or developing economy, or an economy with a small financial sector, the economies of scale from establishing an integrated agency outweigh the costs of moving to such a model. A strong case can also be made for an integrated approach in a financial sector dominated by banks, with little role for capital markets or a highly integrated financial sector. - How should an integrated agency be structured, organized, and managed? There is no single obviously correct organizational structure, and existing agencies are experimenting with a variety of forms. An institutionally based structure has the virtue of simplicity and can be implemented fairly quickly, but tends to preserve the cultures and identities of the predecessor agencies more than is optimal. Whatever the structure, integrated supervision requires active management to secure the potential benefits that the approach offers. - How should the integration process be implemented?

While the decision to move to an integrated agency must be carefully thought through in the context of the country concerned, the more difficult part is implementation, which must be sensitively managed. Once the decision has been made, implementation should take place as quickly as possible. A well-conceived change management process should aim to overcome the cultural barriers associated with the previous fragmented structure.

Taylor and Fleming's review of Northern European experience with integration of financial supervision raises a range of questions relevant to developing and transition economies, which they discuss.

This paper - a product of the Private and Financial Sectors Development Unit, Europe and Central Asia Region - is part of a larger effort in the region to assist transition economies in strengthening the legal and regulatory framework for their financial sectors. The authors may be contacted at [e-mail] or [e-mail].