The Future of Domestic Capital Markets in Developing Countries

Panel Summary: Does Integrated Supervision Work in Emerging Markets?

 Does Integrated Supervision Work in Emerging Markets? Alan Cameron, chair of the panel, deputy chairman of the Sydney Futures Exchange, and a consultant with Dawson Waldron, asked the panel to discuss the use of integrated supervision in developing countries as a response to the growing complexity of the financial industry from conglomeration , globalization, and the blurring of distinct financial industries. The United Kingdom is the most prominent country to use integrated supervision, but such regulation has long been the model in Scandinavia and Singapore as well. Daochi Tong, deputy director general of the Department of Listed Companies Supervision in China’s Securities Regulatory Commission, observed that China’s financial holding-company model may serve as a good model for financial conglomerates in developing markets. This hybrid has the advantages of both integrated and separate financial services : it erects firewalls between subsidiaries to prevent the spread of risks between them yet enables firms to be globally competitive by capitalizing on efficiencies in sharing the client base, information network, and so forth. While this could be an efficient model for firms, it may work especially well for countries that want to adopt integrated supervision but have been unable to do so. While the regulatory structure would permit con-   glomeration to take advantage of efficiencies of scale and scope, sectoral regulators could effectively regulate each subsidiary component. He urged regulators in developing markets to prevent the integration of financial services if they lack the appropriate supervisory capabilities for the individual industries. If a nation lacks such capabilities, it might be better served by maintaining a separate regulatory structure and developing its regulatory capacity before seeking to integrate its regulatory agencies and allowing conglomeration in the industry. Pablo Gottret Valdes, former chair of the Superintendencia de Pensiones, Valores y Seguros in Bolivia and a senior economist in the World Bank’s Human Development Network, elaborated on the rationale behind the decision to integrate a financial regulatory system or leave it separate. Among the many motives for integration, a central one is to avoid regulatory arbitrage, such as the circumvention of capital adequacy requirements. For example, integration can produce consistency in agency-specific technical regulations—conflicts of interest, ratings, and portfolio valuation systems—that under separate agencies can be easily manipulated by regulated entities. Integration makes it easier both to share information and thus prevent conflicts of interest and to coordinate policy and regulation. In Bolivia, similarities between the pension and insurance sectors made integrating their regulatory agencies into a single authority a logical move; creating a single agency ensured adequate regulation and supervision between the two. Integrated supervision also helped Bolivia to handle market crises. Due to political insecurity, the market became extremely volatile, securities values became strongly related to liquidity on a particular day instead of to the underlying quality of the asset, and the market started to collapse. The size of the combined supervisory agency provided the weight necessary to pressure financial industry players to steady the market and secured its managers a place at the table with top politicians and policymakers during the crisis. Supervision of conglomerates also improved because the integrated agency was able to improve its monitoring and to ensure that conglomerates were operating in a transparent and impartial manner. When Bolivia undertook to integrate the individual ministries of insurance , pensions, and securities into one agency, all the superintendents agreed on a common goal for the new body. The aim was to promote and control the prudent growth of each sector, which Gottret felt is not necessarily a conflict of interest because promoting a transparent and prudent market does not inhibit growth.    The agency adopted the specific goal of convincing insurance and pension companies to channel their long-term internal savings through the capital markets. These funds would flow to the real sector on the basis of risk-rated instruments in a market portfolio and generate a market return for the savings. Although this seems an obvious goal, insurance companies were not investing through the capital markets when Gottret assumed his chairmanship. Even the pension funds were only investing in relatively safe instruments such as demand deposits. There existed no risk-rating agencies or coordinated mark-to-market. How did the Bolivian government manage to convince firms to invest in the market? The authorities employed the usual assortment of regulations affecting capital markets, pensions, and insurance and set in place a supervisory system intended to minimize disruption...