## _wp0657

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---

### I. INTRODUCTION
- Purpose of the paper:
  - Present the first comprehensive, cross-country analysis of the emerging experience with integrated financial supervision.
  - Survey theoretical arguments for and against the integrated supervisory model.
  - Use empirical data to assess validity of some arguments, including:
    - How quality of supervision (measured by compliance with international standards and codes) in countries with fully integrated supervisors compares with that in other countries.
    - Whether fully integrated supervision is associated with cost savings via staffing changes.
- Main empirical conclusions (verbatim):
  - (i) integrated supervision is generally associated with higher quality and consistency of supervision across supervised institutions, even though a large part of the difference is explained by other variables, mainly income level; and
  - (ii) integrated supervision is not associated with a significant reduction in supervisory staff.
- Structure of the paper:
  - Section II reviews the trends in integration of supervision.
  - Section III surveys the theoretical arguments for and against integration.
  - Section IV analyzes some of these arguments using the available empirical experience.
  - Section V concludes.

### II. TRENDS IN INTEGRATED SUPERVISION
- Historical diffusion and counts:
  - As of the end of 2004, there were 29 fully integrated supervisory agencies worldwide, of which about half were in Europe.
  - The first countries to embark on integrated supervision were Singapore in 1982 and Norway in 1986.
- Definitions:
  - “Fully integrated” supervisory agency: any supervisory agency that is responsible for prudential supervision of banking, insurance, and securities markets.
  - Partly integrated supervisory agencies (prudential supervision of two of the three segments) and sectoral supervisors (one segment) do not qualify as fully integrated supervisors.
  - The “twin peaks” framework (one agency for prudential supervision across main sectors, another for market conduct/consumer protection/corporate governance) qualifies as integrated supervision under the paper’s definition.
- Observed cross-country variation (2004 snapshot):
  - Supervisory frameworks observed: Sectoral; Semi-integrated; Fully integrated.
  - National choices reflect historic evolution, structure of the financial system, political structure/traditions, and size of country/financial sector.
  - Fully integrated arrangements are found in very small to large complex systems (examples cited: some OFCs; United Kingdom; Japan).
- Cross-border cooperation trends:
  - Bank of England and the Financial Services Authority in the United Kingdom: MOUs with foreign supervisors increased from 1 in 1995 to 20 in 2005.
  - Czech National Bank: number of cross-border MOUs increased from 0 in 2000 to 8 in 2005.
- Empirical indicator of consolidation:
  - The number of conglomerates in the top 500 financial institutions worldwide increased from 42 percent to 60 percent between 1995 and 2000.

### III. THEORETICAL ARGUMENTS, RISKS, AND IMPLEMENTATION LESSONS
- Potential benefits of integrated supervision:
  - Easier to achieve efficiency in supervising financial conglomerates.
  - Possible economies of scale (shared infrastructure, administrative/support functions).
  - Minimize regulatory gaps and ensure competitive neutrality across blurred product/institution lines.
  - Smoother coordination and information exchange within one institution.
  - Reduced duplication and simplified decision making for conglomerates.
  - Greater flexibility in responding to new products and services.
  - Unified data collection and reduced unnecessary duplication of research and reporting.
  - Improved ability to attract, train, and retain professional staff; greater specialization and career paths.
  - Improved accountability (clear responsibility when there is one supervisor).
  - Case evidence: economies with small financial sectors often gain from integration (economies of scale outweigh costs).
- Potential disadvantages and risks:
  - If objectives not clearly specified, may be less effective than sectoral supervisors.
  - Economies of scope may be hard to achieve without harmonized regulations across banking, insurance, and securities.
  - Possible diseconomies of scale if organization becomes too large and bureaucratic.
  - Integrated supervisor may extend moral hazard across whole financial sector (public expectations of equal protection).
  - Integration process may enable politically or special-interest motivated weakening of supervisory framework.
  - Process risk: loss of key staff or high turnover reducing effectiveness.
  - Management challenge: creating single agency without cultural/quality mismatches is demanding.
- Implementation risks and country evidence:
  - Politicians may rush creation of a unified supervisor irrespective of optimality; legislative process may be captured by special interests.
  - Loss of key staff and industry expertise can occur; example: Australia (APRA) — short-term consequences noted by Palmer (2002):
    - (i) some loss of corporate memory due to departure of predecessor-agency staff;
    - (ii) some loss of industry expertise;
    - (iii) delays in reacquiring industry knowledge as new, less experienced staff supervised multiple entity types;
    - (iv) insufficient qualifications of some staff from predecessor agencies or newly recruited staff.
- Implementation recommendations:
  - Aim to harvest benefits: efficient transfer of information/knowledge within institution; harmonization of supervision quality across sectors; cost savings from reduced support activities.
  - Address cultural “silo” barriers, competing goals (monetary policy vs financial stability; prudential supervision vs consumer protection), and accountability of results.
  - Once decided, implementation should take place quickly with a well-conceived change-management plan.

### IV. KEY EMPIRICAL MEASURES AND ANALYTICAL FOCUS
- Quality of supervision:
  - Measured by compliance with international standards and codes: BCP (Basel Core Principles for Effective Banking Supervision), IAIS Insurance Core Principles (ICP), IOSCO Objectives and Principles of Securities Regulation (IOSCO).
- Staffing and cost implications:
  - Data on supervisory staffing used to assess potential cost savings associated with fully integrated supervision.
- Empirical comparisons emphasize role of other explanatory variables, particularly income level (GDP per capita).

### V. EMPIRICAL FINDINGS — QUALITY, CONSISTENCY, AND STAFFING
- BCP compliance index (banking):
  - Constructed from a sample of 65 assessments (mostly 2000–2002).
  - Assessment grades mapped: compliant (4), largely compliant (3), materially non-compliant (2), non-compliant (1).
  - Index equals sum of ratings for individual core principles; possible values between 30 and 120.
  - Of 65 countries, 12 had fully integrated supervisors at time of assessment.
- Regression results (BCP compliance as dependent variable):
  - Integrated regulator dummy positive in all specifications.
  - Specification (1) (integrated dummy only): integrated regulators average about 14 points higher in BCP index than others (statistically significant).
  - Specification (2) (adds quality of regulatory environment): integrated dummy effect shrinks to 8 points (statistically significant).
  - Specification (3) (adds GDP per capita): integrated dummy effect falls to 4.67 (not statistically significant); GDP per capita significant (0.001***).
  - Specification (4) (both controls): integrated dummy 4.80 (not statistically significant); quality of regulatory environment coefficient -0.75 (not significant); GDP per capita 0.001***.
  - Note: Potential multicollinearity between quality of regulatory environment and GDP per capita.
- Three-sector analysis (banking, insurance, securities) — sample of 36 countries:
  - Core principles grouped into four components: (i) regulatory governance; (ii) prudential framework; (iii) regulatory practices; (iv) financial integrity/safety net.
  - Integrated supervisory agencies tend to have higher quality across BCP, ICP, IOSCO measures.
  - Quality of supervision correlated with GDP per capita.
  - After adjusting for GDP per capita:
    - For BCP (banking): positive point estimate for integrated dummy but not statistically significant.
    - For ICP (insurance) and IOSCO (securities): integration dummy retains statistical significance in some components:
      - Regulatory practices (insurance) — integration significant in some cases.
      - Prudential framework (securities) — integration significant in some cases.
      - Financial integrity/safety net (both insurance and securities) — integration significant in some cases.
- Consistency of supervision across sectors (results summarized from Table 7):
  - Method: coefficient of variation across banking, insurance, and securities for each component; GDP per capita (PPP) included as control.
  - Main empirical finding: Integrated supervisory agencies tend to have more consistent quality of supervision across sectors they supervise.
  - Selected coefficient estimates (Table 7; OLS, heteroskedasticity-consistent standard errors; */**/*** denote 10/5/1 percent significance):
    - Regulatory governance: Constant 0.25*** (0.03); Integrated Regulator Dummy -0.04 (0.03); GDP Per Capita (in PPP) -0.37*** (0.12); Number of Observations 36; R-squared 0.20.
    - Prudential framework: Constant 0.18*** (0.01); Integrated Regulator Dummy -0.04 (0.03); GDP Per Capita (in PPP) -0.28*** (0.10); Number of Observations 36; R-squared 0.30.
    - Regulatory practices: Constant 0.21*** (0.02); Integrated Regulator Dummy -0.05* (0.02); GDP Per Capita (in PPP) -0.31*** (0.08); Number of Observations 36; R-squared 0.42.
    - Financial integrity/safety net: Constant 0.22*** (0.03); Integrated Regulator Dummy -0.06* (0.03); GDP Per Capita (in PPP) -0.24 (0.15); Number of Observations 36; R-squared 0.17.
    - Overall: Constant 0.15*** (0.02); Integrated Regulator Dummy -0.04*** (0.02); GDP Per Capita (in PPP) -0.17*** (0.08); Number of Observations 36; R-squared 0.24.
  - Note: Coefficients in Table 7 are multiplied by 10^5 (note in table).
- Location of integrated supervision (inside vs outside central bank):
  - Regression attempts to distinguish location found estimated coefficients generally not significant.
  - Conclusion: Whether integrated supervision is located inside or outside the central bank does not appear to have a significant impact on measured quality of supervision.
- Staffing and resource-cost findings (Table 8 summary and time-series evidence):
  - Data source: Central Banking Publications (1999–2004), supervisory staffing data covering 1996–2003.
  - Cross-country OLS: population and level of development matter for total number of professional supervisory staff; integrated regulator dummy has negative sign but not statistically significant.
  - Time-series cross-country comparisons:
    - Average supervisory staffing change in 61 countries between 1996 and 2003: increased by 23 percent.
    - Sub-sample of 14 countries that underwent integration between 1998 and 2002: supervisory staffing increased by 16 percent (difference from full sample not statistically significant); standard deviation of changes was 27 percent.
    - Countries with supervisory agencies integrated before 1998: staffing increased on average by 41 percent; standard deviation 26 percent.
  - Interpretation: Integrating supervision does not appear to be associated with substantial reductions in professional supervisory staffing in the observed period; possible explanations include insufficient time since integration for cost savings to materialize, unobserved savings in support staff, expanded responsibilities of integrated regulators, or absence of synergies that reduce supervisory staff needs.

### VI. BOX 1 — LINK BETWEEN INTEGRATION, SUPERVISORY QUALITY, AND FINANCIAL SOUNDNESS
- Focus:
  - The paper emphasizes the link between integration and quality of supervision (compliance with international standards) rather than directly on ultimate financial stability outcomes.
- Empirical juxtaposition:
  - In the 29 countries with integrated supervisory agencies, two cases of systemic banking crises were observed (Norway 1987-1993, Sweden 1990-1993); several other significant problems occurred in integrated-supervisor countries (examples cited: recent credit card problems in Korea; the 2001 HIH collapse in Australia).
  - Podpiera (2004) result: higher levels of BCP compliance are accompanied by lower ratios of nonperforming loans to total loans, and lower margins.
  - Combined implication: results suggest that presence of integrated supervision is likely to be associated with better soundness and performance indicators such as nonperforming loan ratios and interest rate margins; causality remains an open question.
- Consistency across sectors:
  - Integrated supervisors tend to have more consistent supervision quality across banking, insurance, and securities, with stronger impacts in regulatory practices and financial integrity/safety net components.
- Location (inside vs outside central bank):
  - No significant measured impact on quality from being located inside versus outside the central bank.
- Staffing:
  - Integration not associated with statistically significant reduction in professional supervisory staff over 1996–2003.

### VII. SUMMARY EMPIRICAL CONCLUSIONS AND POLICY IMPLICATIONS
- Empirical conclusions:
  - Countries with integrated supervisory agencies enjoy greater consistency in quality of supervision across supervised institutions; part of this difference is attributable to higher economic development in integrated-supervisor countries.
  - Greater consistency is not associated with dilution of overall supervision quality; integrated supervision is associated with higher overall quality of supervision.
    - For banking: higher quality can be explained by above-average economic development in countries that opted for integrated supervision.
    - For insurance and securities markets: higher quality cannot be fully explained by economic level, suggesting integration may play a role.
  - Whether integrated supervision is located inside or outside the central bank does not appear to significantly impact quality.
  - Integration does not seem associated with significant reduction of supervisory staff in the medium term.
- Policy implication:
  - Integrated supervision may yield substantial medium-to-long-term benefits—improved information flows, more consistent supervisory practices, better supervision of conglomerates, and possible cost savings on support activities—so country authorities should weigh these against short-term challenges and risks of the integration process and the chosen model.

### VIII. TOPICS FOR FURTHER RESEARCH
- Degree of integration:
  - Move beyond a zero-one approach to capture a continuum of integration degrees; challenge is objective, cross-country-comparable definitions and accounting for de facto cooperation vs de jure integration.
- Burden on financial institutions:
  - Limited data suggest integration reduces regulatory overlaps and duplications; need more complete data to rigorously assess reduction in regulatory burden.
- Cross-border integration:
  - Empirical research on home-host supervisory cooperation and cross-border integration is limited and needs development.
- Formal models:
  - Scope to develop formal theoretical models of integrated supervision beyond existing banking-focused models and lists of pros and cons.
- Supervision of conglomerates:
  - Directly explore whether integrated supervisors are more successful in creating and implementing consistent and complete frameworks for supervision of conglomerates; current empirical methodology addresses this only indirectly.

*Source: _wp0657 (excerpted content provided).*

### References..............................................................................................................

### _wp0657 - References

### I. INTRODUCTION
- Over the last twenty years there has been increasing integration of the banking, securities and insurance markets, and their respective products and instruments.
- In response to market integration, there has been a substantial shift from the traditional sector-by-sector approach to supervision toward integrated financial supervision.
- Purpose of the paper:
  - Present the first comprehensive, cross-country analysis of the emerging experience with integrated financial supervision.
  - Survey theoretical arguments for and against the integrated supervisory model.
  - Use empirical data to assess validity of some arguments, including:
    - How quality of supervision (measured by compliance with international standards and codes) in countries with fully integrated supervisors compares with that in other countries.
    - Whether fully integrated supervision is associated with cost savings via staffing changes.

- Main empirical conclusions (verbatim):
  - (i) integrated supervision is generally associated with higher quality and consistency of supervision across supervised institutions, even though a large part of the difference is explained by other variables, mainly income level; and
  - (ii) integrated supervision is not associated with a significant reduction in supervisory staff.

- Structure of the paper:
  - Section II reviews the trends in integration of supervision.
  - Section III surveys the theoretical arguments for and against integration.
  - Section IV analyzes some of these arguments using the available empirical experience.
  - Section V concludes.

### II. TRENDS IN INTEGRATED SUPERVISION
- Ongoing cross-sector and cross-border consolidation of financial institutions has blurred distinctions between financial sectors and national financial markets (examples cited: Group of Ten, 2001; Zalm, 2005).
- Empirical example from source:
  - The number of conglomerates in the top 500 financial institutions worldwide has increased from 42 percent to 60 percent between 1995 and 2000 (De Nicoló and others, 2003).
- Response in supervisory architecture:
  - The number of fully integrated supervisory agencies has grown rapidly in the last two decades (see Figure 1 in source).
- Definition used in the paper:
  - “Fully integrated” supervisory agency: any supervisory agency that is responsible for prudential supervision of banking, insurance, and securities markets.
- Early adopters mentioned verbatim in the source:
  - "The first countries to embark on integrated supervision were Singapore in 1982 and Norway in"

### KEY EMPIRICAL MEASURES AND ANALYTICAL Focus
- Quality of supervision:
  - Measured by compliance with international standards and codes.
- Staffing and cost implications:
  - Data on supervisory staffing are used to assess potential cost savings associated with fully integrated supervision.
- Empirical comparisons emphasize the role of other explanatory variables, particularly income level.

### INDICATED FIGURES, BOXES, AND TABLES (as listed in source)
- Box: Integrated Supervision and Financial System Soundness.
- Tables include coverage of:
  - General Structure of Financial Sector Regulation and Supervision.
  - Economies with Single, Semi-Integrated, and Sectoral Prudential Supervisory Agencies, 2004.
  - Summary of Pros and Cons of Integrating Financial Sector Supervision.
  - Explaining BCP Compliance.
  - Financial Standards and Their Four Main Components.
  - Explaining BCP, ICP and IOSCO Compliance by Main Components.
  - Explaining Variability in Compliance with International Standards.
  - Integrated Supervision and Staffing.
- Figures include:
  - Number of Integrated Supervisory Agencies, 1985–2004.
  - Regional Distribution of Integrated Supervisory Agencies, 2004.
  - BCP Compliance and Overall Regulatory Environment.
  - Supervisory Staffing in Countries with Integrated Supervision, 1996–2003.

*Source: _wp0657 - References (PDF).*

### 1986. In the following years, integrated supervisors were established in other Nordic

### _wp0657 - 1986. In the following years, integrated supervisors were established in other Nordic

### Historical diffusion and counts
- As of the end of 2004, there were 29 fully integrated supervisory agencies worldwide, of which about half were in Europe.
- Figure 1 caption: Number of Integrated Supervisory Agencies, 1985–2004 (chart shown in source).
- Figure 2 caption: Regional Distribution of Integrated Supervisory Agencies, 2004 (regions shown: Europe, Asia, OFCs, Other).

### Definition and scope of integrated supervision
- A fully integrated supervisory agency is defined as an agency that is in charge of (micro)prudential supervision of at least the three main segments of most financial sectors—banking, insurance, and securities markets.
- Such an agency may or may not be in charge of consumer protection.
- The “twin peaks” framework (one agency for prudential supervision across main sectors, another for market conduct/consumer protection/corporate governance) qualifies as integrated supervision under the paper’s definition.
- Partly integrated supervisory agencies (prudential supervision of two of the three segments) and sectoral supervisors (one segment) do not qualify as integrated supervisors.

### General structure of financial sector regulation and supervision
- The framework consists of macroprudential surveillance, microprudential supervision, consumer protection (business supervision), and competition policy.
- Typical allocation in most countries:
  - Macroprudential surveillance: carried out by a central bank.
  - Competition issues: handled by a separate agency regulating competition in general.
- The paper focuses on microprudential supervision and consumer protection (the “middle (shaded) part” of the table).

### Cross-country variation in supervisory models (2004 snapshot)
- Supervisory frameworks observed in countries:
  - Sectoral (multiple supervisors).
  - Semi-integrated (integrated for two sectors).
  - Fully integrated (one agency across all sectors).
- National choices reflect: historic evolution, structure of the financial system, political structure/traditions, and size of country/financial sector.
- Examples cited:
  - Fully integrated found in very small to large complex systems (e.g., some OFCs; United Kingdom; Japan).
  - Countries with systemic banking crisis prior to integration: Norway.
  - Australia and New Zealand: working on enhanced “home-host” model for integrated banking systems.

### Trends in cross-border cooperation
- Growing cross-border integration of supervision evidenced by increasing numbers of memoranda of understanding (MOUs).
  - Bank of England and the Financial Services Authority in the United Kingdom: MOUs with foreign supervisors increased from 1 in 1995 to 20 in 2005.
  - Czech National Bank: number of cross-border MOUs increased from 0 in 2000 to 8 in 2005.

### Possible benefits of integrated supervision (literature review)
- Main arguments: efficiency, effectiveness, and response to financial conglomerates.
- Potential benefits listed:
  - Easier to achieve efficiency in supervising financial conglomerates.
  - Possible economies of scale (shared infrastructure, administrative/support functions).
  - Minimize regulatory gaps and ensure competitive neutrality across blurred product/institution lines.
  - Smoother coordination and information exchange within one institution.
  - Reduced duplication and simplified decision making for conglomerates.
  - Greater flexibility in responding to new products and services.
  - Unified data collection and reduced unnecessary duplication of research and reporting.
  - Improved ability to attract, train, and retain professional staff; greater specialization and career paths.
  - Improved accountability (clear responsibility when there is one supervisor).
- Case evidence: economies with small financial sectors often gain from integration (economies of scale outweigh costs).

### Potential disadvantages of integrated supervision (literature review)
- Potential cons listed:
  - If objectives not clearly specified, may be less effective than sectoral supervisors.
  - Economies of scope may be hard to achieve without harmonized regulations across banking, insurance, and securities.
  - Possible diseconomies of scale if organization becomes too large and bureaucratic.
  - Integrated supervisor may extend moral hazard across whole financial sector (public expectations of equal protection).
  - Integration process may enable politically or special-interest motivated weakening of supervisory framework.
  - Process risk: loss of key staff or high turnover reducing effectiveness.
  - Management challenge: creating single agency without cultural/quality mismatches is demanding.

### Risks in the integration process and implementation lessons
- Risks during integration:
  - Politicians may rush creation of a unified supervisor irrespective of optimality.
  - Legislative process may be captured by special interests, weakening regulation.
  - Loss of key staff and industry expertise; delays in reacquiring knowledge.
  - Mismanaged technical integration and change management leading to lower supervisory attention.
- Country example: Australia (APRA) — review by Palmer (2002) noted short-term consequences:
  - (i) some loss of corporate memory due to departure of predecessor-agency staff;
  - (ii) some loss of industry expertise;
  - (iii) delays in reacquiring industry knowledge as new, less experienced staff supervised multiple entity types;
  - (iv) insufficient qualifications of some staff from predecessor agencies or newly recruited staff.
- Implementation recommendations from cases:
  - Integration should aim to harvest benefits: (i) efficient transfer of information/knowledge within institution; (ii) harmonization of supervision quality across sectors; (iii) cost savings from reduced support activities.
  - Address cultural “silo” barriers, competing goals (monetary policy vs financial stability; prudential supervision vs consumer protection), and accountability of results.
  - Once decided, implementation should take place quickly with a well-conceived change-management plan.

### Summary of pros and cons (table reproduced in prose)
- Potential Pros:
  - Easier to achieve efficiency in supervising financial conglomerates.
  - Possible economies of scale.
  - Possibly improved accountability.
  - Easier to eliminate duplicities, turf wars.
  - Easier to ensure level playing field across market segments.
- Potential Cons:
  - If objectives not clearly specified, may be less effective than sectoral supervisors.
  - Possible diseconomies of scale if too large an organization that is difficult to manage.
  - If objectives not clearly communicated, possibility to extend moral hazard problems across the whole financial sector.
  - Process of integration may lead to politically or special-interest motivated changes in supervisory framework.
  - Process of integration, if not managed properly, may lead to loss of key staff or other problems.

### Role of the central bank in supervision
- General agreement: central bank involvement appropriate for macroprudential surveillance.
- Open question: degree of central bank involvement in microprudential supervision.
- Arguments for central bank involvement in banking supervision:
  - Synergies between banking supervision and monetary policy (information on banks’ financial position relevant for monetary policy).
  - Central bank needs information about creditworthiness of payment system participants for lender-of-last-resort responsibilities.
  - Economies of scale and overlapping expertise between banking supervision and central bank functions.
  - Central bank independence/resources can protect supervision from political pressures.
- Arguments against central bank involvement:
  - Conflicts of interest between monetary and supervision goals (e.g., central bank may avoid aggressive inflation control to prevent bank failures).
  - Failures under supervision can undermine central bank credibility in monetary policy.
  - Payment system technology reduces need for close monitoring by central bank.
  - Moral hazard: larger safety-net expectations if central bank supervises broad set of institutions.
  - Concentration of power concerns if central bank becomes integrated supervisor without strong accountability.
- Decision-making differences:
  - Monetary policy decisions: repeated, relatively well-defined, transparent, based on public information, no appeals.
  - Supervisory decisions: not scheduled, based on private/confidential information, many types, affected parties may appeal in court.
  - Risk that a single decision-making body cannot effectively or efficiently handle both types of decisions.

### Empirical evidence: why countries integrate (findings from studies)
- Factors associated with integration decisions in studies:
  - Conglomeration: increased financial conglomeration cited as key reason, though exceptions exist.
  - Central bank involvement: trade-off observed — more central bank involvement reduces degree of concentration of supervisory powers; unified agency creation more likely to be separate from central bank.
  - Size of economy: lower overall economic size (GDP or population) increases probability of integration (expertise concentrated in single agency).
  - Recent financial sector crisis: prompted integration in some cases (Nordics, Asia), but relationship not straightforward across broader sample.
  - Legal factors: countries with “Civil Law root” (German and Scandinavian legal systems) have higher probability of integrating supervisory system.

### Cross-country empirical analysis: integration and supervisory quality
- Focus: fully integrated supervisors (dummy variable = 1) versus others (0).
- Quality of supervision measured by degree of compliance with international standards:
  - Banking: Basel Core Principles for Effective Banking Supervision (BCP) — 25 Core Principles.
  - Insurance: IAIS Insurance Core Principles (ICP).
  - Securities: IOSCO Objectives and Principles of Securities Regulation (IOSCO).
- Methodology details:
  - BCP compliance index constructed from a sample of 65 assessments (mostly 2000–2002).
  - Assessment grades mapped: compliant (4), largely compliant (3), materially non-compliant (2), non-compliant (1).
  - Index equals sum of ratings for individual core principles; possible values between 30 and 120.
  - Of 65 countries, 12 had fully integrated supervisors at time of assessment.
- Key empirical observations:
  - Simple comparisons may be misleading because integrated supervisors tend to be in more developed countries with better regulatory environments.
  - Positive relationship between BCP compliance and overall regulatory environment (Kaufmann, Kraay, and Mastruzzi (KKM) 2003 index).
  - In Figure 3, 9 out of 12 integrated supervisors lie above the BCP–regulatory environment regression line.
- Regression analysis (BCP compliance as dependent variable):
  - Integrated regulator dummy positive in all specifications.
  - Specification (1) (integrated dummy only): integrated regulators average about 14 points higher in BCP index than others (statistically significant).
  - Specification (2) (adds quality of regulatory environment): integrated dummy effect shrinks to 8 points (statistically significant).
  - Specification (3) (adds GDP per capita): integrated dummy effect falls to 4.67 (not statistically significant); GDP per capita significant (0.001***).
  - Specification (4) (both controls): integrated dummy 4.80 (not statistically significant); quality of regulatory environment coefficient -0.75 (not significant); GDP per capita 0.001***.
  - Note: Potential multicollinearity between quality of regulatory environment and GDP per capita.
- Expanded three-sector analysis (banking, insurance, securities):
  - Sample of 36 countries with assessments for all three sectors.
  - Core principles grouped into four components: (i) regulatory governance; (ii) prudential framework; (iii) regulatory practices; (iv) financial integrity/safety net.
  - For each component, a compliance index constructed as average of core principles (grades 4 to 1).
  - Findings:
    - Integrated supervisory agencies tend to have higher quality across banking, insurance, and securities (measured by compliance with BCP, ICP, IOSCO).
    - Quality of supervision (four components) correlated with GDP per capita.
    - After adjusting for GDP per capita:
      - For BCP (banking): positive point estimate for integrated dummy but not statistically significant.
      - For insurance (ICP) and securities (IOSCO): integration dummy retains statistical significance in some components:
        - Regulatory practices (insurance) — integration significant in some cases.
        - Prudential framework (securities) — integration significant in some cases.
        - Financial integrity/safety net (both insurance and securities) — integration significant in some cases.

*Source: Authors, based on the content of the provided IMF working paper excerpt.*

### Box 1. Integrated Supervision and Financial System Soundness

### Box 1. Integrated Supervision and Financial System Soundness

### A. Link between integration, quality of supervision, and financial soundness
- The paper focuses on the link between integration and quality of supervision, measured by compliance with international standards, rather than directly on ultimate financial stability outcomes.
- Empirical juxtaposition: In the 29 countries with integrated supervisory agencies, two cases of systemic banking crises were observed (Norway 1987-1993, Sweden, 1990-1993); several other significant problems occurred in integrated-supervisor countries (examples cited: recent credit card problems in Korea; the 2001 HIH collapse in Australia).
- Podpiera (2004) result: higher levels of BCP compliance are accompanied by lower ratios of nonperforming loans to total loans, and lower margins.
- Combined implication: results in Table 4 (paper) plus Podpiera (2004) suggest that the presence of integrated supervision is likely to be associated with better soundness and performance indicators such as nonperforming loan ratios and interest rate margins; causality remains an open question (i.e., whether integration leads to better soundness indicators or whether better-sounding systems are more likely to adopt integrated supervision).
- Note: Variables measuring quality of regulatory environment and government effectiveness were included in BCP estimations but were not significant in almost all specifications when GDP per capita was also included.

### B. Consistency of supervision across sectors (results summarized from Table 7)
- Approach: For each component (regulatory governance, prudential framework, regulatory practices, financial integrity/safety net) the variation coefficient (standard deviation/average) across banking, insurance, and securities markets was used as a measure of consistency; GDP per capita (PPP) included as a control.
- Main empirical finding: Integrated supervisory agencies tend to have more consistent quality of supervision across sectors they supervise.
- Specific coefficient findings (Table 7; OLS, heteroskedasticity-consistent standard errors; */**/*** denote 10/5/1 percent significance):
  - Regulatory governance: Constant 0.25*** (0.03); Integrated Regulator Dummy -0.04 (0.03); GDP Per Capita (in PPP) -0.37*** (0.12); Number of Observations 36; R-squared 0.20.
  - Prudential framework: Constant 0.18*** (0.01); Integrated Regulator Dummy -0.04 (0.03); GDP Per Capita (in PPP) -0.28*** (0.10); Number of Observations 36; R-squared 0.30.
  - Regulatory practices: Constant 0.21*** (0.02); Integrated Regulator Dummy -0.05* (0.02); GDP Per Capita (in PPP) -0.31*** (0.08); Number of Observations 36; R-squared 0.42.
  - Financial integrity/safety net: Constant 0.22*** (0.03); Integrated Regulator Dummy -0.06* (0.03); GDP Per Capita (in PPP) -0.24 (0.15); Number of Observations 36; R-squared 0.17.
  - Overall: Constant 0.15*** (0.02); Integrated Regulator Dummy -0.04*** (0.02); GDP Per Capita (in PPP) -0.17*** (0.08); Number of Observations 36; R-squared 0.24.
- Interpretation: Impact of integration appears higher in regulatory practices and financial integrity/safety net; effect generally holds after controlling for GDP per capita (PPP). Coefficients in Table 7 are multiplied by 10^5 (note in table).

### C. Location of integrated supervision (inside vs outside central bank)
- Regression attempts to distinguish integrated regulators located in central banks from those outside found the estimated coefficients generally not significant.
- Conclusion: Whether integrated supervision is located inside or outside the central bank does not appear to have a significant impact on the measured quality of supervision.

### D. Does integration reduce resource costs? (staffing analysis)
- Data source: Central Banking Publications (1999–2004), supervisory staffing data covering 1996–2003.
- Cross-country OLS results (Table 8 summary): population and level of development matter for total number of professional supervisory staff; the integrated regulator dummy has the expected negative sign but the reduction associated with integration was not statistically significant.
- Time-series cross-country comparisons:
  - Average supervisory staffing change in 61 countries between 1996 and 2003: increased by 23 percent.
  - Sub-sample of 14 countries that underwent integration between 1998 and 2002: supervisory staffing increased by 16 percent (difference from full sample not statistically significant); standard deviation of changes was 27 percent.
  - Countries with supervisory agencies integrated before 1998: staffing increased on average by 41 percent; standard deviation 26 percent.
- Interpretation: Integrating supervision does not appear to be associated with substantial reductions in professional supervisory staffing in the observed period; possible explanations include insufficient time since integration for cost savings to materialize, unobserved savings in support staff, expanded responsibilities of integrated regulators, or absence of synergies that reduce supervisory staff needs.

### E. Summary of empirical conclusions and policy implications (from Conclusions section)
- Empirical conclusions:
  - Countries with integrated supervisory agencies enjoy greater consistency in quality of supervision across supervised institutions; part of this difference is attributable to higher economic development in integrated-supervisor countries.
  - Greater consistency is not associated with dilution of overall supervision quality; integrated supervision is associated with higher overall quality of supervision.
    - For banking: higher quality can be explained by above-average economic development in countries that opted for integrated supervision.
    - For insurance and securities markets: higher quality cannot be fully explained by economic level, suggesting integration may play a role.
  - Whether integrated supervision is located inside or outside the central bank does not appear to significantly impact quality.
  - Integration does not seem associated with significant reduction of supervisory staff in the medium term.
- Policy implication: Integrated supervision may yield substantial medium-to-long-term benefits—improved information flows, more consistent supervisory practices, better supervision of conglomerates, and possible cost savings on support activities—so country authorities should weigh these against short-term challenges and risks of the integration process and the chosen model.

### F. Topics for further research (as listed)
- Degree of integration: move beyond a zero-one approach to capture a continuum of integration degrees; challenge is objective, cross-country-comparable definitions and accounting for de facto cooperation vs de jure integration.
- Burden on financial institutions: limited data suggest integration reduces regulatory overlaps and duplications; need more complete data to rigorously assess reduction in regulatory burden.
- Cross-border integration: empirical research on home-host supervisory cooperation and cross-border integration is limited and needs development.
- Formal models: scope to develop formal theoretical models of integrated supervision beyond existing banking-focused models and lists of pros and cons.
- Supervision of conglomerates: directly explore whether integrated supervisors are more successful in creating and implementing consistent and complete frameworks for supervision of conglomerates; current empirical methodology addresses this only indirectly.

*Source: Box 1. Integrated Supervision and Financial System Soundness (excerpt from provided IMF working paper content).*

### REFERENCES

### REFERENCES

### Cited works and documents
- Abrams, Richard K, and Michael W. Taylor, 2000, “Issues in the Unification of Financial Sector Supervision,” IMF Working Paper 00/213 (Washington: International Monetary Fund).
- Basel Committee on Banking Supervision, 2005, “Home-host information sharing for effective Basel II implementation” (Basel: Bank for International Settlements). http://www.bis.org/publ/bcbs120.htm
- Caprio Jr., Gerard, and Daniela Klingebiel, 2003, Banking Crises Database (Washington D.C.: World Bank). http://www1.worldbank.org/finance/html/database_sfd.html
- Carmichael, Jeffrey, Alexander Fleming, and David T. Llewellyn, 2004, Aligning Financial Supervisory Structures with Country Needs (Washington, DC: World Bank).
- Central Banking Publications, 1999–2004, How Countries Supervise their Banks, Insurers, and Securities Markets (London: Central Banking Publications). Annual reports.
- Das, Udaibir S., and Marc Quintyn, 2002, “Crisis Prevention and Crisis Management: The Role of Regulatory Governance,” IMF Working Paper 02/163 (Washington: International Monetary Fund).
- Das, Udaibir S., Marc Quintyn, and Kina Chenard, 2004, “Does Regulatory Governance Matter for Financial System Stability? An Empirical Analysis.” IMF Working Paper 04/89 (Washington, DC: International Monetary Fund).
- De Nicoló, Gianni, Philip F. Bartholomew, Jahanara Zaman, and M. G. Zephirin, 2003, “Bank Consolidation, Internationalization and Conglomeration: Trends and Implications for Financial Risk,” IMF Working Paper 03/158 (Washington: International Monetary Fund).
- Dewatripont, M., and Jean Tirole, 1994, The Prudential Regulation of Banks (Cambridge, Massachusetts: MIT Press).
- Freytag, Andreas, and Donato Masciandro, 2005, “Financial Supervision Unification and Central Bank Fragmentation Effect,” Quaderni del Dipartimento di Scienze Economiche dell'Università di Lecce - Collana di Economia; 74/35; pp. 15–24.
- Goodhart, C. A. E., and D. Schoenmaker, 1995, “Institutional Separation between Supervisory and Monetary Agencies,” in The Central Bank and the Financial System ed. by C. A. E. Goodhart (Cambridge, Massachusetts: MIT Press).
- Group of Ten, 2001, “Consolidation in the Financial Sector” (Basel).
- Holthausen, Cornelia, and Thomas Rønde, 2004, “Cooperation in International Banking Supervision” Centre for Industrial Economics Discussion Papers 2004–02 (Copenhagen: University of Copenhagen), available on the web at http://www.econ.ku.dk/CIE/Discussion%20Papers/2004/2004-02.pdf.
- Huepkes Eva, Marc Quintyn, and Michael W. Taylor, 2005, “The Accountability of Financial Sector Supervisors: Principles and Practice,” IMF Working Paper 05/51 (Washington: International Monetary Fund).
- International Monetary Fund (IMF), 2004, Financial Sector Regulation: Issues and Gaps. (Washington: International Monetary Fund), available on the web at http://www.imf.org/external/np/mfd/2004/eng/080404.pdf.
- Kahn, Charles M., and João A.C. Santos, 2005, “Allocating Bank Regulatory Powers: Lender of Last Resort, Deposit Insurance and Supervision,” European Economic Review, Vol. 49, pp. 2107–36.
- Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi (KKM), 2003, “Governance Matters III: Governance Indicators for 1996–2002” (Washington: World Bank), available on the web at www.worldbank.org.
- Kremers, Jeroen J.M., Dirk Schoenmaker, and Peter J. Wierts, 2001, “Does Europe Need a Euro-Wide Supervisor?” The Financial Regulator; 6, No. 3, pp. 50–56.
- Kremers, Jeroen J.M., Dirk Schoenmaker, and Peter J. Wierts, 2003, “Cross-Sector Supervision: Which Model?” Brookings-Wharton Papers on Financial Services, pp. 225–243
- Oosterloo, Sander, and Jakob de Haan, 2003, “A Survey of International Frameworks for Financial Stability.” Occasional Studies, Vol. 1, No. 4 (Amsterdam: De Nederlandsche Bank).
- Palmer, John, 2002, “Review of the Role Played by the Australian Prudential Regulation Authority and the Insurance and Superannuation Commission in the Collapse of the HIH Group of Companies,” July 15, 2002, available on the web at www.apra.gov.au.
- Podpiera, Richard, 2004, “Does Compliance with Basel Core Principles Bring Any Measurable Benefits?” IMF Working Paper 04/204. (Washington: International Monetary Fund).
- Reserve Bank of New Zealand, 2005, Financial Stability Report, May, available on the web at http://www.rbnz.govt.nz/finstab/fsreport/fsr_may2005.pdf.
- Taylor, Michael, and Alexander E. Fleming, 1999, “Integrated Financial Supervision: Lessons from Northern European Experience,” Policy Research Working Paper 2223. (Washington: World Bank).
- Vickers, John, 2002, “The Hedgehog and the Fox in Economic Policy,” Oxford Business Alumni Lecture, June 2002, available on the web at http://www.oft.gov.uk/NR/rdonlyres/932DC0F2-6E41-436A-A4FF-A21E894A543F/0/spe0502.pdf.
- World Bank and the International Monetary Fund, 2005, Financial Sector Assessment: A Handbook (Washington: World Bank and the IMF), available on the web at http://www.imf.org/external/pubs/ft/fsa/eng/index.htm.
- Zalm, Gerrit, 2005, “Blurring of Distinctions: The Policy Response,” Speech for the conference: Integrated Supervision of Financial Conglomerates: Challenges for the Future, May 12 (Amsterdam, De Nederlandsche Bank).

*Source: _wp0657 - REFERENCES*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2006/_wp0657.pdf_