Finances need stability

Artur Gherman, chairman of the CNPF

English digest #41

The fast development of a company often needs internal adjustments in order to ensure harmonious growth and efficient protection from outside so that the opponents cannot erect obstacles.

The swift growing of an economic sector is attractive not only for investors, but also for some of the politicians, especially those interested in regulating the given sector or, even in politically controlling it.

Undoubtedly, the financial, banking or nonbanking industry, needs rigorous control so as to exclude fraudulent schemes and to hinder the formation of financial pyramids that ’swallow’ the population’s savings. Clear rules of the game are also needed. Favorable conditions must be created for investments and systemic risks should be prevented as it is known that the current economic crises are determined not as much by the production process, but rather by the instability of the financial markets, especially as regards the speculative transactions of large financial investors.

In general, forms and methods of regulating the financial markets are similar in all countries of the world. But state regulation models are different from one country to another.

Currently, there are four models for regulating the financial markets:

The institutional (sector) regulation model that envisions the traditional division of the financial system into three main sectors: banking services, insurance and securities. This model is based on the strict distribution of the powers and provides for the existence of three supervision and regulatory bodies that work each in the sector that is within its jurisdiction. The institutional regulation model is used for example in the U. S., Greece, Spain, Cyprus, Portugal, Slovenia, Indonesia, Macedonia, Azerbaijan, and Ukraine.

The Dutch Twin-Peaks model that represents an example of switching from the institutional model to a model based on prudential supervision and market conduct principles. In this approach, every supervision element (micro and macroeconomic stability, disclosure of information, competition) is within the jurisdiction of one independent body. Thus, there is no strict distribution by sectors, but every body has inter-sector supervision and regulation powers. The given model is used in such EU member states as Germany, Austria, Belgium, Denmark, Estonia, Ireland, Latvia, Hungary, Romania, Malta, Poland, Sweden, Norway, the Netherlands, Finland, Bulgaria, and Japan. One of the forms of this model is used in Moldova.

The functional model that is one of the forms of the institutional regulation model, whose limits are vague and that includes the basic supervision elements, centering on certain objectives, as well as other purposes. It is used in France and Italy.

The centralized (integrated) model or the model of one regulator that envisions the existence of one supervision authority, with powers in all the sectors of the financial market. The centralized model implies concentration of attention directly on the institutions or for achieving the goal of regulation. Single mega-regulators work in the Czech Republic, Ireland, Lithuania, Slovakia, Russia, Kazakhstan, Armenia, and Georgia.

None of these models can be theoretically considered the best or optimal as the supervision model in any country must meet all national financial structure requirements, be efficient and viable.

They are different, often for subjective political reasons, and are closely connected with the political model of the state where the regulatory authority works. To my mind, if the checks and balances mechanisms function efficiently, the regulator’s activity is corresponding.

The subject of the mega-regulator is now in vogue. It derived first of all based on a political pretext that stemmed from the financial crisis of 2008. I will try to explain.

I consider that the politicians from certain countries found a ‘scapegoat’, arguing that the crisis was the consequence of an inefficient activity of the regulator and, consequently, decided to create a single mega-regulator, assuring that ‘the crisis situations will not repeat anymore! “.

It is a purely political decision. It is evident that the tension on the financial market remained. Besides, having taken part in different international conferences and having asked if there is any direct connection between the model of regulating the financial market in certain countries and the extent to which the given markets were affected by the crisis, I’ve got a clear answer – there is no such connection.

The modern financial markets are radically different from those that existed 15-20 years ago. Today the markets are not only global, but also function continuously and instantaneously, being saturated with very complex derivatives that penetrated different sectors of the world economy. As a result, the prevention of the financial crises depends not only on the model of one or another regulator, but rather on its capacity to analyze the risks, the efficiency of its interaction with other state authorities and the capacity to take certain preventive actions of national and international scale.

After the crisis, mega-regulators have been created in some of the countries only because foreign experts intervened, who always ‘know better’ what should be done, promoting their own consultancy services. This way a few millions are spent on the implementation of these ideas, but after the experts leave more problems remain.

I do not want to diminish the role of the foreign technical assistance in reforming the national economies and the regulation models – the contemporary world is too complex, with multiple facets and extremely globalized. I think that things should be yet treated with much more intelligence, by a thorough analysis of the needs and consequences, taking into account the local particularities.

Over a year this subject has been intensely discussed in Moldova, being considerably supported by the National Bank (BNM) that, on any occasion, promotes the idea that if the BNM takes the National Financial Market Commission (CNPF) under its management, the markets will benefit immediately. The arguments invoked by the BNM do not withstand criticism or are disputable. Also, a number of objective factors support the maintenance and strengthening of the existent model at this stage.

First of all, after the reform of 2007, the National Commission for Financial Markets became a mega-regulator as it supervises and regulates not only the capital market, but also the insurance and microfinance industry. Take one year of perturbations out, and then another two years (2011-2013) when, due to the political dissention, the NCFM didn’t have a fully-fledged chairman, which obviously influenced a lot the institutional efficiency.

Thus, de facto the NCFM had an intense activity during about three-four years. In spite of this fact, the CNPF fulfills its duties well: all the segments of the market have increased by about 10% a year. New laws and regulations are drafted and adopted and reforms are implemented, even if amid disagreements and with compromises. The trend is univocal – the non-banking financial market has grown continuously without special crises!

Moreover, after the chairman of the NCFM was named and a new Administration Board was elected this summer, the pace accelerated. Changing something now means in fact sabotaging the market. Maybe somebody wants to disturb the market for another year or two with organizational changes?! I’m against.

It would be much more reasonable and strategic to maintain what we have now and to strengthen the Commission’s powers by adopting a new law on NCFM, a draft of which is somewhere lost in corridors of coordination.

Secondly, a super mega-regulator should be created based on a developed and efficient financial market and viable laws. Only when ethics of corporate governance and respect for shareholders, insurers and other consumers become a norm and when self-regulatory organizations are founded and function, will it be possible to create it and to merge the regulators without causing perturbations on the market, as the basis will be uniform. In other words, the financial market should be an integrated platform for safe, guaranteed and attractive investments and for consistent entries of capital on the market. What we have now is far from being a civilized financial market. It is rather a large bazaar and the problems revealed by the raider attacks during the last two years are a proof of this.

Thirdly, imagine that the NCFM didn’t exist and everything was in the hands of the BNM when the raider attacks took place. I’m convinced that the NCFM played a relevant role in the state system of checks and balances.

Fourthly, the last few years showed that the BNM has its own, rather serious problems: Investprivatbank, Universalbank, Banca de Economii, the raider attacks, a lot of loans without appropriate coverage or delinquent loans, the excessive depreciation of the lei. As if the state of affairs is perfect and the BNM can also regulate the non-banking sector?! It’s maybe the case to speak about the implementation of the Twin-Peaks model under which the BNM is responsible only for the currency-monetary policy and the anti-inflation policy, while the NCFM regulates all other aspects in the banking sector?

Moreover, at the current stage of forming and strengthening the non-banking financial market, NCFM performs not only the role of prudential supervision, but also deals with thousands of petitions, lots of corporate governance problems, long-lasting liquidation of investment funds and trust companies, problems related to the liquidation of independent registrars, etc. I think the answer to the question why the NBM needs these problems right now and how ‘efficient’ will it be in this case is evident.

Fifthly, by concentrating all the regulations in the hands of one institution, namely when the non-banking market started not only to develop, but also to require more attention and a prompt reaction with regards to the adjustment of laws and normative documents to the European directives, the result will be a bureaucratic and rather inefficient system. Consequently, the synthesis and institutional information flow bottom to top and downwards will procrastinate. A banal example: we recently organized the conference of regulators of the capital markets of the Commonwealth of Independent States. A super mega-regulator from the region needed two weeks to choose the representatives who were to take part in this event! While nowadays, within the current model, it is easy to enter the office of the chairman of the NCFM or of a member of the Administration Board. Very often, we need to hold extraordinary meetings within the CNPF, and we call them in a matter of minutes.

Sixthly, the financial factor has been mentioned. They argued the salaries at the NBM are higher, while the resources allocated for developing the organizational structure are larger. Thus, even if the NCFM levies taxes from the players of the non-baking market, it anyway cannot compete with the NBM with regard to financial capacity.

In this context, we need to mention the following: a) the NBM is not a charity or a private organization and works also on public money as proceeds from financial transactions; b) the NCFM levies not taxes, as they say, but regulatory taxes that are a norm in the countries, where similar models work; c) when we set the regulation taxes, we take into account the interests of the market; d) our budget is sufficient for ensuring the independence of the members of the Administration Board who take decisions that influence the market and the professional participants, and for paying salaries to employees, which are comparable to the salaries applied by professional participants.

One serious issue we encounter, however, is salaries for IT employees, which we cannot compare with those paid in private sector. But this is the problem, I guess, of all the state institutions. Given that we go towards full computerization of the management process slowly but steadily, I think the Government and Parliament should identify solutions to these problems.

Until then, we make effort to deal with some problems by outsourcing, while others we solve independently. At first, we adopted recently a decision to create a separate IT department starting with 2014, event if the problem of competitiveness of salaries is felt and it is hard to attract specialists.

In conclusion, I want to note that many problems are faced in the non-banking sector – starting with the unfinished liquidation of the investment funds and ending with the monopolization of the insurance market, problems related to the Green Card, or those concerning the protection of consumers, including the creation of the guarantee fund, etc. In other words, the market is developing and it’s not rational to try a new regulation model. Such kind of perturbations should not be often – money needs stability, market efficiency and clarity. For the time being, a logical political move is to maintain and strengthen what we have.


Numarul ziarului: 
Nr.46 (517) din 4 decembrie 2013