Integrated Financial Supervision Lessons of Scandinavian Experience

• Author: Michael Taylor and Alex Fleming
• Position: Reader in Financial Regulation at the University of Reading/Lead Financial Economist in the World Bank's Europe and Central Asia Regional Office

Several industrial countries have recently merged their banking, securities, and insurance regulators. Of these, three Scandinavian countries have the longest experience with integrated financial sector supervisory agencies, which have enjoyed considerable success. Would such agencies also make sense in developing and transition countries?

Integrated financial regulation-in which banking, securities, and insurance regulation is combined within a single agency-was first tried in Scandinavia more than a decade ago. Although international interest in the idea has recently been kindled by the United Kingdom's recent, dramatic decision to form the Financial Services Authority, many countries considering this type of supervisory arrangement may have more to learn from the Scandinavian experience. Denmark, Norway, and Sweden not only have longer experience with operating integrated regulatory agencies but also introduced them for reasons that are more relevant to developing and transition countries than those that influenced more recent converts to integrated regulation, such as Australia and the United Kingdom.

First, Scandinavian interest in the concept of integrated financial regulation predated, to a large extent, the financial trends that have led to its adoption in other industrial countries. The chief argument advanced for integrated regulation during the last few years is that it has been made necessary by the creation of new financial instruments, owing to the unbundling and rebundling of services offered by different types of financial services firms. Consequently, the boundaries of the banking, securities, and insurance sectors have blurred. Integrated financial sector supervision offers a response to these developments by bringing all regulatory functions together within a single organization. Many developing and transition economies have yet to experience this type of financial innovation, however. Hence, developing the ability to respond to such innovations is less important to them than developing effective supervisory capacity.

The three Scandinavian countries embarked on supervisory integration for other reasons that also concern developing and transition economies. The first was the need to respond to the development of financial conglomerates-in which banking, securities, and insurance businesses are combined-that were coming to play a dominant role in their financial sectors. Equally important were their desires to build supervisory capacity and to achieve synergies and economies of scale in countries with comparatively small financial sectors. Given all these considerations, it is appropriate to examine the Scandinavian experience with integrated supervision to determine whether it holds any general lessons for other countries contemplating such a move.

Scandinavian experience

Norway was the first country to establish an integrated financial sector supervisory agency in 1986, followed by Denmark in 1988 and Sweden in 1991. There are a number of similarities in the general outline of their systems. The scope, powers, and governance arrangements of the three agencies bear a strong family resemblance. The Scandinavian agencies each have a broadly similar regulatory scope. They regulate banks, nonbank investment firms, and insurance companies, mainly to ascertain their solvency. How such firms conduct business and other consumer protection concerns are not the agencies' primary responsibilities, but instead are assigned to various ombudsman schemes. The agencies have similar staffing levels and are funded by levies on the regulated industries rather than by general government revenues. Such funding secures the agencies some independence from their finance or economic ministries, to whom they ultimately report. Their independence in each country is further buttressed by a supervisory board, which oversees the general policy and operations of the agency. The...