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“A single agency responsible for systemic risk would beaccountable in a way that no regulator was in the run-up to the 2008 crisis.With access to all necessary information to monitor the markets, this regulatorwould have a better chance of identifying and limiting the impact of futurespeculative bubbles.” Former US Secretary of the Treasury Henry PaulsonDiscuss. Financial supervision isessential in order to be able to monitor financial institutions. Therefore,regulation will help investors to gain trust in the financial system. Investorstrust in the financial system can be gained by showing evidence that financialinstitutions that breach the law (example make use of market abuse) will facenegative sanctions against them which will result into any type of enforcementin order to ensure that the financial market is fair, efficient and transparentby monitoring all transactions and investigating suspicious transactions in thefinancial market.

Financial supervision can be divided into two, this includesthe Macro-prudential supervision which seeks to ensure financial stability andthe Micro-prudential supervision which seeks to focus on the stability ofindividual financial institutions. The micro-prudential supervision may beclassified into three models which are the sectoral model, twin peaks model andthe single regulator model. Globally, different institutional models are usedin relation to financial supervision. Each type of institutional model has itsown advantages and disadvantages. There are 3 factors one should keep in mindwhen considering which type of institutional model for financial supervisionone should choose. These factors include: the size of the state and sector, howcomplex business is in that particular country (complexity of business) andalso the culture in that particular state.

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 The Sectoral model (thethree pillar model) is an institutional model which consists of a regulator forthe 3 main sectors which includes, banking supervisor, securities and marketssupervisor and insurance supervisor. This means that each one of those areaswill have its own supervisor which consists of its own policies and practices.Therefore using this system will include separate supervisors for each area ofthe financial services and will also include separate policies held out inorder to measure accordingly each sector.

This type of institutional model isused in countries like Greece, Portugal, Cyprus, and Italy.The main advantage of thesectoral model is that since it is made out of 3 sectors it will consist 3supervisors one in each and every sector. Therefore one should note that thistype of model is more focused than the other models because apart from thesupervisor focusing on that particular sector, there will also be supervisionbased on the type of entity. On the other hand the main disadvantage that willbe experienced while using this type of model is the lack of communication,which will result in lack of co-operation. Communication is very importantespecially in the financial markets because if there is lack of communicationbetween supervisors they can easily miss information (example missing apotential emerging risk) which is essential for them to identify in order totake action.  Fragmented supervision canimpact the efficiency and thoroughness (complete system) of supervision.Another disadvantage that can be encountered while using the sectoral model isturf wars. Turf wars in this case is basically an argument which is raisedbetween supervisors since they are all competing in the same particular area(state).

The difficulties that emerged from this type of model, played a rolein order to develop the other two alternative institutional models for micro-prudentialsupervision. These two alternative institutional modules are the twin peaksmodel and the single financial supervisor model. The second model is the TwinPeaks model, where this model consists of the functions of regulation separatedbetween two supervisors, these two supervisors consists of the Conductsupervisor and the Prudential supervisor where both of them focus on differentobjectives rather than sectors (as the sectoral model does).

The Conductsupervisor is responsible for market integrity and investor protection whilethe Prudential supervisor is responsible for financial soundness ofinstitutions and financial stability. This regulatory model has two corefunctions, the first function is the ability to be able to maintain the financialsystem stability while the second function is to assure market conduct andconsumer protection in the financial markets. This model is implemented inEurope such as the United Kingdom, Netherlands, Belgium and also outside ofEurope in Australia.

The main benefit ofimplementing the Twin Peaks model is that regulators will be much moreeffective, accountable and also focused since there are two supervisorsfocusing on a particular area. Furthermore, this model will allow eachregulator to generate their own culture that best fits with their objectivesand will also allow regulators to acquire specific expertise in order to meetthe objectives. On the other hand, the biggest disadvantage in this model wouldbe the lack of communication between supervisors which could also lead tooverlapping supervision .Therefore, if the two supervisors do not co-operatebetween each other , risks in the financial system can occur . Those riskswhich are identified by only one supervisor and not the other supervisor, are consideredas not sufficiently addressed risks. Overlapping supervision occurs when theobjective of the Conduct supervisor conflicts with the objectives of thePrudential supervisor.

This means that, one of the supervisors (either theconduct or the prudential) will take priority and therefore the institutionwill have to choose either the conduct approach or the prudential approach. Finally, the third and lastinstitutional model is the single regulator model. This model includes onefinancial supervision covering the entire market.

Where the supervisor has theresponsibility to monitor compliance with both prudential and conduct ofbusiness regulation of the entire industry. Therefore, this may be a suitableoption in order to avoid turf wars which alters the effectiveness ofsupervision. This type of model is increasing its popularity and it is commonlyused in small states and medium size states, including Malta, Ireland andGermany amongst many more. Like every other model, this type of model has bothadvantages and disadvantages.The main benefit ofimplementing this regulatory model is because of the higher quality ofsupervision, which occurs since there is only a single supervisor. Eventually,the single supervisor has the ability to acquire the required information moreeasily than the other models since with this model lack of communication willbe minimized by a lot. Furthermore, with a single regulator, one can be able toprioritize issues example, when there is a crisis the regulator will focus allthe energy on that crisis.

Therefore, having a single regulator will leadpriorities to what the supervisor thinks it’s best and most important for thatparticular state. The single regulator model also allows economies of scale totake place. Research pointed out that using this type of model will lead toless corruption which will result in better institutional governance and a moreefficient judicial system. In contrast, the main disadvantage of using thissystem is because of the lack of regulatory competition improvement insupervisory systems could be restrained. Having just a single supervisor couldresult in having an over might bully which can curb accountability andindependence of the regulation. Therefore, using this model will result inhaving less specialization and also less expertise. Furthermore, although thistype of model is more effective it is not that efficient, since, unlike thesectoral model there is less specialization in banking, securities andinsurance sectors since in the single regulatory model there will be onesupervisor regulating all sectors.

 In this quote by Henry Paulson, “Asingle agency responsible for systemic risk would be accountable in a way thatno regulator was in the run-up to the 2008 crisis. With access to all necessaryinformation to monitor the markets, this regulator would have a better chanceof identifying and limiting the impact of future speculative bubbles.” HenryPaulson is pointing out that having multiple regulators has led to thefinancial crisis which occurred in 2008.

Therefore, I believe that the mostappropriate model would be the single regulator model because having just asingle supervisor will result in a unified system. Eventually, a unified systemwill consist all the required information in order to be able to identifypotential risks in the financial markets. This shows that communication is verycrucial especially communication in the financial markets, because withcommunication it will be easier to identify the potential risks. In contrary,in the twin peaks model and the sectoral model lack of communication may occursince there isn’t just a single supervisor which can also result in conflictsor turf wars between supervisors which makes it even more difficult to identifythe risks.