First, I should like to thank the Dutch Association of Insurers and the Dutch Bankers’ Association for their invitation to speak to this gathering on behalf of DNB and the PVK, on an issue that is currently at the centre of attention within our two organisations. I am referring to the efforts undertaken by both supervisors to improve the efficiency of prudential supervision. I will explain the position taken by DNB and the PVK in the debate on ways to reduce the cost of supervision and the contributions both institutions may make to this end.
Position of DNB and the PVK in the debate on reducing the cost of supervision
You will understand the joy felt by the supervisor in me on reading the first words of this symposion’s motto, ‘Better supervision’. Improving the quality of supervision has enjoyed high priority within DNB and PVK, too. And our efforts have borne fruit, witness the finding of the IMF in its recent assessment of the Dutch financial sector, that prudential supervision in the Netherlands satisfies international standards to a very high degree, although further refinement here and there is still possible. Also, I welcome your appreciation of the quality of supervision. Lately, efforts to reduce administrative burdens have seemed to overlook the benefits of supervision. When the relief of burdens becomes a mission in itself and the purpose for which prudential supervision was created in the first place is lost from view, society as a whole may suffer the financial consequences. So let me stress here that not only society, but the financial institutions themselves as well benefit from the contribution which prudential supervision makes towards a healthy financial system.
However, DNB and the PVK work to achieve not only high quality supervision but also efficient supervision. In other words: DNB and PVK make a stand for adequate prudential supervision at no higher cost than necessary. Yet there is a limit to our efforts to reduce the cost of supervision. That limit is reached when the quality of supervision comes under threat. For DNB and the PVK have a statutory duty to exercise prudential supervision. Within that limit however, we will do our utmost to perform our duties at the lowest possible cost.
Whether the efficiency of supervision will be improved as a result of ‘less regulation’, the second part of this symposion’s motto, is less than certain. DNB and the PVK will be the first to abolish unnecessary regulations, as we have done on an extensive scale, lately, for instance by scrapping a large number of reporting requirements in the context of banking supervision. Scrapping rules, however, tends to make it more difficult to allow for specific circumstances and may thus serve to increase the compliance burden. Think, for instance, of rules in banking supervision that allow certain transactions to be eligible for reduced solvency requirements on account of counterparties’ high credit standing or the high quality of collateral. Scrapping such rules would mean that banks would have to hold more solvency capital. At the same time, calls for more regulation have become louder on account of, for instance, the tragic attack on the New York World Trade Center and the various book-keeping scandals of recent years. If the attempt to reduce the number of rules should imply that such developments would necessitate the scrapping of other – possibly unrelated – supervisory regulations, that would defeat the purpose for which these regulations had been created in the first place.
Efforts by DNB and PVK to enhance the efficiency of prudential supervision
If deregulation is not in all cases the ideal instrument to improve the efficiency of prudential supervision, you may wonder what else we do to attain that goal. In the first place, DNB and the PVK are currently in the midst of a major culture change, which is the outcome of the strategic review we perform periodically with regard to our duties and our position in society. Another result of this strategic review has been that the costs of supervision – especially the indirect costs – have been brought into focus more sharply than before. In order to enhance the efficiency of supervision, DNB and the PVK will have to complete the culture change initiated some time ago. This means that for each of our supervisory activities we will have to ask ourselves, even more urgently than before, whether they are really necessary for adequate supervision and whether they may be performed more efficiently. This applies to the drafting of supervisory regulations, the enforcement of regulations as well as to the logistics surrounding supervisory reports. One good example of increased cost-consciousness is the reorganisation both organisations have achieved in the runup to their merger, which will lead to annual cost savings of up to some 24 million euros. Yet typically, it takes time for culture changes to sink in, for a new approach to become internalised. Should you find that DNB and the PVK, despite the cost reduction effort, seem to relapse into their former ways, then I trust you will not hesitate to sound the alarm.
In addition to a culture change, we have also initiated various specific actions aimed at improving the efficiency of prudential supervision, distinguished into actions directed at existing regulations and actions we take with regard to new regulations.
In respect of existing regulation we have taken a two-pronged approach. First, there is the administrative burden reduction project initiated by the Ministry of Finance, and secondly, there is the study into other compliance costs held by the supervisors in collaboration with the sectoral organisations. Bernard ter Haar has already told you some more about the administrative burden reduction project, so I will restrict myself to stressing the fact that DNB and the PVK are active and enthousiastic participants in this project. Currently, both organisations are busy implementing the reduction proposals that have come out of it. One preemptive, so to speak, success story deserves to be mentioned in this context. Because as early as 2000, DNB decided to introduce what it called ‘direct reporting’ with respect to balance of payments reports. A recent survey among the users of the e-Line betalingsbalans application revealed that its use involves annual running costs of less than EUR 10 million. Earlier calculations by the Ministry put annual running costs at some EUR 75 million – which implies an almost 90% reduction of the administrative burden.
Also, DNB and the PVK have initiated a study, performed in collaboration with market conduct supervisor AFM and finance industry sectoral organisations, into the remaining costs of compliance. This study, now under full steam, involves charting costs related to compliance with the Regulation on CDD, the Insider Regulation and various regulations in the area of AO/IC, and drafting recommendations for improvement.
Two important lessons may be drawn from both the administrative burden project and the study into remaining costs of compliance. The first is that a comprehensive analysis of both direct and indirect costs of supervision is neede before a net reduction can be achieved. For a supervisory measure leading to a reduction in one cost item may cause a disproportionate rise in another.
The second lesson is that most indirect costs of supervision are caused not so much by actual compliance with regulations as by the initial implementation of regulations by institutions. In other words, most gains are to be made not on existing regulations but through the manner in which new regulations are implemented. This in itself is a pleasing conslusion: in coming years, the bulk of supervisory regulations is to be overhauled completely on account of Basel II, Solvency II and the Financial Assessment Framework. That should give us plenty of room to improve the efficiency of prudential supervision. And in order to ensure that DNB and the PVK realise the required efficiency jump, the assessment of the financial effects for institutions is embedded explicitly in the policy process. This means that in developing new supervisory rules, DNB and the PVK will determine beforehand what supervisory effect they intend to achieve by those rules. Also they will chart the range of possibilities available to realise that effect. Next, each of these possibilities will be assessed for several relevant parameters including its expected contribution to the supervisory objective, its financial consequences to the sector (in terms of both direct and indirect costs) and the way it may affect the level playing field. Based on this assessment, policy options are determined and elaborated. You will be involved from an early stage both in the preliminary phase of the process and in its ultimate elaboration. For close and constructive collaboration between supervisors and the supervised is indispensible for the establishment of a supervisory regime that is both effective and efficient. We on our part will point out what supervisory objectives we intend to realise and what information we will need from you to do it, while we would like to hear from you how we may achieve our aim at the least possible cost. Because no one is more capable than yourselves of charting the incremental costs involved in new regulatory measures and of indicating how we may keep those costs to a minimum for you. The final appraisal of the costs and benefits of the several policy options, however, is not for the supervised institutions to make, but for DNB and the PVK and, ultimately, the legislator, since they are both responsible and accountable for that appraisal.
To conclude, in order to set the panel discussion going, I shall now put forward a pair of propositions, which I shall be glad to explain afterwards if you wish.
Deregulation does not lead automatically to improved supervision.
Effective and efficient supervision requires culture changes not only in supervisors but also in the institutions they supervise.