5 - Integrated, Twin Peaks, and Systemic Risk Supervision for Financial Stability

Summary

Supervisory models evolve with financial markets. To address the evolution of financial markets and institutions, new supervisory structures have been developed. This chapter analyzes systemic supervision under the integrated, functional, and Twin Peaks models, and systemic composite bodies to elucidate their strengths and weaknesses when managing financial stability. Models examined cover those in Hong Kong, Mainland China, the United States, United Kingdom, Singapore, Australia, South Africa, and the Netherlands. Systemic oversight between traditional central banks and integrated micro-prudential supervisors is subject to supervisory underlap. This was the core weakness of the United Kingdom’s integrated model and is a regulatory flaw inherent to the institutional, sectoral, and functional models. Composite systemic bodies are imperative for supervisory models consisting of central banks that are not unified with prudential supervisors or divided among multiple supervisors. The Twin Peaks model does not need a composite systemic body because this is the role of the systemic peak supervisor. Neither does a unified fully integrated supervisor because the role is internalized. However, competing objectives within a fully integrated supervisor can produce bias and conflicts, eroding systemic supervision and financial stability.