It was sought thereby to acknowledge the growing presence of institutions operating in the different realms of financial activity, and the increase in large financial conglomerates, which blurred the old sectoral boundaries. Moreover, the single supervisory authority model enabled the synergies existing in the supervision – whether prudential or conduct- related – of different types of institutions to be harnessed. Finally, this model sought to prevent potential conflicts of interest between monetary policy, which remained in the hands of the central bank, and financial supervision, which was entirely the responsibility of a separate agency. More recently, especially in the wake of the crisis that broke in 2008, the twin peaks model has become more widespread in Europe. Under this model supervision is structured around two agencies: the first, set up within the realm of the central bank, is entrusted with the prudential oversight of all institutions capable of generating systemic risk (be these deposit-taking institutions, insurance companies or market intermediaries); the second agency is tasked with monitoring the conduct of all types of intermediaries and with pursuing the protection of investors in or consumers of all financial products and services. Compared with the single supervisory authority model, the twin peaks model seeks to protect the system from potential conflicts of interest between the monitoring of financial institutions’ solvency and the oversight of rules of conduct and of market integrity.
Unlike regular deposit insurance, where the Bank has favoured the UK moving to a degree of pre-funding of the system, it is less clear that such a regime could or should be pre-funded. But, as with regular deposit insurance, the question of whether or not any ex post allocation of costs should somehow be risk based would need to be considered. Indeed, more generally, including perhaps even for liquidity insurance, we need over time to be clearer about the principles that drive whether insurance premiums are risk based and collected up front. This is obviously difficult territory. There are arguments against any approach along those lines. I air it not so much a proposal but in the hope of stimulating serious thinking about what a COLR regime might look like. If a COLR regime could be devised, it would be very important that it was not overused. Private sector backstops should be used first; and they could be better designed. One such approach would be to require banks to take out private capital insurance. This could take a variety of forms. One idea would be straight capital insurance: ie a commitment from investment institutions to subscribe when called upon to do so by a bank. As with possible public sector capital-insurance schemes to be activated only during a systemic crisis, such private insurance could be linked to maintaining a required minimum capital ratio.