with bank supervision in the ncb and securities supervision in an independent standalone authority. insurance supervision is in many countries also located in a separate authority, but in other cases it is a department of the ministry of commerce or some other ministry. the second main stream is full unification of the supervision of banks, securities companies and insurance companies, all in one institution. the trend since some 15 years is that bank supervision in a number of countries has been moved outside the ncb and has been consolidated with the supervision over securities and insurance companies. however, the most common structure is still the traditional one 1. martin cihak and richard podpiera : imf working paper wp / 06 / 57 from 2006. but there are many variations. one is the combination of banking and securities supervision, which is logical due to the close relations between banking and securities activities. another is the combination of securities and insurance supervision with the aim to create a stronger authority with more resources and expertise. there are also some broader alternatives. the fsa in the uk performs supervision over a wide range of financial institutions, including brokers, pension funds and many more. its objectives also include financial sector consumer issues and even the promotion of london as a financial market place. all kinds of supervision and other activities related to the financial sector are placed under one roof. the netherlands, australia and others have followed an approach based on the purpose of the supervision. in these countries prudential supervision of banks and securities firms is conducted separately from the oversight of the conduct of the financial markets. the underlying rationale is that these activities are different. ensuring the safety and stability of banks and securities firms requires different regulations and skills from monitoring market conduct and taking enforcement actions. ireland, france, finland and others have retained bank supervision in an organisation closely related to the central bank but not in the central bank itself. in this way they benefit from the resources of the ncb and can make some cost savings, but avoid some of the arguments against locating supervision in the ncb itself. other countries, among them germany, have a stand - alone authority for financial regulation but the central bank maintains a role in the conduct of supervision by conducting most of the on - site inspections of banks. in this way the bundesbank benefits from its vast network of regional branch offices and its knowledge of the local economy. criteria for evaluating the organisation of supervision the choice of structure for supervision is not an end in itself but a means to achieve certain objectives. we should therefore

: integration of trade and capital markets stimulates growth for both the euro adopter and the euro area. in the case of acceding countries, there are probably additional advantages of monetary integration ; it gives added stability after the difficult years of transition and is important for their underdeveloped financial sectors. so the issue is not really euro area enlargement as such, but rather its timing and preconditions. second, from the perspective of the euro area itself it is hard to see how acceding countries could pose any major risks to price stability. the sum of the economies of all the new member states does not presently amount to more than the gdp of the netherlands. furthermore, historically high inflation rates in the acceding countries have been reduced through reinforced macroeconomic discipline ( which in turn owes much to the enlargement process ). a simple calculation shows that even if growth in the acceding countries averages some 4 per cent more than the euro area, and this catch - up, according to most estimates, generates balassa - samuelson price convergence with 2 - 3 percentage points higher inflation than euro economies, their inclusion in the euro area would still only add some 0. 2 percentage points to area - wide inflation. instead, it is the perspective of the acceding countries themselves that is crucial. risks with erm ii the one risk with erm ii that has been discussed at length in recent years is the potential conflict between a pegged exchange rate and an inflation target. both exchange rate stability and low inflation are necessary to fulfil the conversion criteria, but in some cases it may be difficult for monetary policy alone to meet two targets at the same time. one possible situation is that the central parity has been set too low and that real appreciation pressures, due to catching up, are so strong that the upper band comes into question. this can result in large - scale speculative currency flows and unnecessary turbulence, as demonstrated by the attack on the forint at the beginning of this year. the obvious solution to speculation against the upper band is to reach an agreement in erm ii to revalue. but this is often difficult in practice. when political decision - makers are forced to choose between the inflation and exchange rate targets, it takes courage - and good analyses - to give priority to low inflation and opt for revaluation. as the case of ireland has demonstrated, this does not exclusively apply to acceding countries. in the end, the result can be inflationary pressures