Developing a Resilient Securities Market Supervisory Architecture

1. Introduction

The 2008 GFC led to dynamic regulatory changes in financial markets in general and the securities markets in particular. Vibrant changes in SMS architecture post-GFC have been a neglected topic of academic literature though post-GFC financial architecture reform was addressed (Crockett, 2009; Helleiner, 2011; Kawai, 2009, 2011) and the trendy integration of securities supervision was scrupulously discussed by Masciandaro and Quintyn (2010).

The research contributed in the contextual gaps of the existing literature about the GFC’s impacts by addressing the research gaps on what, how and why the changes in SMS architecture were made as a result from crisis impacts. This study is the first to investigate and explain the convergence and divergence between developed and emerging markets in their post-GFC SMS architecture policy reforms as well as the reasons for the alike and different ways of policy making by the two groups. It is also the first to develop recommendations on post-GFC SMS restructuring for emerging markets in the context that post-GFC policy debates focuses mainly on developed markets (IMF, et al., 2011; FSB, et al., 2012).

A mix-methodology employing both quantitative survey and qualitative research under the single paradigm of critical realism was used to generalize impacts of the GFC on SMS architecture and analyze the complex crisis-induced policy responses made by securities regulators. The study found that the GFC has not only changed the securities regulators’ ideology of market supervision, but also modified their perception about how the supervisory system should be constructed to perform effective supervision and enforcement.

Key research findings include: (i) There was a worldwide trend of restructuring of financial and securities regulators; (ii) SROs faced diminishing roles in market supervision post-GFC: (iii) Twin-peaks model became an optimum model for developed markets but not a convenient choice for emerging markets in post-GFC restructuring: (iv) Prevalence of integrated model was a continued progress since 1997 Asian Financial Crisis and further supervisory consolidation mandated by the 2008 GFC in emerging markets; and (iv) A new era of central banks emerged post-GFC. Regulatory implications are drawn out for emerging market given the context that most of post-GFC debates focuses on regulatory reforms for developed markets. Policy recommendations to solve the dilemma of post-GFC supervisory restructuring and the role of SROs to set up a supervisory architecture that endures a financial crisis are proposed to securities market regulators.

The paper is structured into six sections: section 2 outlines the concept of SMS architecture, reviews literature of SMS architecture and defines research questions. Section 3 describes the research methodology employed in this study. Section 4 discusses research findings. Section 5 provides regulatory implications for securities markets in solving the dilemma of post-GFC SMS architecture restructuring and role of SROs. Section 6 summarizes and concludes the paper.

2. Literature Review of SMS Architecture and Research Questions

SMS architecture is the institutional structure of securities market supervisory system, which is set up with involvement of different regulatory agencies and placed within a larger framework of financial regulation. SMS architecture is the structure where the securities regulator and SROs are put into relevant statutory positions so that they can perform their supervisory functions effectively in a hierarchy, which reflect the areas and functions of market supervision involved in and taken by different units of the regulator and SROs (Duong, 2016).

In the last decade, the theories of standard finance have been the most influential ideas to underpin the SMS philosophy. However, there is a trend to consider that the securities regulators should switch to adopt the policies derived from behavioral finance because behavioral finance is better in understanding normal investors and the not-always-efficient markets when developing and implementing realistic supervisory policies, which are not based on theoretical hypotheses but are based on the knowledge of the real behavior of markets and market participants. Krugman (2009) suggested that the significance of irrational and unpredictable behaviour of securities investors should be recognized by regulators and economists to deal with market imperfections because securities investors are rational and not well self-regulated. Erskine (2010b) recommended to establish a new conceptual framework of securities regulation, which include insights of behavioural finance and agents’ needs to deal with behavioural problems, such as conflicts of interest and agency costs. In addition, the securities markets are not efficient because it is proven that credit rating agencies, public companies, investment managers, stock exchanges and other self-regulatory organizations (SROs) often weighed their self-interests more than those of public investors.Furthermore, Herd philosophy has been used to explain the crashes or distortion of securities markets. Market plummet and market boom are often caused by the expectations of investors rather than changes in the fundamental values of the stocks. The use of standard finance theory to explain the financial market crisis was deficient according to Shiller (2010) as it had disregarded the importance of economy conduct and the ‘role of animal spirits’.

The financial supervision structure in a certain market may be set up according to one of four approaches of integrated, functional, institutional, or twin peaks. Each model has different arrangement of securities supervision. The integrated approach is the one in which a single universal regulator conducts both safety and soundness oversight and conduct-of-business regulation for all the sectors of financial services business (G30, 2008). The functional approach is the arrangement in which supervisory oversight is determined by the business that is being transacted by the entity, without regard to its legal status. Each type of business may have its own functional regulator. The institutional approach is the structure in which a firm’s legal status (for example, a bank, broker-dealer, or insurance company) determines which regulator is tasked with overseeing its activity from both a safety and soundness and a business conduct perspective. Finally, the twin peaks approach, a form of regulation by objective, is the one where there is a separation of regulatory functions between two regulators: one that performs the safety and soundness supervision function and the other that focuses on conduct-of-business regulation. Shavshukov and Zhuravleva (2023) identified global financial oversight into seven distinct models with a specific focus on the Conservative (Sectoral/Two-Tier), Twin Peaks, and Mega-Regulator frameworks. Chirulli (2025) traced the development of the framework for the Single Supervisory Mechanism (SSM) and the creation of the European Supervisory Authorities (ESAs) initiated sectoral legislative developments that have significantly broadened the supervisory scope of the ESAs.

However, the structure may imply: a regulatory monopoly where the concentration of power could harm the democratic policies (Reddy, 2001); excessive power of central bank may lead to the case where its regulatory failure potentially tarnish its reputation and credibility, especially monetary policies (Abrans & Taylor, 2000); pooling of resource with different skills and regulatory objectives of banking, securities and insurance may not yield the expected synergy (Reddy, 2001; Pellerin et al., 2009); potential moral hazards (Abrans & Taylor, 2000); lack of specialization (Pellerin et al., 2009); loss of scope economies between consumer protection and safety supervision; and adjustment and organizational costs (Pellerin et al., 2009).

The literature of financial supervisory architecture after the 2008-GFC reflects an urgent demand of regulatory reform towards a more consolidated supervisory structure that enable a crisis management framework and co-ordination between authorities during crises (Praet & Nguyen, 2008). Validity of the fragmented functional financial supervision was questioned as it was not proved efficient in response to the systemic risks (Acharya, 2009; Jawardj & Louhichi, 2016) and supervision of multi-discipline financial conglomerates (Cox, 2008; Paulson et al., 2008; Bernanke, 2009; Zingales, 2009). The twin peaks structure was claimed a superior structure (G30, 2008) that made Australia far less affected by the 2008-GFC (Erskine, 2010a, 2010b) and promises to overcome some of the problems in the current single regulator system (Weatherhead, 2010). However, Davis (2011, p. 38) observed that although the 2008-GFC indicated deficiencies in some regulatory structures and has led to changes in institutional arrangements and responsibilities in some markets, there is no clear answer to the optimal regulatory structure.

The SMS architecture cannot be analyzed in isolation from the whole financial supervision structure and the position of SROs. Self-regulation is a prominent concept in the securities market supervision. SROs can be defined as private sector organizations that share the same objectives of market integrity, market efficiency and investor protection with governmental regulators, having limited statutory authority to regulate the market participants and individuals under their jurisdiction. They may have limited extent of disciplinary power and must maintain the relevant framework to eliminate the conflicts of interests that may be caused by their commercial and regulatory activities (Richard, 2006). Though different markets relied on different approaches to structure their SMS architecture, a common feature is they all had SROs as co-regulators. Pre-GFC SROs were recognized by the securities regulatory community as a compulsory component of the securities supervision structure (IOSCO, 2003a). Many academics and practitioners (Austin, 2010; Pellerin, et al., 2009; Duong, 2016;) have the same observation that pre-GFC SROs were officially designated as one component of the securities co-regulation regime promulgated by the IOSCO.

Changing roles of SROs were observed as an outcome of re-thinking about the securities market architecture after the 2008-GFC (Carson, 2009, 2011; Rudd, 2009). The conventional values of self-regulation and SROs were doubted (Haldane, 2009; Larosière, 2009; Ford, 2010; Madhur, 2011). In 2011, Greenspan was still blamed for pursuing the idea of self-regulation among financial institutions in pre-GFC time (Frean, 2011) and the Securities and Exchange Commission of US has conceded that self-regulation of investment banks contributed to the crisis (Kumar, 2011). In spite of arguments that dismissed the values of self-regulation, there are milder views which still see the self-regulation is a necessary component of the securities market after the GFC (Paulson et al., 2008; Azuero, 2009; Carson, 2009, 2011). Bhattacharyay and Gupta (2025) examined the impact of self-regulation by testing the impact of U.S. Financial Industry Regulatory Authority (FINRA) 2241 Rules on quality of financial markets which concluded with mixed evidence on effectiveness of SROs in improving efficiency and information quality.

The emerging markets experienced principal capacity challenges that the regulators need to overcome, such as supervisory independence constraints, incomplete legal frameworks, inability to adequately regulate and supervise multi-sectoral conglomerates (IMF et al., 2011, p. 9); the too big to fail financial institutions that have become an unresolved public policy issue (Kaufman, 2014); adopting international standards that is consistent with the level financial development and supervisory capacity (FSB et al., 2012) etc. Vijayagopal et al. (2024) found that developing countries’ regulators struggle to keep pace with rapid technological change constraint due to lack of regulatory infrastructure and coordination. Alex-Omiogbemi, A. et al. (2024) identified that regulatory compliance in emerging markets was constrained by inadequate infrastructure, high implementation costs and limited technical capability.

In summary, the literature reflects the fact that the 2008-GFC has triggered a rising demand of SMS restructuring to respond to the crisis, an emerging favor of twin-peaks as a financial crisis resilient model and an increasing doubt of SROs’s role in securities supervision. However, a full picture of what, how and why the changes in SMS architecture were made as a result from crisis impacts is still absent and the vibrant SMS architecture restructuring after 2008 GFC is a neglected topic.

Addressing the literature gaps, the paper investigates whether GFC has generated important impacts on SMS architecture and led to vibrant SMS restructuring post-GFC. This paper established the following research questions (RQ)as below:

RQ1: What were the changes in SMS architecture undertaken by securities regulators as responses to the 2008 GFC?

RQ2: What roles would SROs play in post-GFC SMS architecture?

RQ3: What model was favored by financial regulators of securities markets in their post-GFC SMS restructuring?

RQ4: What were the roles of the central bank in SMS restructuring?

3. Research Methodology

Behavioral Finance considers critical realism as a single paradigm for mixed methodology. In this research, it combines with the ontology that “reality is real” and a social phenomenon to be studied is an external reality that exists independently of the researcher’s mind (Bhaskar, 1978; Harre & Madden, 1975; Magee, 1985). The research was designed in a way that allows triangulation in different stages of the study to enhance the precision of the representation of crisis impacts on SMS by examining it with different theories, methods and data sources (Denzin, 1978; Modell, 2007). The overall research design may be described as a sequential mixed methods design spanning into three-stage framework, where qualitative and quantitative methods are employed in a sequence with results from one feeding into the later one (Mingers, 2001).

In Stage One exploratory qualitative research, literature review was conducted to define the conceptual framework and pre-GFC landscape of SMS architecture, identify research gaps, formulate research questions and provide inputs for further research at Stage Two (Greene, et al., 1989; Malhotra, 1993; Creswell & Clark, 2011).

Stage Two was an empirical quantitative research, conducted through a cross-sectional structured survey questionnaire with 42 securities commission respondents that provides data for descriptive, comparative and correlational comparative research strategies for the period of 2008-2016. One of the key objectives of the survey is to identify various impacts of the GFC on SMS architecture, defining the trends of policy responses to the crisis by emerging and developed markets. In order to pursue the mentioned research objectives within the complexity of the SMS architecture post-GFC, statistical analysis and quantitative data are employed as they develop reliable descriptions and provide accurate comparisons (Gerhardt, 2004).

In Stage Three explanatory qualitative study, documentary research was undertaken with references of 463 policy papers published by IOSCO, 486 documents and an analysis of websites of 101 securities regulators and international organizations, such as World Bank, IMF, ADB, for confirmation, completeness and retroduction of the findings from qualitative and quantitative research in two previous stages. Because qualitative research is ‘valuable in its depth and its ability to uncover and interpret mechanisms behind behavior’ (Gerhardt, 2004, p. 10), it was used to study and explain the “behavior” and momentum behind the “behavior” of securities regulators to restructure their post-GFC SMS architecture. Duong (2016) reinforce that this stage is pivotal, which provide data to understand and explain the divergence of various securities markets in the SMS policy responses to the crisis impacts that were uncovered in quantitative research in Stage Two.

4. Research Findings

Five key research findings are discussed in this section: (i) A worldwide restructuring of SMS architecture was undertaken by securities regulators; (ii) SROs faced changing roles in market supervision after 2008 GFC; (iii) Twin-peaks became an optimum model for securities developed markets but not a convenient choice for emerging markets; (iv) Prevalence of integrated model was continued since 1997 Asian Financial Crisis and further securities markets supervisory consolidation became mandated after 2008-GFC in emerging markets; and (v) Central Banks in many countries emerged as macro-prudential supervision peak of twin-peaks model and mega-regulator in integrated model post-GFC.

4.1. Restructuring of SMS Architecture for RQ1

The hypothesis that the GFC has generated impacts on SMS architecture that led to vibrant SMS restructuring post-GFC was supported by the empirical analysis. The quantitative research with 42 securities regulators undertaken in 2013-2014 shows that the GFC led to changing in SMS architecture of 78.57 % of respondents from developed markets and approximately 39.3% of emerging market group (Duong, 2016). In the group of survey respondents reporting crisis impacts on SMS architecture, 77.3% had re-evaluated and re-constructed their SMS system post-GFC, 27.3% developed a new SMS structure to respond to crisis impacts and 59% reported other crisis impacts to their SMS structure.

Documentary research, using quasi-quantitative techniques verifies outcome of the descriptive survey research and gives a more specific picture of diversified policy responses undertaken by 101 securities regulators in terms of SMS restructuring for the period of 2008-2016 (Figure 1).

Findings are included:

• 16.83% of existing securities regulators have strengthened their powers by new legislation, such as supervision regarding the products, markets and institutions that were not under supervised during pre-GFC including OTC derivatives, hedge funds, and market gatekeepers (such as CRAs and auditors).
• About 28.71% regulators has transformed from one to another model of supervisory structure (either by realigning of responsibilities of existing regulators or setting up of new supervisory organizations and/or strengthening of supervisory powers by new legislations).
• 14.85% of the securities regulators have experienced reform or organizational restructuring.
• Some securities regulators (4.95%) have participated in a regional financial supervisory body or a national network of supervisory coordination was set up.
• Some securities regulator (14.85%) strengthened their powers by new legislation with organizational restructuring or establishing new supervisory organizations.
• Organizational restructure was combined with participating in regional supervisory body or setting up national supervisory coordination network (6.93%).
• Supervisory responsibilities were shifted from one to another organization (2.97%).

It should be noted that the securities supervisory structure is an inseparable part of the overall financial supervisory structure. Therefore, the reform depicted in Figure 1 has a broader scope that overcomes the borderline of national securities markets.

Figure 2 shows the financial supervisory structure of the selected 101 jurisdictions as of March 2016. Criteria for classifying the supervisory structure of the sample is essentially based on the definitions and classification of G30 (2008) on the structure of financial supervision. The current structure is an outcome of transformation of around 21 % of the research sample from one to another supervisory architecture during 8 years since the 2008 GFC. Integration of financial supervision is inherently a trend that became stronger after the crisis. The post-GFC trend of supervisory consolidation is highlighted by emergence of integrated structure under central bank.

The fully integrated model accounts for 30.7% of the research sample (19.8%+10.9%). The proportion of 21.8 % of research sample that have a partly integrated supervisory structure accordingly shows the fact that the supervisory consolidation toward integration was undertaken by 52.5% of the securities regulators. Twin-peaks model only accounts for approximately 6.93% of the research sample. The institutional model accounts for nearly 25% whereas functional model shrank to less than 12% of the research sample.

Both quantitative and qualitative research provide meaningful data showing the momentum behind the post-GFC SMS restructuring. Descriptive survey research shows that 68% of the respondents who identified reasons for changing their SMS structure post-GFC agreed that the 2008 GFC was the key reason leading to the changes in SMS system as it revealed the flaws of pre-GFC SMS structure. Only 16% of the respondents changed their SMS structure as their existing system was no longer relevant to adapt to new environment after the crisis. Twenty four percent reported other reasons for them to make changes in their SMS system in post-GFC time, including: (i) changes were made in a planned legislative reform or a capital market development roadmap; (ii) changes were made to implement IOSCO recommendations; and (iii) changes were made in a planned consolidation that allows better oversight of market members to enable timely detection and response to risks (see Figure 3).

The qualitative research also found that major momentum for the crisis-induced policies to restructure SMS architecture is the requisite of recovering financial stability, harmonization of macro and micro-prudential supervision, changing supervisory approach to risk-based methodology, building up a comprehensive supervisory information base, reducing of regulatory arbitrage risks, enhancing investor protection by adopting insights of behavioural finance and unifying of supervisory activities across interconnected sectors (see the rationale for the SMS architecture transformation of 24 selected jurisdictions in Appendix 1).

4.2. Diminishing Roles of SROs for RQ2

Both quantitative and qualitative research provide strong evidence to sustain that SROs have no longer maintained their position as a compulsory component of SMS architecture. Table 1 shows that 82.35% of the survey respondents reporting crisis impact on SROs have undertaken re-evaluation and improvement of the SROs’ roles during post-GFC.

Quantitative research also provides evidence showing that first time in history SROs have become regulated entities. As shown in Figure 4, over 91% of the research sample chose to undertake more supervision over market institutions (MIs) and SROs after the crisis. Policy responses of regulators are diversified, including: issuing new rules or regulations on supervision over MIs and SROs (64.7%), newly establishing regulators or regulatory structures to perform the function of MIs and SROs supervision (26.5%), shifting the role of MIs and SROs supervision from one to another regulator (5.9%) and putting selected types of MIs and SROs in more supervision (35.3%)

Self-regulation used to be considered by IOSCO a valuable complement to the regulator in achieving the objectives of securities regulation (IOSCO, 1998) and an effective model for regulation of financial services industry (IOSCO, 2000) during pre-GFC. However, during post-GFC IOSCO does not only eliminate the roles of SROs in its three-dimension supervision framework including information disclosure, regulation and self-regulation (IOSCO, 1990) but also clearly states that the SROs should be regulated (IOSCO, 2010, 2013). Recommendation of IOSCO on regulation of SROs was strongly supported by securities regulators. During the period 2008-2015, 78% of the securities regulators had undertaken policy reform with stock exchanges and other SROs, ranging from intensifying supervision over the institutions to restructuring or setting up some coordination to enhance market supervision ( See Table 2).

Data analysis of legal framework and policy papers of 89 jurisdictions where SROs are available in the research sample (101) found that 68 jurisdictions (76.4%) had undertaken policy reform to strengthen supervision over SROs in the period 2008-3/2016. In 22 developed markets, 19 or 90.5% issued new legal framework to fortify supervision over SROs. Whereas, 49 out of 67 emerging markets (73.1%) had the same policy response (See Figure 5). Typical examples are jurisdictions in EU, Japan, Malaysia, Slovenia, and United States, where there has been first time an SRO was charged an administrative penalty by the securities regulator. Appendix 2 provides detailed results.

4.3. Twin-Peaks Model-An Optimum Model for Developed Markets but Not a Convenient Choice for the Emerging Markets for RQ3

The twin-peaks model was recognized as the ‘optimal means’ of ensuring that issues of transparency, market integrity, and consumer protection receive sufficient priority (Alembakis, 2015; G30, 2008, p. 14). However, this study found that the model, despite the claimed superiority, has not obtained the expected significance in post-GFC trend of supervisory restructuring.

Twin-peaks and integration are the two alternatives for supervisory architecture redesigning. Among 24 regulators that had taken steps to restructure their supervisory architecture, twin-peaks model was the choice for seven regulators with more developed financial sectors (five from functional and one each from integrated and institutional models), accounting for 29.2 % total group (Table 3). However, an integrated model (partly or fully) was the choice for 15 other regulators to redesign their supervisory architecture, making a proportion of 62.5 % of total group. Two remaining regulators balanced between twin-peaks and integration and developed a partly integrated system with twin-peaks elements, accounting for 8.3% of the group.

Further documentary research helps to reveal that twin-peaks model seems to be a ‘customized’ setting for developed markets rather than emerging markets. Development of the twin-peaks model may require fundamental political-economic and institutional factors which makes the model viable in Australia but not available in the emerging markets. In other words, the twin-peaks model is not the one-size-fit-all that can be transferred to other financial markets without considerations. The paradox can be explained by the following reasons:

Firstly, one crucial factor to the success of twin-peaks model is the notion that both regulators in charge of prudential regulation and conduct supervision are equal in power and importance, and that neither should play second-fiddle to the other (Schmulow, 2016). The factor makes twin-peaks hardly applicable in emerging markets, where financial systems tend to be relatively smaller in size, more concentrated and less complex, with banks playing a large role while capital markets and other financial institutions remain relatively underdeveloped (IMF et al., 2011). Sectoral design, rival for regulatory powers and over dominance of bank regulators make the institutional restructure to establish two specialized regulators with balanced power and importance in the emerging markets impossible. Data collected from IMF’s country reports for financial system stability of the 24 jurisdictions that have their structure redesigned after 2008 GFC provides reliable evidence to support this observation. Seven (Belgium, New Zealand, Portugal, Spain, UK, France and Germany) among nine jurisdictions that constructed a pure model of twin-peaks or mixed it with integrated settings in the period 2008-3/2016 are the developed financial markets with more complex financial systems compared to the larger part of the group (see Table 4). Two other jurisdictions, South Africa and United Arab Emirates are still members of IOSCO Growth and Emerging Markets Committee. However, South Africa has large, sophisticated financial sectors (IMF, 2014g) and United Arab Emirates was ranked by World Economic Forum (Liu & Reinhardt, 2016) as one of 25 World’s strongest financial markets in 2015. Among the group of 15 jurisdictions that chose integration model rather than twin-peaks, 14 are the emerging and developing economies that share many of the characteristics as mentioned above by IMF et al. (2011). These characteristics may be the obstacles that contributed to them not choosing the twin-peaks model. An exception in this group is Switzerland. Although it is a developed economy by definition of IMF et al. (2011), Switzerland chose integration model for their new financial supervisory setting.

Secondly, coordinating the views of the different regulators and resolving conflicts is a challenge of twin-peaks model (Weatherhead, 2010; Restoy, 2016). For success, two peaks in the model need to rely upon effective and efficient inter-agency collaboration, which is free from rivalry and political interference. In Australia, Australian Prudential Regulation Authority and the Reserve Bank of Australia (RBA) in one peak of prudential regulation, and ASIC in the other peak of market conduct supervision, have demonstrated history of close cooperation (Schmulow, 2016). Furthermore, Australian public servants are highly skilled and largely free from corruption because of an independent judiciary and existing within a state based upon the rule of law. The same characteristics seem to be evident in group of seven mentioned developed economies that have taken steps to restructure into twin-peaks model within eight years post-GFC. However, the characteristics are not available in 14 of 15 jurisdictions that opted to integrate their supervisory agencies (except Switzerland). With weaker institutional frameworks and market infrastructures, emerging markets often lack an efficient mechanism for cooperation and sharing information among regulators. This fact might cause the twin-peaks model to become less attractive for them. In addition, in the context that there has been a general shift toward more politicization of financial policy making after the 2008 GFC (Véron, 2012), twin-peaks model that require technical regulators and political interference free environment may not be a convenient choice for emerging markets with a relatively greater involvement of the state in the financial system (IMF et al., 2011).

Thirdly, the costs of restructuring the supervisory system into twin-peaks may overcome the benefits. In addition, market participants may incur higher costs because more regulators means more resources should be allocated to compliance (Bryane, 2014). For the emerging markets with important capacity constraints (IMF et al., 2011) in term of both human and financial resources, twin-peaks may be an expensive option.

Finally, twin-peaks model is recommended as a resilient model to cope with financial crisis (Paulson et al., 2008; KPMG, 2012; Erskine, 2014; Schmulow, 2016). Documentary research found that jurisdictions that transformed to twin-peaks are the ones that were hurt more severely in the 2008 GFC. All the jurisdictions that chose twin-peaks highlighted the requisite of developing a supervisory architecture that is viable in financial crisis and provides effective investor protection (see Appendix 1). In addition, data from updated IMF’s country reports on financial stability of 101 securities regulators shows evidence to verify research finding that emerging markets are less affected from the 2008 GFC. Another report of IMF recently concluded that many emerging markets proved resilient during the crisis (IMF et al., 2011). This may be a factor that makes the requirement to set up a costly crisis-preventive structure like twin-peaks less urgent for the emerging markets. The case of Switzerland provides some further evidence to support this observation. Different from other developed markets that transformed their supervisory system post-GFC, Switzerland chose integration model rather than twin-peaks and claimed that their supervisory consolidation had ‘nothing to do’ with the 2008 GFC (FINMA, 2009).

Prevalence of Integrated Model

The trend of consolidation of supervisory powers is not newly emerged. Instead, it has been trending for nearly 20 years after the 1997 South East Asia Financial Crisis (Masciandaro & Quintyn, 2010). The momentum for supervisory consolidation after that crisis was identified by many researches (Jabotinsky, 2012; Masciandaro & Quintyn, 2009). The momentum behind supervisory consolidation after that crisis is the increasing need to adopt a mechanism that can address the changing industry structure with financial conglomerates, emergence of new financial products, especially derivatives products that overlapped conventional deposit, insurance, securities boundaries (Klein, 2009; Taylor, 2011). This research found that the reasons for transition to integration model of some jurisdictions in the years 2008-2009, including Korea (2008), Uruguay (2008), Bolivia (2009); Egypt (2009) and Switzerland (2009) did not originate with the current GFC. In fact, the consolidation was to respond to the changing landscape of financial market since the first crisis (1997). The second crisis (2008 GFC) just additionally fueled or accelerated the process.

However, the trend of supervisory integration in other jurisdictions after the 2008 GFC seems to be connected closely with the crisis (Melecky & Podpiera, 2013). Paradigm shifting in SMS philosophy possibly required regulators to redesign their current structure to accommodate new supervisory tasks. Two new supervisory functions emerged after 2008 GFC, including the management of the resolution of non-viable institutions and the adoption of macro-prudential policies to prevent potential macro-financial imbalances and mitigate their destabilizing effects (Taylor, 2011). Harmonization of macro-prudential and micro-prudential supervisory activities becomes indispensable. The choice of ten jurisdictions (El Salvador, Indonesia, Barbados, Romania, Georgia, Hungary, Ireland, Kazakhstan, Lithuania, and Russia) that transformed into partly or fully integration during the period 2010-2015 (see Appendix 1) was related to the new responsibilities and the requisite of harmonization of macro and micro-supervisory functions.

In the securities industry, integration in supervision means more information, less coordination costs for regulators and less chance of regulatory arbitrage risks, which may generate or amplify the potential systemic risk spin-offs from one sector to another. Compared to twin-peaks model, supervisory integration may be a more economic, institutionally suitable and practical choice to ensure macro-prudential supervision and equivalent regulation across different sectors of financial markets (see Appendix 1). In addition, eight of the ten jurisdictions are from Europe and have participated in the EU regional supervisory networks such as European Securities Regulator or Single Supervisory Mechanism. Transposition of EU new legislations to respond to 2008 GFC was found a key policy responsibility of the agencies post-GFC (See Appendix 1). For the cases, supervisory integration was considered a pre-requisite for implementation and application of a uniform set of policy recommendations (AFS, 2013) by regional and international supervisory bodies that were formed after the GFC.

4.4. Emerging Role of Central Banks: Macro-Prudential Peak in Twin-Peaks Model and Mega-Regulator in Integrated Model for RQ4

This study found a new era of central banks post-GFC that central banks are emerging as prudential regulators in the twin-peaks model and central banks as integrated supervisors of financial markets. Emerging trend of integration under central banks was found among SMS architecture reform by emerging markets. Involvement of the central banks in financial supervision was increasingly strengthened through the adoption of the twin-peaks model in developed markets and the adoption of integration under central banks in emerging markets.

Seven out of nine jurisdictions that transited to twin-peaks model and partly integrated with twin-peaks elements in the period 2008-3/2016, including Belgium, New Zealand, Portugal, South Africa, Spain, U.A.E, and Germany have the central bank in the peak of prudential regulation. France and UK established a subordinate organization under their central banks to conduct the prudential supervision responsibilities, namely Autorité de Contrôle Prudentiel (ACP) under Bank of France and Prudential Regulation Authority (PRA) under Bank of England respectively. Since, 2019, EU has developed the framework since the creation of the European Supervisory Authorities (ESAs) and the Single Supervisory Mechanism (SSM) accompanying with sectoral legislative developments that have significantly broadened the supervisory roles of the ESAs (Chirulli, 2025).

Seven (46.7%) of the 15 jurisdictions (see the list in Appendix 1 and Table (6) that restructured their financial system toward integration in the period from 2008-3/2016 had set up a partly or fully integrated structure under the umbrella of central bank. And even three of them transited from the fully integrated model outside central bank to integration under central bank. Among these three, one was separated from central bank before but re-integrated into central bank after the GFC (Kazakhstan). It was found that the crisis-induced mandate of strengthening macro-prudential (usually assumed by central banks) and controlling the risks generated by rapidly growing financial institutions in harmony is an impetus for their financial supervision systems to be integrated under central banks.

This research outcome was supported by the research of ECB (2010) that confirms a departure from functional (sectorial) setting and tendency toward further enhancing the role of national central banks in supervisory activities. The fact that the requirement of systemic risk control and the information-related synergies between the central banking and the prudential supervisory function was highlighted by the GFC (ECB, 2010) helps to explain this phenomenon.

5. Policy Implications for SMS Architecture

Following 2008 GFS, it is obvious that SMS policy making present a trend of an architecture shift from stand finance to behavioral finance. In the context that the securities need to be prepared for abnormal financial performance in a resilient and responsive way, this paper provide some recommendations for policy makers regarding SMS architecture reforms. Emerging markets were not well prepared for the shock of the post-GFC paradigm shift. It is not an exception for emerging markets to take mimic action regarding post-GFC SMS paradigm shift. However, the critical question for emerging markets is whether it is always a right thing to fully adopt those policies that has been developed by well-developed markets without re-thinking the current systems and recognizing the prevailing emerging market conditions and institutions. This paper also fills the gaps by providing following policy recommendations for emerging markets in particular focused on financial market reforms.

5.1. Separating of Macro-Prudential Supervision and Micro-Prudential Supervision in a Mini-Twin-Peaks Structure at Any Setting of Financial Supervisory Architecture

It is highly recommended that macro-prudential supervision to be conducted separately from micro-prudential supervision, ideally in the twin-peaks model (Masciandaro et al., 2013; Schmulow, 2016). However, in cases where twin-peaks model is not a feasible option for emerging markets, a mini twin-peaks structure within integrated model or the model of independent securities regulator may work as a more cost effective alternative. This structure requires separate units to be established to take responsibilities of macro-prudential supervision and micro-prudential supervision within any financial supervisory setting other than the original twin-peaks model. Specifically, one unit focuses on financial systemic stability and the other is charged with market conduct and investor protection. A mechanism of checks and balances between these units should be set up for harmonization of macro- and micro-prudential supervisory activities.

Involvement of securities regulator in macro-prudential to identify and encounter systemic risks which are caused by shadow banking (Acharya, et al., 2013; Gennaioli, et al., 2012; Gorton & Metrick, 2012) and operation of systemic risk important financial institutions (SIFIs) (Bartram, et al., 2007; Ibragimov, et al., 2011; Carey, et al., 2012) is an essential mandate of post-GFC financial regulation. Shavshukov and Zhuravleva (2023) emphasize the growing divide from Central Banks (handling macro-economic/monetary policy) to dedicated "mega-regulators" (handling micro-prudential supervision and consumer protection). Setting up a macro-prudential supervision unit at a securities regulator is therefore a natural post-GFC policy response in the financial architecture where separated regulators for banking, insurance and securities market are maintained. In this structure, clear lines of authority and a regime of freely and continuously sharing information, and effective coordination of regulatory actions between regulators in the financial markets are required. Early interaction and buffer build-up by money policy and macroprudential policy improve resilience and allows release during crises (Detken, 2025)

Further, that regime should ensure no administrative obstructions in performing prudential supervision and business conduct oversight (Duong, et al., 2013). In this mini twin-peaks structure, it is politically and economically easier to give ‘equal power and importance’ (Schmulow, 2016) to both of the mini peaks as well as to set up an efficient coordination between them at the micro level in comparison to the full twin-peaks model, which requires a mega-restructuring and time consuming political involvement in emerging markets.

5.2. Clearly Defining the Role of Securities Regulator as a Counter-Cyclical Regulator

The research findings implied that the role of securities regulators is no longer to ensure that market is provided with full, timely and accurate information as perceived before the crisis. As the 2008 GFC has proved that the traditional pro-cyclical regulatory policy magnifies financial turbulence, securities regulators need to be counter-cyclical regulators for effectively involvement in macro-prudential supervision and preventing financial crises (Ren, 2011; Aghion & Kharroubi, 2013; Dutt, 2013;). Kress and Turk (2022) revealed a blueprint for strengthening the United States’ countercyclical framework following with three principles—automaticity, portfolio strategy, and market wide coverage

The key concept of counter-cyclical financial regulation is that regulation would be more effective if financial regulation ‘clamped down during financial expansions and lightened up during economic slumps’, when financial institutions were in financial struggles and risk averse (McCoy, 2016, p. 1181). A typical counter-cyclical policy is to require financial firms to build up reserves during the booms as a risk buffer for market downturns (Hofmann, 2015; Vickers, 2016) with the regulatory tools such as capital adequacy requirement, liquidity regulation and provisioning. Counter-cyclical regulation helps to restrain market bubbles and prevent spill-over effects from troubled financial institutions into the financial system (McCoy, 2016). The counter-cyclical securities regulators should build up a new SMS philosophy that is a manifold theoretical framework with Keynesian Economics (Keynes, 1930, 1936) at the center and intertwines insights from behavioural finance, financial market instability, financial network theory and agency theory (Duong, 2016). In order to be an efficient counter-cyclical regulator, a securities regulator should perceive three essential facts:

• The more securities market develops with sophisticated innovative products, the likelier it performs with the booms and bursts cycles

Securities regulators should observe and efficiently response to the market booms and bursts cycles that were coined as Minsky moments and Minsky journeys. Minsky moment is the financial market phenomenon recognized by Minsky (1992, 2008). It is described as the time when a booming market and a prospering economy lead investors to being over optimistic and borrowing beyond their earnings. The market rise is followed by more speculation with accelerating debts and investors who have overly borrowed must sell their assets to disburse their loans or become insolvent if they have no assets available to pay out their debts. Mass selling out then causes sudden collapse of asset values. Minsky journey, forwardly or reversely travels through three debt units: hedge financing units, in which the buyer’s cash flows cover interest and principal payments; speculative finance units, in which cash flows cover only interest payments; and Ponzi unit, in which cash flows cover neither and depend on rising asset prices to keep the buyer floating (McCulley & Fuerbringer, 2007; Minsky, 1992, 2008; McCulley, 2009).

2.

A securities market is a sophisticated network inside the networks of the national, regional financial system and global vitally interconnected markets

Properties of the connected networks are: (a) robust but fragile; (b) having feedback effects like disease contagion; (c) having dimensionality and complexity, amplified by asset price uncertainty cause financial market ‘seizures’; (d) having financial innovation by SFPs increase further network dimensionality, complexity and uncertainty; (e) where the diversity is gradually eroded by institutions’ business and risk management strategies, making the whole system less resistant to disturbance (Haldane, 2009). Furthermore, multiplex networks of financial institutions may couple with financial market networks and remove modularity, which in turns amplifies financial instability because the network then fails to isolate feedbacks and limit cascades while it retains its robust-yet-fragile features (Berndsen, et al., 2016).

3.

Risk-based approach is vital for defining potential risks of financial institutions at micro level and systemic risks at macro level and designing suitable counter-cyclical tools.

Three aspects of risk-based approach in securities micro-prudential supervision include (a) minimum entry requirements for licensing and capital requirements; (b) risk assessment frameworks; and (c) risk-focused inspection methodologies (IOSCO, 2009, p. 3). In terms of macro-prudential supervision, securities regulators should bear in mind that systemic risks have multi-layer network nature that is particularly harmful due to the possibility of cascading failure, where the collapse of a financial institution can led to defaults of others (Battiston, et al., 2012; Poledna, et al., 2015, Donald, et al., 2016).

5.3. Capacity Building Should Be in Place Before Any Effort to Restructure the SMS System

There are other special challenges to emerging market regulators in the current post-GFC reform. To overcome the principal capacity challenges, the emerging market regulators need to improve the independence of supervisory bodies and regulators, to establish complete legal frameworks, and to supervise multi-sectoral conglomerates. To adopt international standards is a way to establish an environment to nature and protect financial and economic development at a pace consistent with resources. The above-mentioned capacity constraints prevention help the emerging market regulators from executing their supervisory functions on one hand to discipline the breaches, such as insider trading, illegal stock promotion, market manipulations, financial frauds etc., and on the other hand to control systemic risks and fight financial crises (IOSCO, 2024). It is recommended that the capacity constraints need to be addressed by emerging market regulators before any SMS architecture reform is undertaken.

5.4. Any Reform Toward Consolidation of SMS Powers into Central Banks Should Be Considered with Pros and Cons of This Model

Assigning supervisory powers to central banks is considered a natural choice for policy makers after 2008 GFC (Dalla Pellegrina, et al., 2013). The study found that the information-related synergies between the central banking and the prudential supervisory function has put central banks at the center of the post-GFC supervisory restructure: central banks as prudential regulators in the twin-peaks model and central banks as integrated supervisors of financial markets in the integration model. In the context that consolidated supervision is critical weakness of emerging markets (World Bank, 2013); supervisory integration under the central banks in emerging markets may be a responsive and cost-effective approach to effectively supervise cross-sectoral financial institutions and to harmonize macro and micro-prudential supervision.

The structure eliminates regulatory arbitrages, reduces the regulatory transaction costs, generates the economies of scale, enhances accountability due to regulatory concentration, responds more effectively to financial innovation and cross-sectoral problem, produces regulatory flexibility and facilitates extensive and dynamic cross-border regulatory cooperation by acting as a single point of contact (Abrans & Taylor, 2000; Reddy, 2001;Pellerin et al., 2009). Supervisory architectures have evolved in response to increasing market integration and crises, moving from purely sectoral models towards Twin-peaks models and more integrated supervisory arrangements across all objectives and comprehensive ranges of responsibilities (IOSCO, 2024). The pros and cons should be observed for any further plan of integration under central banks and during the course of functioning of this model by securities markets.

5.5. Efficacy of SROs Should Be Facilitated Depending on Existing Market Conditions

The research findings also indicated that SROs are no longer privileged co-regulators in the SMS architecture and they now are subject to stringent supervision than before (IOSCO, 2013). Its means that the post-GFC supervisory burden of the securities regulators is heavier due to the adding up of responsibility. In addition, the ‘quietness’ of most emerging securities regulators about the role of SROs in the post-GFC securities supervisory reform plan might indicate that they are still in the post-GFC shock of paradigm shift. The lack of attention to self-regulation was also recognized as ‘an important omission in the debate on regulatory reform in the financial services sector’ in other research (Omarova, 2011, p. 2). It is possible that the securities market regulators might not know where to fit the current SROs, many of which were established as regulatory tools recommended by IOSCO, now proved inefficient by the 2008 GFC and strongly recommended as subject to critical supervision (IOSCO, 2013), into their post-GFC supervisory systems. Jansen (2025) investigated that the SROs in the Dutch securities industry can function through fortifying how Hollowing actions. The results also suggest a difference among stakeholders in their effectiveness to affect self-regulatory institutions.

Ignoring the role of SROs in the post-GFC SMS reform may not be a smart choice for some markets, given the complexity and global interconnected nature of the markets, any government unilateral attempt to undertake the SMS policy reform without involvement of private sector may encounter regulatory arbitrage. It means that there will be a never ended cycle of rule-making and rule evading supported by Omarova (2010).

Therefore, it is recommended that the efficacy of self-regulation in a particular market should be facilitated in consideration of specific market circumstances and characteristics (Carson, 2009). The securities markets with long tradition of self-regulation should enjoy the market expertise of and regulatory burden sharing with SROs as far as regulators bear in mind that the co-regulatory mechanism can only work if there are: (i) a clear line of responsibilities between statutory regulators and the SROs; (ii) conflict of interests are comprehensively identified by legal framework and efficiently enforced; (iii) corporate governance and management of the SROs are reasonably constructed and performed; and (iv) adequate oversight operation is in place.

In newly established securities markets, where the size of markets does not justify establishing an SRO and role of formal SROs is not achievable, self-regulation may not be an option because the statutory regulator is still weak in capacity and the SROs may be manipulated by moral hazards rather than operated under self-discipline and adequate supervision according to behavioural finance. Van Koten, S. (2021) used a theoretical model to show that SROs require parallel public oversight due to incentive problems. The experimental findings revealed that SROs often struggle to commit to strict enforcement or fraud disclosure, which creates an environment for "cover-ups". Therefore, supplementary governmental oversight of both the SRO members and the SRO itself is typically required to ensure better compliance.

In some emerging markets where SRO stock exchanges are traditionally powerful while the statutory regulators are weak, self-regulation is not sustainable (Carson, 2011). In this case, capacity building of statutory regulator and stronger supervision over SROs is recommended. In the meantime, reassessing the rules and performance of existing SROs and revaluation of SMS structure in emerging markets are relevant steps before deciding on the future role of SROs.