5th Annual International Seminar on Policy Challenges for the Financial Sector: International Financial Conglomerates
Issues and Challenges
Danièle NOUY Secretary General of the French Banking Commission and Vice-Chair of the Committee of European Banking Supervisors - CEBS
Section 5: Issues in Supervision of International Financial Conglomerates
Washington2 June 2005
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Outline
I - The Committee of European Banking Supervisors (CEBS): role and tasks
II - The objectives of financial conglomerates supervision
III - The European framework
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I – CEBS: role and tasks
The Committee of European Banking Supervisors (CEBS) is in charge of the efficient and consistent implementation of EU banking rules in Europe
• CEBS was established on 5 November 2003 and first met in January 2004; its Secretariat is based in London;
• It has been created within the « Lamfalussy Approach » and is a so-called « Level 3 Committee »;
• It is comprised of supervisory authorities and central banks;
• It represents a new, more formalised, and efficient banking supervisory framework in Europe: some kind of EU decentralised banking supervisory model.
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I – CEBS: role and tasks
The Lamfalussy approach
• Level 1- Legislative framework: proposals by the Commission to the Council of Ministers and the European Parliament for co-decision.
• Level 2- Implementation measures are defined, proposed and decided by the Commission with the assistance of level 2 regulatory committees and the technical advice received from the level 3 supervisory committees.
• Level 3- European supervisors work in close cooperation to ensure consistent implementation of Level 1 and 2 acts within the Member States and to promote convergence of supervisory practices.
• Level 4- The Commission’s enforcement of Community law.
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I – CEBS : role and tasks
EBC¹
CEBS²CEIOPS3
CESR3
¹Finance ministries²Supervisors and Central Banks³Supervisors
ECOFIN Council
EBC European Banking CommitteeEFC Economic and Financial CommitteeFSC Financial Services CommitteeFST Financial Stability TableCEIOPS Committee of European Insurance and Occupational Pensions SupervisorsCESR Committee of European Securities Regulators
European Commission
European Parliament
FSC¹
European Central Bank (ECB)
EFC-FST¹ Economic and MonetaryAffairs Committee (ECON)
Banking Supervision Committee (BSC)
Level-3 coordination
Advice/accountability
Cooperation
CEBS and the Lamfalussy framework
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I – CEBS: role and tasks
The CEBS organisation
• CEBS members are high level representatives from the banking supervisory authorities and central banks of the European Union, including the European Central Bank.
• The CEBS is comprised of 25 member countries and 46 member organisations, observers from EEA* countries, the European Commission and the Banking Supervision Committee of ESCB (European System of Central Banks).
Chairman - José María RoldánSecretary General - Andrea Enria
* Iceland, Liechtenstein, Norway and soon Romania and Bulgaria.
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I – CEBS: role and tasks
The institutional tasks of CEBS
• To advise the European Commission on banking policy issues, in particular for the preparation of draft measures for the implementation of European legislation;
• To foster the consistent implementation of the Directives and to the convergence of supervisory practices;
• To promote supervisory co-operation and exchange of supervisory information.
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II – The objectives of conglomerates’ supervision
1. To take better into account the increasing complexity of financial groups
2. To implement internationally agreed principles
3. To address risks not captured in traditional sectoral supervision
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II – The objectives of conglomerates’ supervision
1- To take better into account the increasing complexity of financial groups
• Some groups provide financial services pertaining to the 3 financial sectors: bank, insurance, investment services;
• The magnitude of possible problems is particularly important, when such groups are cross-border EU or international groups;
• The risks of such cross-sector groups are not adequately captured in traditional sectoral supervision;
• Concerns about cross-sectoral risk transfers, and possible regulatory arbitrage have increased recently.
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II – The objectives of conglomerates’ supervision
2 - To implement internationally agreed principles
• Supervision of financial conglomerates (Joint Forum, February 1999);
• Risk concentration principles (Joint Forum, December 1999);
• Intra-group transactions and exposures principles (Joint Forum, December 1999);
• Trends in risk integration and aggregation (Joint Forum, August 2003);
• Credit risk transfers (Joint Forum, March 2005).
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II – The objectives of conglomerates’ supervision
3 - To address risks not captured in traditional sectoral supervision
• Ensure that financial conglomerates have sufficient capital basis, without double gearing of own funds and unreasonable capital leverage;
• Address intragroup transactions and possible excessive concentration of risks;
• Ensure adequate internal control as well risk measurement and management across the whole group;
• Designate a single « lead coordinator to monitor the supervision of the whole group ».
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III – The European framework
1. Definition of an EU financial conglomerate
2. Designation of competent supervisors
3. Content of supplementary supervision
4. Means of supplementary supervision
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III – The European framework
• It is a group,
• With at least one regulated entity within the Group,
• Which activity is mainly financial,
• With significant involvement in the banking/investment
services sector and the insurance sector.
1. Definition of an EU financial conglomerate
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III – The European framework
• Meaning a parent-subsidiary relationship (including participations) or
• An horizontal structure.
1. Definition of an EU financial conglomerate
• It is a « Group »
• A financial conglomerate may be a sub-group of another financial conglomerate;
• In such cases, they are in principle both subject to
supplementary supervision; but possibility to waive
supplementary supervision at sub-group level.
• … Or a « Sub-Group »
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III – The European framework
• A bank (« credit institution »), or a securities firm/broker dealer
(« investment firm »), or an insurance company,
• With its head office in the EU.
1. Definition of an EU financial conglomerate
… With « at least one regulated entity » within the Group
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III – The European framework
Total balance sheet of the financial sector entities > 40% of total
consolidated balance sheet of the whole group.
1. Definition of a financial conglomerate
… The Group’s activities must be mainly financial
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III – The European Framework
The weight of the less important financial sector must not be less than 10%.
This is assessed by comparing the total of the balance sheet and the capital
adequacy requirements of each financial sector against those of the whole
group.
1. Definition of a financial conglomerate
… And cross-sector financial activities must be significant
a) The micro-economic parameter
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III – The European Framework
• The total of the balance sheet of the smallest financial sector > EUR 6 Billions;
• Waiver by relevant competent authorities if:
- micro-economic parameter ≤ 10%, and
- if not necessary or inappropriate or misleading with respect to the
supervisory objectives.
1. Definition of a financial conglomerate
… Cross-sector financial activities must be significant
b) The macro-economic parameter
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III – The European Framework
• Current solo supervisors keep exclusive responsibility for solo supervision;
• Current sectoral group supervisors keep their responsibilities
for sectoral supervision at both solo and consolidated levels;
• Appointment of a unique lead coordinator for conglomerate
supervision.
2. Designation of competent supervisors
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III – The European Framework
• The Lead coordinator is appointed according to precise criteria determined by the Directive. In practice, most of the time, it is the supervisor in charge of the main financial sector;
• Nevertheless, the Directive’s criteria may be waived by the team of the « relevant supervisors », when needed;
• The coordinator is assisted by the team of other «relevant supervisors».
2. Designation of competent supervisors
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III – the European Framework
• Information gathering and dissemination, on an on-going basis and in crisis situations;
• Assessment of financial soundness and compliance with
financial conglomerate regulation;
• Compulsory coordination arrangements;
… But he has no enforcement powers with respect to
regulated entities located outside his jurisdiction.
2. Designation of competent supervisors
The missions and powers of the lead coordinator consist in :
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III – The European Framework
a) Capital adequacy,
b) Risk concentration,
c) Intra group transactions,
d) Internal control and risk management requirements.
3. Content of supplementary Supervision
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III – The European Framework
a) Capital adequacy
3. Content of supplementary Supervision
The basic principle is that:
The overall capital at conglomerate level must be sufficient to
meet the total capital requirements of all entities within the
group after elimination of intragroup elements.
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III – The European Framework
a) Capital adequacy
The four methods developed by the Joint Forum in 1999 can be used:
3. Content of supplementary Supervision
• accounting consolidation method,
• deduction aggregation method,
• book value/requirement deduction method,
• combination of 2, or all, of methods above.
The choice of the method is validated by the lead coodinator.
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III – The European Framework
b) Risk concentration
3. Content of supplementary Supervision
• There is a group-wide measure of concentration risks;
• It comprises all risks, namely credit, counterparty, investment,
underwriting, market risk, etc.
• It is a qualitive supervision, but discretion for quantitative limits,
• The coordinator role consists in:
– setting limits, according to the risk profile of the group,
– measuring contagion risk/conflicts of interests/arbitrage, etc.
– determining risk categories requiring reporting.
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III – The European Framework
c) Intra Group transactions
3. Content of supplementary Supervision
• Concept of « important Intra Group Transactions - IGTs»
(> 5% of minimum capital requirements);
• Periodic notification of the important IGTs to the coordinator;
• Qualitive supervision of the IGTs, but country discretion for
quantitative limits;
• Coordinator role, similar to his role in risk concentration
monitoring.
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III – The European Framework
d) Internal control and risk management requirements
3. Content of supplementary Supervision
• Sound management processes: (adoption and periodic
assessment by the top management of the Group’s strategies,
policies and risk policy);
• Capital adequacy policy, appropriate to match the conglomerate’s
risk profile and strategy;
• Internal risk measurement and management processes
commensurate with the conglomerate’s risks;
• Sound internal control mechanisms and accounting principles.
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III – The European Framework
• Access to information,
• Cooperation and exchange of information,
- Areas of information exchanges are mainly: group’s structures, strategy, acquisitions, restructuring, CAD, IGT’s, large exposures, profitability, shareholders, management, internal control systems, materially adverse developments, regulatory measures, etc.
- Essential information must be shared; relevant information may be shared.
• Verification of information,
• Enforcement.
4. Means of supplementary Supervision
EU Financial conglomerates
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III – The European Framework
Entities established outside the EU
4. Means of supplementary Supervision
• notion of equivalent supervision, and
• cooperation agreements
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III – The European Framework
• What needs to be determined? Whether « appropriate and equivalent » supervisory is in place;
• When and by whom? The request is made at the initiative of the parent or the regulated entity or the coordinator;
• Who determines the possible equivalence? The coordinating supervisor decides with the advice of other relevant supervisors, and taking into account the general guidance issued by the Financial Conglomerates Committee in July 2004 regarding the equivalence of supervision in Switzerland and the USA;
• What if no equivalence? In this case, the Directive is applied by analogy to the EU parts of group; and appropriate methods are used to capture and measure at least « the sub-group’s risks » (e.g. require a sub-holding company).
….
4. Means of supplementary Supervision
Groups with a Third Country Parent
Contact details:
ChairmanJosé María RoldánEmail: [email protected]. : +44 20 7382 1770
Vice ChairDanièle NouyEmail: [email protected].: +33 1 4292 7501
Secretary GeneralAndrea EnriaEmail: [email protected]. : +44 20 7382 1750
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