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Section 5: Issues in Supervision of International Financial Conglomerates

5th Annual International Seminar on Policy Challenges for the Financial Sector: International Financial Conglomerates Issues and Challenges. Section 5: Issues in Supervision of International Financial Conglomerates. Danièle NOUY

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Section 5: Issues in Supervision of International Financial Conglomerates

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  1. 5th Annual International Seminar on Policy Challenges for the Financial Sector: International Financial Conglomerates Issues and Challenges Section 5: Issues in Supervision of International Financial Conglomerates Danièle NOUY Secretary General of the French Banking Commission and Vice-Chair of the Committee of European Banking Supervisors - CEBS Washington 2 June 2005

  2. Outline • I - The Committee of European Banking Supervisors (CEBS): role and tasks • II - The objectives of financial conglomerates supervision • III - The European framework 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  3. 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  4. 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  5. ECOFIN Council European Commission European Parliament EFC-FST¹ FSC¹ EBC¹ Economic and Monetary Affairs Committee (ECON) Advice/accountability CEIOPS3 CEBS² European Central Bank (ECB) Level-3 coordination CESR3 Banking Supervision Committee (BSC) Cooperation EBC European Banking Committee EFC Economic and Financial Committee FSC Financial Services Committee FST Financial Stability Table CEIOPS Committee of European Insurance and Occupational Pensions Supervisors CESR Committee of European Securities Regulators ¹Finance ministries ²Supervisors and Central Banks³Supervisors I – CEBS : role and tasks CEBS and the Lamfalussy framework 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  6. 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  7. 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  8. II – The objectives of conglomerates’ supervision • To take better into account the increasing complexity of financial groups • To implement internationally agreed principles • To address risks not captured in traditional sectoral supervision 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  9. 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  10. 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). 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  11. 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 ». 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  12. III – The European framework • Definition of an EU financial conglomerate • Designation of competent supervisors • Content of supplementary supervision • Means of supplementary supervision 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  13. III – The European framework 1. Definition of an EU financial conglomerate • 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  14. III – The European framework • 1. Definition of an EU financial conglomerate • It is a « Group » • Meaning a parent-subsidiary relationship (including participations) or • An horizontal structure. • … Or a « Sub-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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  15. III – The European framework • Definition of an EU financial conglomerate • … With « at least one regulated entity » within the Group • A bank(« credit institution »), or a securities firm/broker dealer (« investment firm »), or an insurance company, • With its head office in the EU. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  16. III – The European framework • Definition of a financial conglomerate • … The Group’s activities must be mainly financial • Total balance sheet of the financial sector entities > 40% of total consolidated balance sheet of the whole group. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  17. III – The European Framework • Definition of a financial conglomerate • … And cross-sector financial activities must be significant • a) The micro-economic parameter  • 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  18. III – The European Framework • Definition of a financial conglomerate • … Cross-sector financial activities must be significant • b) The macro-economic parameter • 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  19. III – The European Framework 2. Designation of competent supervisors • 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 coordinatorfor conglomerate supervision. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  20. III – The European Framework 2. Designation of competent supervisors • 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». 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  21. III – the European Framework 2. Designation of competent supervisors The missions and powers of the lead coordinator consist in : • 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  22. III – The European Framework 3. Content of supplementary Supervision a) Capital adequacy, b) Risk concentration, c) Intra group transactions, d) Internal control and risk management requirements. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  23. III – The European Framework 3. Content of supplementary Supervision • Capital adequacy 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  24. III – The European Framework 3. Content of supplementary Supervision • Capital adequacy Thefour methods developed by the Joint Forum in 1999 can be used: • 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  25. III – The European Framework 3. Content of supplementary Supervision • Risk concentration • 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  26. III – The European Framework 3. Content of supplementary Supervision c) Intra Group transactions • 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  27. III – The European Framework 3. Content of supplementary Supervision • Internal control and risk management requirements • 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  28. III – The European Framework 4. Means of supplementary Supervision EU Financial conglomerates • 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. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  29. III – The European Framework 4. Means of supplementary Supervision Entities established outside the EU • notion of equivalent supervision, and • cooperation agreements 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  30. III – The European Framework 4. Means of supplementary Supervision Groups with a Third Country Parent • 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). …. 5th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005

  31. Contact details: ChairmanJosé María RoldánEmail: josemaria.roldan@c-ebs.orgTel. : +44 20 7382 1770 Vice ChairDanièle NouyEmail: daniele.nouy@banque-france.frTel.: +33 1 4292 7501 Secretary GeneralAndrea EnriaEmail: andrea.enria@c-ebs.orgTel. : +44 20 7382 1750

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