the supervision of mixed financial services groups in europe

OCCAS IONAL PAPER S ER I E SNO. 20 / AUGUST 2004

THE SUPERVISION OFMIXED FINANCIALSERVICES GROUPS IN EUROPE

by Frank Dierick

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OCCAS IONAL PAPER S ER I E SNO. 20 / AUGUST 2004

THE SUPERVISION OF

MIXED FINANCIAL SERVICES GROUPS

IN EUROPE

by Frank Dierick 1

This paper can be downloaded from the ECB’s website (http://www.ecb.int).

1 The author works in the Directorate Financial Stability and Supervision of the ECB. The author is grateful for comments receivedfrom Mauro Grande, Luc Roeges, Panagiotis Strouzas, PedroTeixeira and an anonymous referee. Research assistance provided by

Pedro Fernandes and Ingrid Ulst is gratefully acknowledged. All remaining errors and omissions are the author's. The views expressed in this paper are those of the author and do not necessarily reflect those of the ECB or the Eurosystem.

© European Central Bank, 2004

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As at 19 July 2004.

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Occa s i ona l Pape r No . 20Augus t 2004

CONTENT SEXECUTIVE SUMMARY 4

INTRODUCTION 5

1 THE DEVELOPMENT OF CROSS-SECTORALCAPITAL LINKAGES 6

1.1 Cross-sectoral mergers andacquisitions activity 6

1.2 Major European bancassurancegroups 9

2 DEFINITION OF FINANCIAL CONGLOMERATE 10

2.1 Generic definition 10

2.2 Definition under the FinancialConglomerates Directive 10

3 MAIN CHARACTERISTICS OF A CONGLOMERATE’SBUSINESS AREAS 12

4 MOTIVES FOR CONGLOMERATION ANDTHE RISKS INVOLVED 14

4.1 Motives for conglomeration 14

4.2 Risks involved 15

5 CORPORATE STRUCTURES FOR PROVIDINGFINANCIAL SERVICES IN A GROUP 17

5.1 Integrated model 17

5.2 Parent-subsidiary model 17

5.3 Holding company model 18

5.4 Horizontal group model 19

6 FRAMEWORK FOR THE SUPERVISION OFFINANCIAL SERVICES GROUPS 20

6.1 Types of supervision 20

6.2 The supervision of mixed financialservices groups 21

7 SPECIFIC REGULATORY AND SUPERVISORYISSUES 23

7.1 Capital adequacy 23

7.2 Intra-group transactions and largeexposures 24

7.3 Organisational requirements 25

7.4 The coordinator and cooperation/information exchange betweenauthorities 25

7.5 Parent undertakings outside the EU 26

8 REGULATORY AND SUPERVISORY STRUCTURESDEALING WITH FINANCIAL CONGLOMERATES 27

8.1 At the European level 27

8.2 At the national level 29

9 THE SUPERVISION OF FINANCIALCONGLOMERATES IN THE UNITED STATES 32

9.1 The Glass-Steagall Act and BankHolding Act 32

9.2 The Gramm-Leach-Bliley Act 32

10 OPEN ISSUES 37

11 CONCLUSION 41

REFERENCES AND FURTHER READING 42

ANNEXES

1 Glossary 48

2 Key directives 51

3 Top 5 banks and insurersin each of the EU countries andtheir bancassurance groups 52

4 Comparison of the supervision offinancial groups 56

4ECBOcca s i ona l Pape r No . 20Augus t 2004

EX E CU T I V E S UMMARYFinancial services are often offered throughgroup structures. To avoid regulated entitiescircumventing prudential rules using suchstructures and to address group specific risks,individual supervision has to be supplementedby group-wide supervision. For financialgroups active in the same business area, theEuropean regulatory framework for suchsupervision has already existed for some time.With the adoption of the FinancialConglomerates Directive in December 2002, asupplementary layer was created to also dealwith the supervision of mixed financial servicesgroups. Member States have to transpose theDirective into national law by August 2004.

Such groups, in particular those that combinebanking and insurance, have becomeincreasingly important in Europe over time.They often result from cross-sectoral mergersand acquisitions, which are typically domesticin nature. The majority of large banks andinsurance companies in the European Union(EU) are now part of a wider banking andinsurance (bancassurance) group. Although thegroups can assume quite complex structures, auseful typology for analysing them starts withfour basic models, each having its ownstrengths and weaknesses: the integrated model,the parent-subsidiary model, the holdingcompany model and the horizontal group model.

Several factors explain the growing importanceof structural cross-sectoral capital linkages,including the opportunity to realise efficienciesof scale and scope and diversification effects toreduce the volatility of cash flows (thusreducing the probability of financial distressand the need for external financing).Additionally, managers may want to realisetheir own objectives (e.g. increased status andremuneration), which do not necessarilycoincide with the shareholders’ best interests.Conglomeration also poses some clear risks:intra-group transactions create opportunitiesfor regulatory arbitrage, moral hazard and thespreading of difficulties across group entities.Complex group structures may reduce

transparency, and there are concerns aboutconflicts of interest and the abuse of economicpower.

The EU rules which address some of theseconcerns have to a large extent been inspired byearlier work of the Joint Forum, to which theinternational organisations of banking,insurance and securities supervisors contribute.They are generally intended to introduce asupplementary layer of supervision onregulated group entities. Capital adequacy, andin particular the need to address the multiple useof the same capital by different group entities, isa major issue. Other areas of attention are intra-group transactions, large exposures andorganisational requirements. The coordinatingsupervisor plays a crucial role in thissupplementary supervision.

The regulatory and supervisory structures, atboth the European and the national level, haveto cope with the growing cross-sectorallinkages, in particular through conglomerates.Information and cooperation arrangements havebeen set-up, such as joint committees,memoranda of understanding and mutual boardrepresentation. Some countries have gonefurther by adopting a single, integratedfinancial supervisor.

By way of comparison, the treatment offinancial conglomerates in the United States isdiscussed. Although the United States hastraditionally had a strict separation between thedifferent financial sectors, opportunities forconglomeration were enhanced through theadoption of the Gramm-Leach-Bliley Act.However, the US regulatory frameworkdemonstrates some key differences to theEuropean one in terms of, for example,organisational requirements, the role of creditinstitutions in the group, and the role of thelead-supervisor/coordinator. Finally, the paperconcludes by highlighting some open issuesrelated to supervision and financial stability.

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INTRODUCTIONI N T RODUCT I ONFinancial companies are increasingly movinginto each other’s traditional core business areasand one way of doing so is through financialservices groups. Some of these groups, called“financial conglomerates”,1 are active in severalbusiness areas such as banking and insurance.These groups pose certain risks which are notadequately addressed by the sectoralsupervisory framework. In order to tackle this,the Financial Conglomerates Directive2 wasadopted at the European Union (EU) level. Thispaper investigates in more detail the variousissues related to the emergence of suchconglomerates.

Section 1 reviews the data on the developmentof cross-sectoral capital linkages, in particularbetween the banking and insurance sectors.Such linkages are a necessary, but not sufficientcondition for the existence of a financialconglomerate. Section 2 therefore examines theconditions required for a financial conglomerateto exist under the Financial ConglomeratesDirective. A characteristic of such groups isthat they are active in several business areas.Section 3 thus identifies the key characteristicsof the main business areas, which sheds somelight on the motives for conglomeration and therisks involved, as discussed in more detail inSection 4. Conglomerates can adopt verycomplex corporate structures, which are often acombination of different basic models. Section5 reviews four such basic corporate models andidentifies the related key concerns. This isfollowed by a discussion of the supervision offinancial services groups. While Section 6presents a broad outline of such groupsupervision, Section 7 addresses some major,specific supervisory issues. Financialconglomerates have to be dealt with throughadequate supervisory structures, both at thenational and the international level, and thedifferent models adopted in practice arepresented in Section 8. Other jurisdictions arealso confronted with financial conglomeratesand Section 9 compares the situation in the EUwith that in the United States. Section 10reviews some open policy issues and Section 11contains the paper’s conclusions.

1 Annex 1 contains a glossary which explains the technical termsused in this paper.

2 Annex 2 provides an overview of all key directives referred to inthis paper together with their full references.


Because of demographic developments,deregulation, increasing competition andinnovation, financial companies areincreasingly moving into each other’s areas.Banks3 are now acting as insurance agents orbrokers by selling insurance policies throughtheir branch networks, insurance companies areselling insurance policies that have all thecharacteristics of investment products, andmany commercial banks have moved into thesecurities business. In Europe the combinationof banking and insurance has becomeincreasingly popular. Apart from banksdeveloping insurance activities(“bancassurance” or “bankinsurance” in thenarrow sense), insurance companies alsodevelop banking activities (“assurfinance”) orholdings combine both (“allfinanz”). Thesecross-sectoral strategies can take differentforms: distribution agreements, joint ventures,the establishment of own subsidiaries ormergers and acquisitions (M&A) involvingalready existing companies. This paperconcentrates in particular on bancassurancegroups as they are a common form of financialconglomerates in the EU.

1.1 CROSS-SECTORAL MERGERS ANDACQUISITIONS ACTIVITY

Total M&A activity in the banking andinsurance sectors4 involving EU undertakingsreached around €950 billion in the period 1990-2003 (see Table 1). Around 60% of this activityconcerned same-sector, same-country deals,pointing to the difficulties that continue to existin establishing financial groups that crossexisting geographical and sectoral boundaries.

3 In this paper the terms “bank” and “credit institution” are usedinterchangeably.

4 The M&A data discussed in this part were retrieved from SDCPlatinum (Thomson Financial). The banking sector is defined insuch a way that it covers credit institutions, commercial banks,bank holding companies, mortgage banks and mortgage brokers(SDC Platinum codes). The EU figures do not include the newMember States that joined on 1 May 2004.

1 THE D E V E LOPMENT O F C RO S S - S E C TORA LC A P I TA L L I N K AG E S

Given the fact that, in terms of total assets, thebanking industry in the EU is significantlylarger than the insurance sector, it is notsurprising that the value of banking dealsoutweighed those in the insurance sector by afactor of more than two. Cross-border dealswere almost evenly split-up between thoseinvolving EU parties on both sides and thoseinvolving a non-EU party on one side.

The value of cross-sectoral deals in the sameperiod stood at around €130 billion, withinsurers showing more activity than banks asacquirers. However, it should be noted that thisfinding is very much influenced by the takeoverof Dresdner Bank by Allianz, a deal whichalone totalled more than €22 billion. The valueof purely domestic deals is in relative termssomewhat higher for inter-sectoral transactionsthan for intra-sectoral ones, but the difference isperhaps is not as great as one would expectgiven the additional layer of complexity thatresults from combining companies fromdifferent financial sectors in different countries.This may at least partly be explained by the factthat no minimum threshold was applied to theM&A data in terms of the stake acquired in thecompanies. Hence, the data cover purelyfinancial shareholdings as well as long-termstrategic investments made with the intention ofdeveloping business synergies. Obviously, in

Target

Domestic Intra - EU Outside EU Total

Acquirer Bank Insurer Bank Insurer Bank Insurer Bank Insurer

Bank 446.3 40.7 75.1 4.3 60.0 5.1 581.4 50.1Insurer 52.3 115.3 20.2 36.9 3.9 73.3 76.5 225.6

Table 1 Value of M&As involving credit institutions and insurance undertakings in the EU(period 1990-2003)(€ billions)

Source: Thomson Financial. Transactions also include asset deals. No minimum threshold in terms of acquired share was used.

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1 THE DEVELOPMENTOF CROSS-SECTORALCAPITAL LINKAGES

the first type of deal integration problems aremuch less of a concern.

Chart 1 compares the situation in the EU withthat in the United States. In each case adistinction is made between domestic and cross-border deals, and for the EU this is furtherbroken down into deals taking place entirelywithin the EU and those where the bidder ortarget is outside the EU. A similar analysis isnot performed for Japan, where legalimpediments continue to prohibit financialconglomeration.5 Total cross-sectoral M&Aactivity in the United States in the period 1990-2003 was almost three quarters of the activity inthe EU. Similar patterns as for the EU can beobserved (i.e. the dominance of domestic dealsand the active role of insurance companies asacquirers), but the patterns are much morepronounced in the case of the United States.Again, due care should be taken in drawinggeneral conclusions from the figures since inthe case of the United States the results arestrongly influenced by the Travelers Group/Citicorp mega deal worth USD 73 billion.

As is clear from Chart 2 and Table 2, most ofthe cross-sectoral M&A activity in the EU wasconcentrated in the late nineties and 2000/2001.

Three quarters of the total deal value was in factrealised in the period 1998-2001, with 2000 and2001 as clear peak years. This particular timepattern, which roughly coincides with a periodof strongly booming financial markets, raisesthe question whether the “bancassurance” and“assurfinance” business models will be long-lasting or whether they are merely the result ofparticularly favourable but temporary marketconditions. The fact that more recently somebanks have had to inject capital into their ailinglife insurance subsidiaries or that insurers havehad to support their bank subsidiaries incountries such as Germany, Switzerland and theUnited Kingdom, may indeed cast some doubton the success of certain strategies. One mayalso want to keep in mind the fact that forindustrial and commercial conglomerates atrend towards “deconglomeration” wasobserved in the eighties and nineties, resultingin an increased focus on core businesses.

Another distinct pattern that emerges fromthe data is the importance of mega deals (seeTable 3). About half of all domestic cross-sectoral M&A activity in the EU was accountedfor by just three transactions, with the Allianz/

Chart 1 Value of M&As involving creditinstitutions and insurance undertakings in theEU and in the United States (period 1990-2003)(€ billions)

Source: Thomson Financial. Transactions also include assetdeals. No minimum threshold in terms of acquired share wasused.

Acquirer = Bank, Target = InsurerAcquirer = Insurer, Target = Bank

0

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60

70

80

0

10

20

30

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60

70

80

DomesticEU

Intra-EU

OutsideEU

DomesticUS

Non-domestic US

Chart 2 Value of M&As involving creditinstitutions and insurance undertakings inthe EU (period 1990-2003)(€ billions)

Source: Thomson Financial and Datastream. Transactions alsoinclude asset deals. No minimum threshold in terms of acquiredshare was used. Indices: 1990 = 100.

5 Van Cauter (2003).

Outside EU (left-hand scale)Intra-EU (left-hand scale)Domestic (left-hand scale)Insurer share price index (right-hand scale)Bank share price index (right-hand scale)

35

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400

350

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01990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003


Acquirer = Credit institution Acquirer = Insurance undertakingTarget = Insurance undertaking Target = Credit institution

Domestic Intra-EU Outside EU Domestic Intra-EU Outside EU

1990 0.0 - - 1.4 1.5 0.21991 0.4 0.4 - 5.6 0.0 0.01992 1.6 0.0 - 0.5 0.3 -1993 0.6 - 0.0 0.5 0.1 0.01994 0.4 0.2 0.1 1.0 - 0.01995 1.2 - - 0.1 0.8 0.11996 3.1 - - 0.1 - 0.21997 2.8 - 0.1 1.1 6.4 0.01998 0.1 0.6 0.3 12.9 2.6 1.31999 6.1 0.0 0.7 1.8 6.2 0.52000 16.0 3.1 3.4 3.7 1.9 1.12001 5.7 - 0.0 22.7 0.1 0.32002 0.9 - 0.6 0.2 0.3 0.22003 1.6 - - 0.7 - -1990-2003 40 .7 4 .3 5 .1 52 .3 20 .2 3 .9

Table 2 Value of M&As involving credit institutions and insurance undertakings in the EU(period 1990-2003)(€ billions)

Source: Thomson Financial. Transactions also include asset deals. No minimum threshold in terms of acquired share was used.- = not available or no transactions; 0.0 = value lower than €0.04 billions.

Acquirer Target Year Deal value

1 Allianz (I) DE Dresdner Bank (B) DE 2001 22.32 Lloyds TSB Group (B) UK Scottish Widows Fund & Life (I) UK 2000 12.03 Fortis (I) BE Générale de Banque (B) BE 1998 10.54 Nationale Nederlanden (I) NL NMB Posbank Groep (B) NL 1991 5.65 ING Groep (I) NL BBL (B) BE 1997 4.16 Abbey National (B) UK Scottish Provident Institution (I) UK 2001 2.97 Dexia Belgium (B) BE Financial Security Assurance (I) US 2000 2.78 Irish Permanent (B) IE Irish Life (I) IE 1999 2.79 ING Groep (I) NL BHF Bank (B) DE 1999 2.310 Lloyds TSB Group (B) UK Lloyds Abbey Life (I) UK 1996 2.111 Wuestenrot Beteiligung (B) DE Wuerttembergische Versicherung (I) DE 1999 2.112 Skandinaviska Enskilda Banken (B) SE Trygg-Hansa (I) SE 1997 2.013 Fortis NL (I) NL Banque Générale du Luxembourg (B) LU 2000 1.814 Banco Santander Central Hispano (B) ES Cia de Seguros Mundial (I) PT 2000 1.715 Halifax Group (B) UK Equitable Life Assurance Society (I) UK 2001 1.716 Vakuutusosakeyhtio Sampo (I) FI Leonia Bank (B) FI 2000 1.717 Fortis International (I) NL ASLK-CGER (B) BE 1999 1.518 Royal Bank of Scotland Group (B) UK Churchill Insurance Co Ltd (I) UK 2003 1.519 Caixa Geral de Depositos (B) PT Cia de Seguros Mundial (I) PT 2000 1.420 Fortis (I) BE MeesPierson (B) NL 1997 1.321 ING Groep (I) NL BHF Bank (B) DE 1998 1.322 ING Groep (I) NL Crédit Commercial de France (B) FR 1999 1.223 Unidanmark (B) DK Tryg-Baltica Forsikring (I) DK 1999 1.224 Assicurazioni Generali (I) IT Banca della Svizzera Italiana (B) CH 1998 1.1

Table 3 Most important M&A bank-insurance deals involving EU institutions (period 1990-2003)

(€ billions)

Source: Thomson Financial. Only deals with a value of at least €1 billion are shown. No minimum threshold in terms of acquired share.B = bank; I = insurance undertaking.

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1 THE DEVELOPMENTOF CROSS-SECTORALCAPITAL LINKAGES

1 Deutsche Bank DE 917.72 Allianz DE 911.93 BNP Paribas FR 825.34 HSBC Holdings UK 778.65 ING Group NL 705.16 ABN Amro Holding NL 597.47 The Royal Bank of Scotland Group UK 590.08 Barclays UK 573.59 Crédit Agricole FR 563.310 Société Générale FR 512.511 Fortis BE 475.412 AXA FR 474.013 Santander Central Hispano ES 355.914 Dexia BE 351.315 Banca Intesa IT 313.216 Lloyds TSB Group UK 312.917 Banco Bilbao Vizcaya Argentaria ES 305.518 Abbey National UK 303.319 Aviva UK 300.920 Groupe Caisse d’Epargne FR 285.921 Aegon NL 264.122 Almanij BE 259.323 Prudential UK 255.824 Nordea SE 241.525 Generali Assicurazioni IT 222.926 Credit Mutuel - CIC FR 218.8

Table 4 Major bancassurance groups in the EU

(As of end 2001, total consolidated assets in € billions)

Source: Based on information from Bankscope and Isis. Assets are on a consolidated basis if available

27 Danske Bank DK 209.028 UniCredito Italiano IT 208.229 Munich Re Group DE 190.130 San Paolo IMI IT 169.331 Standard Life Assurance Company UK 130.432 Svenska Handelsbanken SE 124.833 Skandinaviska Enskilda Banken SE 118.634 Gruppo Monte dei Paschi di Siena IT 116.835 Foereningssparbanken - Swedbank SE 99.236 Caja de Ahorros y Pens. de Barcelona ES 87.537 Allied Irish Banks IE 86.338 Caixa Geral de Depositos PT 66.539 Skandia Insurance Company SE 64.140 Groupama FR 60.141 Eureko NL 53.242 Wuestenrot & Wuertembergische DE 53.143 National Bank of Greece GR 52.644 BAWAG PSK Group AT 47.945 Raiffeisen Zentralbank Oesterreich AT 44.646 SNS Reaal Groep NL 43.847 Espirito Santo Financial Group LU 42.748 Alpha Bank GR 30.749 Okobank Group FI 30.050 Sampo FI 29.451 Banco BPI PT 24.852 Commercial Bank of Greece GR 18.1

Dresdner Bank deal representing a particularlylarge share. Some groups, such as ING, Fortisand Lloyds TSB emerge as particularly activeacquirers as they have been involved in severalmajor deals.

1.2 MAJOR EUROPEAN BANCASSURANCEGROUPS

Annex 3 provides an overview of the top fivebanks in each of the 15 “old” EU Member Statestogether with the name of the bancassurancegroup of which they are part. If the group has aninsurance undertaking in the same country, thisundertaking is also mentioned. There is asimilar overview of the top five insuranceundertakings. On the basis of this detailedinformation, the major European bancassurancegroups indicated in Table 4 can be identified.

This list is not comprehensive as groups whichdo not include a top-five bank or insuranceundertaking are not included. No minimumthreshold for each business area was applied sothe relative weight of the banking or theinsurance part may vary widely. For example,Axa and Münich Re are groups with a stronginsurance focus, but Barclays and DeutscheBank are predominantly banking groups. Not allthe groups may therefore qualify as a financialconglomerate under the FinancialConglomerates Directive, which imposes aminimum threshold for the cross-sectoralactivities. In addition, the table does not providedetails regarding the banking or insuranceactivities outside the EU.


2.1 GENERIC DEFINITION

In the most general sense, a financialconglomerate is a group of entities whoseprimary business is financial and whoseregulated entities engage to a significant extentin at least two of the activities of banking,insurance and securities.6 According to thisdefinition, bancassurance groups would qualifyas financial conglomerate, but so would groupscombining insurance and securities or bankingand securities.

The definition used in the different countriesfor their supervision of financial conglomeratesis sometimes more restrictive than theaforementioned general definition. Forexample, the regulations on financial holdingcompanies in the United States require thepresence of a bank, which is not a prerequisiteunder the Financial Conglomerates Directive.Also, bank-investment firm groups do not fallunder the Directive since they are treated as“homogeneous” groups while in the UnitedStates, the financial holding regulations apply.

2.2 DEFINITION UNDER THE FINANCIALCONGLOMERATES DIRECTIVE

Although the Directive does not refer to theconcept of systemic groups, it is this type ofgroup that the EU legislator had in mind whenestablishing the supervisory framework.7 Thefollowing formal requirements have to be metfor a group to qualify as a financialconglomerate under the Directive:

(i) the presence in the group of at least oneregulated entity in the EU;

(ii) if the group is headed by a regulated entity,it must be the parent of, hold aparticipation in or be linked through ahorizontal group with an entity in thefinancial sector;

(iii) if the group is not headed by a regulatedentity, its activities should occur mainly inthe financial sector;

2 D E F I N I T I ON O F F I N ANC I A L C ONG LOMERAT E

(iv) the group should have at least oneinsurance or reinsurance undertaking andat least one entity from a different financialsector; and

(v) the group must have significant cross-sectoral activities.

A “group” is a set of undertakings, consistingforemost of a parent undertaking and itssubsidiaries as defined under the ConsolidatedAccounts Directive. However, according to theprudential objective of the FinancialConglomerates Directive, the group concept isat the same time wider than the one used forpure accounting consolidation. First, thesupervisory authorities can include in the groupentities between which in their opinion adominant influence exists, even if they do notformally meet the accountancy definition ofparent-subsidiary. Second, the group alsoincludes the participating interests8 held by theparent and subsidiaries. And third, horizontalgroups are equally covered.9 Because of thewider definition, a group that qualifies as afinancial conglomerate does not necessarilycoincide with a group that is required to publishconsolidated accounts under the ConsolidatedAccounts Directive. In addition, the entities thathave been used to check whether the groupmeets the definition of a financial conglomerate,are not necessarily the same that will be subjectto the supplementary supervision provided forin the Financial Conglomerates Directive.

The group should include at least one regulatedentity in an EU Member State . A “regulatedentity” is a credit institution, insuranceundertaking or investment firm as defined under

6 Joint Forum (1999).7 Van Cauter (2003).8 The participating interest of a company in another undertaking is

the right in capital, which, by creating a durable link with thisundertaking, is intended to contribute to the company’s activities.Additionally, the direct or indirect ownership of 20% of thevoting rights or capital in an undertaking also qualifies as aparticipating interest. When the company exercises a significantinfluence in the undertaking (which is presumed to be the casewhen the company has at least 20% of the voting rights), theundertaking is considered to be an “associated undertaking”under the Consolidated Accounts Directive.

9 See Section 5.4 for more details on horizontal groups.

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2 DEFINITION OFFINANCIAL

CONGLOMERATEthe respective EU directives for those sectors.The reason for this requirement is that the aimof the Financial Conglomerates Directive is tocreate a supplementary supervision of EU-regulated entities. If there are no such entities,there is no need for an additional layer ofsupervision. It is not required that the regulatedentity is a credit institution.

If the group is not headed by a regulated entity,which is the case when it is headed by a non-regulated entity or does not have a parentcompany (a “horizontal group”), the group’sactivities should mainly occur in the financialsector. When a non-regulated entity heads afinancial conglomerate, its parent is called amixed financial holding company. Aquantitative threshold, based in principle onbalance sheet data,10 is used to define what“mainly occur in the financial sector” means.The ratio of the balance sheet total of thefinancial sector entities in the group to thebalance sheet total of the whole group has to begreater than 40%.

The financial sector entities envisaged are:

(i) credit institutions, financial institutionsand ancillary banking undertakings(= banking sector);

(ii) insurance undertakings, reinsuranceundertakings and insurance holdingcompanies (= insurance sector);

(iii) investment firms and financial institutions(= investment services sector);

(iv) mixed financial holding companies; and(v) asset management companies.11

These various types of entity are defined underthe respective sectoral Directives. Some of themare regulated entities according to theseDirectives, while others, such as financialinstitutions, reinsurance undertakings and thevarious holding companies, are not.

The group should have at least one entity in theinsurance sector and at least one entity inanother financial sector, i.e. the banking or theinvestment services sector. It is not required

that there is a regulated entity in each financialsector covered by the group. For example, agroup consisting of a regulated investment firmand an unregulated reinsurance undertakingcould, in principle, qualify as a financialconglomerate.

The last condition is that the group should havesignificant cross-sectoral activities. For thisassessment, two sectors are considered: (i) theinsurance sector and (ii) the banking/investmentservices sector taken together, and both have tobe significant. Again, quantitative criteria areused to define what “significant” means. Thereis a relative criterion and an absolute criterion.The relative criterion refers to the importance ofthe sector in the group’s total assets andsolvency requirements, which has to be onaverage more than 10%.12 The absolute criterionis that when the smallest sector, measuredaccording to the above-mentioned relativecriterion, has a balance sheet total of more than€6 billion, the cross-sectoral activities are alsopresumed to be significant. But if the groupdoes not meet at the same time the minimumthreshold of the relative criterion, the competentauthorities may decide not to treat the group as afinancial conglomerate.13

10 In exceptional cases, and by common agreement, the relevantcompetent authorities may replace or complement the criterionbased on the balance sheet total by the income structure and/oroff-balance sheet activities.

11 The specific case of asset management companies is discussed inmore detail in Section 6.2.

12 Also here, the criterion based on the balance sheet total may bereplaced by the income structure and/or off-balance sheetactivities.

13 The Financial Conglomerates Directive gives two exampleswhere this can be the case: (i) the smallest sector is 5% or lowerof the group’s balance sheet total and/or solvency requirements,and (ii) the market share for each sector in any Member State is5% or lower.


Financial conglomerates combine banking,insurance and securities business in the samegroup. These three business areas differ interms of risk characteristics and the way theyare supervised (see Table 5), which complicatesmatters in getting an overall view of theconglomerate.

The main business of banks consists ofcollecting customer deposits in order to grantloans and invest in securities. Typically, banksinteract with customers through a branchnetwork. Their primary risks are credit risk andfunding liquidity risk. The balance sheet ofsecurities firms reflects their securitiesportfolios and financing arrangements. Theasset side is dominated by the financialinstruments portfolio and receivables fromborrowed securities and repos; on the liabilitiesside, there are mainly the customer receivablesand obligations related to the firm’s own shortpositions. Securities firms are especiallyexposed to market risk and liquidity risk.Insurance companies underwrite risks for apremium. To cover potential claims, technical

3 MA I N CH AR A C T E R I S T I C S O F ACONG LOMERAT E ’ S B U S I N E S S A R E A S 14

provisions are made and an investment portfoliois held to meet the liabilities. Insurers typicallyinteract with customers through tied agents andindependent brokers. Their main risks areunderwriting risk (the risk that the technicalprovisions or premiums are too low) andinvestment risk (the risk that the investmentportfolio does not generate a sufficiently highreturn).

The different core businesses correspond todifferent time horizons. Securities firms havethe shortest horizon, reflected in the “mark tomarket” valuation of their balance sheet, whileinsurance companies often have the longesthorizon. Premiums are received in the present,but claims may occur far into the future. Oneshould, however, distinguish between life andnon-life insurance. In the latter case, the timehorizon is usually shorter as most of the claimsare settled within a few years of the policy’sinception, although “long-tailed” risks may

Criterion Bank Insurance Securities

Main assets Customer loans, interbank Investment portfolio Receivables secured byassets, securities securities, financial instruments

Main liabilities Customer deposits, interbank Technical provisions Payables to customersliabilities

Typical distribution channel Branch Agent, broker Financial intermediary

Time horizon Intermediate Long (life), long or short Short(non-life)

Main risks Credit risk, funding Underwriting risk, Market risk, liquidity riskliquidity risk investment risk

Main risk transfer Securitization, credit Reinsurance OTC derivativesmechanisms derivatives, OTC derivatives

Use of capital vs. provisions Capital as well as provisions More provisions More capital(especially life)

Primary supervisory Systemic risk, protection Protection policyholders Investor protection, systemicconcerns depositors risk, fair / transparent /

efficient markets

Main supervisory tools Capital requirements, Capital requirements, Capital requirements, assetrestrictions on permitted adequacy technical provisions, segregation, record keeping,activities, sound policies investment rules, rules on operational controlsand procedures reinsurance

Table 5 Comparision of bank, insurance and securit ies business

Source: Based on information in Joint Forum (2001b).

14 This section draws in particular on Joint Forum (2001b).

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3 MAINCHARACTERISTICS

OF A CONGLOMERATE’S BUSINESS AREAS

occur. The time horizon for banks is somewherebetween the other two.

The different risks and time horizons arereflected in the institutions’ risk managementpractices. The most sophisticated risk practicesfor a certain risk category are found ininstitutions that are most exposed to that risk.For example, internal ratings and credit riskportfolio models are especially found in banksand “value at risk” (VAR) models in securitiesfirms. The risk transfer techniques also differ:banks and securities firms are large users of“over the counter” (OTC) derivatives, while thestandard risk transfer technique used byinsurance companies is reinsurance. Recently,the use of credit derivatives by banks to transfercredit risk to institutional investors, inparticular insurance companies, has attractedthe attention of authorities.

An important area of risk management is therole of capital and provisions. Both aim toabsorb potential losses, but the degree to whichthey are relied on varies from sector to sector.Securities firms rely the most on capital and theleast on provisions, while for life insurancecompanies the picture is reversed. The highimportance of (technical) provisions forinsurers follows from their core business, sincethey are created to cover future claims. In thecase of securities firms, the regular “mark tomarket” valuation immediately reflects thelikelihood of profits or losses in the firm’saccounts, so there is less need to maintain lossprovisions. Banks do not mark-to-market theirloan portfolio, so loan loss reserves are kept asa buffer against expected credit losses.Minimum capital requirements are an importantinstrument in the supervisory tool kit. InEurope, banks and investment firms (securitiesfirms) are subject to the same regime,15 unlikein the United States.

The primary supervisory concerns varysomewhat for the three sectors. Systemic riskhas traditionally been very high on the bankingsupervisors’ priority list. The reasons are thatbanks are especially vulnerable to crises of

confidence, the central role they play in theeconomy, and their high degree ofinterconnection through the interbank marketand payment systems. By contrast, consumer orinvestor protection are of greater concern toinsurance and securities supervisors, althoughit is recognised that the failure of a largesecurities or insurance firm might also haveimportant spill-over effects.

The various risks and concerns are reflected inthe tools used by supervisors. Investment andreinsurance rules are typically used byinsurance supervisors, while correct recordkeeping and the segregation of customer assetsfrom the firm’s own assets are emphasised forsecurities firms. Bank supervisors typicallyexpect banks to adopt sound policies andprocedures16 and restrict the activities they canengage in. All three categories of business aresubject to minimum capital requirements, whichunderscores the importance of capital as theultimate means to cover losses.

15 See the Capital Adequacy Directive.16 A leading role in defining such sound practices is played by the

Basel Committee on Banking Supervision.


In a world with perfect capital markets andperfect competition and no information oragency problems, there would be no need forfinancial conglomerates since they would notcreate any added value. However, such a worldis a theoretical abstraction and financialconglomerates do exist because of cost andrevenue synergies, diversification benefits andagency problems. Their existence also createscertain risks, most of which are not unique toconglomerates, but come more to the fore insuch organisations because of their sheer sizeand complexity.

4.1 MOTIVES FOR CONGLOMERATION

Cost and revenue synergies.17 Cost synergiescan be due to efficiencies of scale or scope. Acompany may be able to reduce its average costby providing the same product on a larger scaleor by providing multiple products. Somedelivery methods exhibit important economiesof scale, which may have increased over timedue to technological advancements. The samemay also be true for tools of financialengineering and risk management. Distributionchannels and customer databases, on the otherhand, are examples of areas where efficienciesof scope can be realised. If the organisation orgroup becomes too large, inefficiencies mayarise because of coordination problems.

Efficiencies of scale or scope may also work onthe revenue side. For example, multinationalcompanies may only want to do business withfinancial companies of a minimum size. Scopeefficiencies arise because of cross-sellingopportunities resulting from consumptioncomplementarity, the sharing of the reputationassociated with a certain brand name, thepossibility of developing a close customerrelationship, and the preference of a customer toreveal private information to a single group.Revenue synergies are often mentioned as themain reason for the existence of bancassurancegroups. Again, there is the risk that at a certainpoint the efficiencies turn into inefficiencies,for example when one moves away from the

4 MOT I V E S F O R CONG LOMERAT I ON AND TH ER I S K S I N VO LV ED

core business or when conflicts of interestarise.

Diversification. By diversifying, a companycan reduce the volatility of its cash flows. Thismay in turn reduce the probability of financialdistress, thus avoiding certain costs. In thescenario of a bankruptcy, there are direct (legaland administrative) as well as indirect costs(difficulty of running a company that is goingthrough such a process). But even when thecompany is not entering bankruptcy,management may suffer because of increasedconflicts of interest between bondholders andshareholders. Finally, diversification may alsoreduce the company’s need for external finance.It has been argued that companies preferinternal finance because they want to avoidmarket discipline and the costs associated withissuing securities, or giving adverse signals tothe market.

Diversification allows companies to tap newsources of revenue, which can complement astagnating or shrinking core business. Forexample, by engaging in fee-business such asinsurance broking, investment banking or fundmanagement, banks may offset the prevailingdisintermediation trend. Banks that have astrong market position may choose to expand inother, related markets in order to avoidintervention by competition authorities.

Agency reasons. By engaging in mergers andacquisitions, managers may want to achievepersonal goals which do not necessarilycoincide with the objective of maximisingshareholder value. One such goal could be“empire building”, if a manager’s status andcompensation are linked to the size of hiscompany. Another goal could be to protectcompany-specific human capital by reducing theinsolvency risk through diversification.Conglomeration also allows managers tocomplement their skills, thus making them morevaluable to the organisation. Finally,

17 For a more extensive discussion, see Berger et al. (2000).

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4 MOTIVES FORCONGLOMERATION

AND THE RISKSINVOLVED

management may want to shelter itself frommarket discipline and corporate controlmechanisms, which can be achieved throughmore stable cash-flows (i.e. diversification) andless external finance.

4.2 RISKS INVOLVED

Regulatory arbitrage. Since conglomerates aremanaged on a group-wide basis, transactionsmay be booked in certain entities or deals maybe generated to exploit regulatory differences.Intra-group transactions can be set up toformally meet regulatory requirements, but atthe same time circumvent the aims of thoserequirements. Examples which have attracted alot of supervisory attention include “double ormultiple gearing” and “excessive leveraging”.Double gearing refers to the use of the samecapital by two (or more) regulated entities in thegroup. Excessive leveraging can occur whendebt is issued by a parent company and theproceeds are down-streamed in the form ofequity to regulated entities of the group.

Contagion. Difficulties in one group entity mayspill over to other ones. Such a situation canresult directly from economic links betweenentities, such as capital holdings, loans,guarantees and cross-default provisions.Indirect contagion, on the other hand, resultsfrom the behaviour of third parties (e.g.customers, investors) to a group entity inresponse to problems of an affiliated entity. Itcan result from mere association (e.g. use ofcommon branding and marketing).18 Contagionis of particular concern when it affectsregulated entities because of problemsoccurring in non-regulated entities. One may tryto limit the contagion risk through the design of“firewalls”19 but there is the possibility thesemay become ineffective, especially in times ofstress. For example, market pressure may lead aparent company to support its ailing subsidiaryalthough it may have no legal requirement to doso.

Moral hazard.20 Moral hazard can work inseveral ways. First, a non-regulated entity maytry to gain access to a bank’s safety net (such asdeposit insurance and lender of last resortfacilities) by being associated with it in aconglomerate. Second, the conglomerate maybecome so large that it is perceived to be “toobig to fail” by market participants. Theexpectation that the conglomerate will be bailedout by public authorities may stimulate riskybehaviour. Third, moral hazard can also workwithin the group as group entities may expecthelp from other group entities in the event offinancial distress and so behave in a more riskyway.

Lack of transparency. Because of the group’ssize and complexity it may be difficult formarkets and supervisors to obtain an accuratepicture of its structure and risk profile. Thelegal and managerial structures of a group mayvary (e.g. reporting according to business lines/geographical areas, matrix structure). Due tothe interaction between different group entities,the risk of the conglomerate is most likely to bedifferent to the sum of the risks in the variousentities on a stand-alone basis. Intra-grouptransactions can be used or abused to transferassets from one entity to another and as avehicle for cross-subsidisation. Anotherconcern is that important risk positions may bebuilt up which remain unnoticed because theyare dispersed over many group entities. Thegroup’s complexity may also make a work-outor winding-down of an ailing conglomeratevery difficult.

18 Freshfields Bruckhaus Deringer (2003).19 “Firewalls” refers to restrictions placed between a bank and its

affiliates to protect against liabilities/losses. More specifically, italso refers to statutory and regulatory limitations on financialtransactions between banks and their affiliates. Such limitationsare meant to prevent the spread of financial difficulties within abanking group. The restrictions should in particular prevent thegroup from shifting losses from its non-bank entities to its insuredbank entities and potentially to the deposit insurance fund. SeeWalter (1996).

20 Moral hazard is the risk that the risk-taking behaviour of partieswill increase because of the existence of certain arrangementsor contracts.


Conflicts of interest. A conglomerate takes up amultiple of different roles in its customer-dealing which may potentially conflict. Thesharing of customer information between groupentities may violate privacy laws. However,conflicts of interest also exist in the sameorganisation so the key issue is whether thereare any incentives and opportunities in theorganisation to exploit such conflicts ofinterest. Professional investors may understandsuch situations and take them into account intheir decisions. Competition and fear ofreputation loss may also act as a restraint. Otherpossible measures to limit the risk aredisclosure, voluntary codes of conduct andinternal structures/procedures designed toensure that the different business areas aremanaged sufficiently independently.

Abuse of economic power. Financialconglomerates can lead to greater marketconcentration, less competition and, ultimately,a less efficient financial system. They candrawn on revenue from many operations and aretherefore in a better position to fightcompetitors. The lack of competition can in turnhave a negative effect on innovation. Thetraditional separation between commercialbanking and investment banking in the UnitedStates has been defended on the basis of theargument that this model would stimulatecompetition and innovation within businesslines. The concentration of economic power as aresult of dominating different financial sectorsmay ultimately lead to groups that are “too bigto discipline” or “too large to fail”.

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5 CORPORATESTRUCTURES FOR

PROVIDING FINANCIALSERVICES

IN A GROUP

Financial groups can provide financial servicesthrough various corporate structures and theirchoice will depend on practical as well asregulatory elements. It may, for example, not belegally possible to offer a range of financialservices and products from a single balancesheet. Four basic models of corporate structurecan be distinguished, each having certainbenefits and risks: the integrated model, theparent-subsidiary model, the holding companymodel and the horizontal group model. Thehorizontal group is generally not discussed inthe literature, but is mentioned here because theFinancial Conglomerates Directive explicitlyprovides for it.

Although the four basic models are a convenienttypology, reality is often much more complexand mixtures of the basic models in one and thesame group frequently occur. For example, itseems to be rather common that, at least from alegal point of view, both a product and ageographical area dimension are present ingroup structures. Banking and insuranceentities may not be neatly grouped into twoclearly distinguishable parts of the group: inone country a parent bank may hold bothinsurance and banking subsidiaries, while inanother country it is an insurance parent thatowns the banking and insurance subsidiaries.

5.1 INTEGRATED MODEL

In the integrated model, the financial servicesare offered by one and the same entity. In thearea of banking, this corresponds to theuniversal bank model where commercial andinvestment banking are combined in the samelegal entity. This is the standard Europeanmodel allowed under the Consolidated BankingDirective,21 and it allows for a maximumrealisation of the synergies and diversificationbenefits between activities. The degree to whichuse is made of this possibility can vary fromcountry to country because the ConsolidatedBanking Directive only provides for a minimumlevel of harmonisation. Differences also occurbetween institutions as institutions may prefer,

5 CORPORAT E S T RU C TUR E S F O R P ROV I D I NGF I N ANC I A L S E RV I C E S I N A G ROUP

for a variety of reasons, to concentrate theirsecurities business in a separate specialisedsubsidiary even if they are not legally requiredto do so.

The United States, by contrast, has under theGlass-Steagall Act traditionally had a verystrict separation between commercial bankingand investment banking and, although thisseparation has gradually been eroded over time,commercial banks are still prohibited fromdirectly engaging in securities business. Avariety of reasons have been put forward tojustify this: to facilitate supervision, to avoid asituation where the safety net is extendedbeyond traditional banking activities leading tocompetitive distortions, to eliminate potentialconflicts of interest and to insulate the bankingbusiness from the risks associated with otheractivities.22

5.2 PARENT-SUBSIDIARY MODEL

Insurance undertakings are subject to thespecialisation principle in order to protect theinterests of insured parties from the risksassociated with other business activities.Combining insurance with banking, securitiesor any other commercial business in the samelegal entity is therefore prohibited by law,23 soalternative corporate models have to be used.

One such model is the parent-subsidiary model,which can come in different forms. Apart fromthe bank (parent)-securities firm (subsidiary)example mentioned earlier, other commonstructures are bank (parent)-insuranceundertaking (subsidiary) and insuranceundertaking (parent)-bank (subsidiary). The

21 The Consolidated Banking Directive, however, sets a number of(generous) limits on qualifying holdings outside the financialsector. Members States also have the option to exempt holdings ininsurance and reinsurance undertakings from these quantitativelimits.

22 Santos (1998).23 For the EU see Article 6(1)(b) of the Life Assurance Directive

and Article 81(b) of the Non-Life Insurance Directive.Furthermore, life assurance and non-life insurance business canin principle not be performed by the same undertaking (seeArticle 18(1) of the Life Assurance Directive).


legal separation between parent and subsidiaryalso introduces operational separateness, so thesynergies and diversification benefits of theintegrated model cannot be fully realised. Inaddition, it requires the parent and thesubsidiary to be separately capitalised andpotentially introduces agency problems becauseof multiple management teams and differentownership structures. The advantage of suchseparation is that, at least from a legal point ofview, the parent does not have to cover theliabilities of its subsidiary.

This last statement has to be qualified in severalways. First, the market may not perceive theparent and the subsidiary to be independent inspite of the fact that they are legally andoperationally separate. This perception may beencouraged by practices such as the use ofconsolidated financial statements, integratedrisk management systems and a single brandname. Second, in practice the parent may not beable to walk away from the subsidiary’sliabilities because of the potential negativeeffects on, for example, the parent’s reputationand on future market-funding opportunities.Third, the principle of separation is not absoluteand might be modified by other legal principles.Parent companies have been declared liable fortheir subsidiaries’ debts on the basis ofrepresentation, deficient capitalisation, de factodirectorship, tortuous or negligent acts etc.

5.3 HOLDING COMPANY MODEL

Under the holding company model, a top companywithout its own operational activities controlsspecialised subsidiaries. Common groupfunctions can be centralised at the holdingcompany level, such as risk management, capitalraising and allocation, IT and group auditing.24 Inthis way, the management structure may alsobetter take into account the know-how of allbusiness areas. It may also be easier in such astructure to isolate the different business streamsof the group and evaluate each company on astand-alone basis, not influenced by the activitiesof other group entities. On the other hand, bycentralising functions, group entities may berendered incapable of operating independently,which could complicate their later divestiture.

The main difference to the previous structure isthat the various specialised firms do not have adirect capital relationship, but only an indirectrelationship through the common holdingcompany. In a parent-subsidiary structure withthe bank as the parent, the profits of thesubsidiary accrue directly to the bank.Moreover, its investment in the subsidiary is anasset accessible to the bank’s creditors. In aholding company structure, by contrast, thebank does not have direct access to the profitsor assets of the holding company’s othersubsidiaries, or vice versa.25 However, aspointed out earlier, this formal separation mayin practice not always be so absolute.

In a variant of the holding company model, thetop company can head two other holdingcompanies, one controlling the bankingsubsidiaries and one controlling the insurancesubsidiaries. Such a two-legged approach hasthe advantage that both the banking and theinsurance business are presented as equalpartners, while the overall strategy is defined atthe level of the ultimate holding company.

Chart 3 The parent-subsidiary model of thefinancial group

Parent

Subsidiary

24 Oliver, Wyman & Company (2001).25 Santos (1998).

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5 CORPORATESTRUCTURES FOR

PROVIDING FINANCIALSERVICES

IN A GROUP

Chart 4 The holding company model of thefinancial group

Subsidiary 1 Subsidiary 2

Holdingcompany

Chart 5 The horizontal f inancial group

Entity 1 Entity 2 Entity 3

Unified managementShared representatives

5.4 HORIZONTAL GROUP MODEL

Finally, the Financial Conglomerates Directiveprovides explicitly for the case of horizontalgroups. In a horizontal group, the entities arenot linked to each other through direct orindirect capital links. Nevertheless, they can beconsidered to belong to the same group becausepursuant to a contract or provisions in thememorandum/articles of association they aremanaged on a unified basis, or because themembers of their corporate bodies are largelythe same persons. Of course, these specificfeatures make horizontal groups particularlydifficult to identify.


6.1 TYPES OF SUPERVISION

In the supervision of regulated entities threelayers can be distinguished. At the first layer, theregulated entities are supervised on a stand-aloneor solo basis.26 For regulated entities in a groupthis is not sufficient since they are exposed tospecific risks and may try to develop activitiesthrough group entities which they are barred fromdeveloping directly. The second and third layersof supervision therefore take a group-wideperspective. Groups that are predominantly activein the same financial services area, also called“homogenous financial groups”, are dealt with atthe second layer. Such supervision is the longestestablished and most developed for bankinggroups, while for insurance undertakings it ismore recent and less comprehensive. Finally, thethird layer corresponds to the supervision offinancial conglomerates. These are mixedfinancial groups, or groups that are

6 F R AMEWORK F OR TH E S U P E RV I S I ON O FF I N ANC I A L S E RV I C E S G ROUP S

predominantly active in financial services but indifferent areas.

In addition, there are also mixed-activitygroups, combining commercial or industrialactivities with financial services. These groupsare not subject to a specific harmonisedregulation.27 Indirectly, however, they may be

Chart 6 Example of a mixed activity group combining dif ferent sub-groups

Insurance group Banking group

Financial conglomerate

Insurer

Bank

Bank

Insurer

Holding 2Industrial firm Commercial firm

Holding 1

Mixed activity group

26 The legal basis for the stand-alone supervision of creditinstitutions in the EU is the Consolidated Banking Directive; forlife insurance companies it is the Life Assurance Directive; fornon-life insurance companies it is the Non-Life InsuranceDirective; and for investment firms it is the Investment ServicesDirective.

27 The Consolidated Banking Directive only provides for anobligation for mixed-activity holding companies and theirsubsidiaries to supply information relevant for the purpose ofsupervising subsidiaries that are credit institutions. TheInsurance Groups Directive contains a similar provision.Moreover, in the case of a mixed-activity insurance holdingcompany, the competent authorities also have to exercise generalsupervision over intra-group transactions. These specificrequirements are in addition to the more general requirement thatsignificant shareholders should not pose a threat to the sound andprudent management of a bank or insurance undertaking.

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6 FRAMEWORK FOR THE SUPERVISION

OF FINANCIALSERVICES GROUPS

affected by the rules that apply to their regulatedentities/sub-groups. For example, supervisorsmay want to “ring-fence” the credit institutionor the banking sub-group in a mixed-activitygroup by requiring that bank managementoperates independently from the rest of thegroup or by placing limits on intra-groupexposures. It has been argued that in suchgroups additional firewalls could be erected inresponse to the contagion risk. This can beachieved, for example, by requiring that non-financial subsidiaries are separately capitalised,restricting inter-company funding and cross-company guarantees, limiting commonmembership of corporate bodies andencouraging the presence of independent non-executive directors, and adopting clear policieson the use of common brand and businessnames.28 Finally, it should be noted thatdifferent types of sub-group can co-exist in oneand the same group, each being subject to aspecific regulation (see Chart 6).

The basis for the supervision of financialgroups in the EU are directives with thecommon characteristic that they introduceminimum levels of harmonisation, thus leavingMember States the option to impose stricterrules. In all cases, the entry point for thesupplementary group supervision is anindividually regulated EU entity, which is eithera credit institution, investment firm orinsurance undertaking. Moreover, thesupervision is of a supplementary nature,meaning that regulated entities continue to besupervised on an individual or solo basis, whilenon-regulated entities are not. Annex 4compares the various sectoral group regulationsand the conglomerates regulation with regard toa number of key characteristics.

6.2 THE SUPERVISION OF MIXED FINANCIALSERVICES GROUPS

Some financial services groups fall outside thesupplementary supervision regime that theDirectives have established for homogenousfinancial services groups. This is, for example,

the case for groups where a credit institution/investment firm controls an insuranceundertaking (or vice versa) or where a holdingcompany controls a credit institution/investment firm as well as an insuranceundertaking. The recently adopted FinancialConglomerates Directive is the basis for thesupervision of such heterogeneous or mixedfinancial services groups. Member States haveto transpose the Directive into national law byAugust 2004 and its provisions will apply forthe first time from 1 January 2005 onwards.

The Directive’s rules have to a large extent beeninfluenced by previous work undertaken by theJoint Forum. The Joint Forum is aninternational group of technical expertsworking under the umbrella of the BaselCommittee on Banking Supervision (BCBS),the International Organization of SecuritiesCommissions (IOSCO) and the InternationalAssociation of Insurance Supervisors (IAIS). Itwas established in 1996 to take forward thework of a predecessor group, the TripartiteGroup, in examining supervisory issuesrelating to financial conglomerates.29 The JointForum has published a number of influentialpapers with supervisory principles on issuessuch as capital adequacy; the fit and properrequirements for shareholders, directors andmanagers; supervisory information sharing; andthe role of the coordinator in supervisingconglomerates.30 The Joint Forum’s principleshave to a large extent been mirrored in theFinancial Conglomerates Directive.

28 Oliver, Wyman & Company (2001). See also Freshf ieldsBruckhaus Deringer (2003) with recommendations on firewallsas a follow-up to this report.

29 For a more extensive discussion of the Joint Forum’s mandate andwork, see Joint Forum (2002).

30 Joint Forum (1999).


The supplementary supervision of financialconglomerates only covers regulated entities.The Directive obliges Member States to alsoinclude asset management companies31 in thescope of this supplementary supervision, butequally in the supervision of homogenousfinancial services groups, a requirement whichdid not exist before the Directive was adopted.Member States also have to decide to whichfinancial sector (banking, investment services,insurance) asset management companiesbelong. It should be noted that the entities usedto check for the existence of a financialconglomerate (see Section 2.2) do notnecessarily coincide with those that areincluded in the supplementary supervision.

In terms of applicable supervisory regime, theDirective distinguishes between two types offinancial conglomerate: those that are headed byan entity with its heads office in the EU, andthose with their head office in a third country.The latter case is discussed more in detail inSection 7.5.

31 An asset management company is any company whose regularbusiness is the management of undertakings for collectiveinvestment in transferable securities (UCITS).

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7 SPECIFICREGULATORY AND

SUPERVISORYISSUES

7.1 CAPITAL ADEQUACY32

Regulated entities are subject to capitalrequirements both on an individual and on agroup-wide basis. The general framework forthe capital requirements of banks andinvestment firms in the EU is very similar. Therequirements are determined on the basis of theinstitutions’ “risk weighted assets”, i.e. the sumof on-balance sheet and off-balance sheet itemsweighted by a coefficient to reflect their relativerisk. The capital requirements for insuranceundertakings are based on criteria that arerelated to the insurer’s overall business volumeas a risk proxy. This includes premiums andclaims for non-life insurers and mathematicalprovisions and capital at risk for life insurers(“fixed ratio” approach). The solvency rules forbanks, investment firms and insurancecompanies have the drawback that they are notsufficiently sensitive to the company-specificrisk profile. Regulatory reforms are nowunderway to address this, and regulations mayultimately evolve in the same direction.33

The eligible capital elements to cover the capitalrequirements are generally very much the samefor the three financial sectors. Paid-up capital,reserves and subordinated debt, for example,can in all cases be taken into account. But thereremain peculiarities to each sector which areimportant in the context of a conglomerate’scapital requirements (the issue of “cross sector”capital is discussed below). For example, futureprofits and subscribed but non-paid-up capitalcan under certain conditions be used byinsurance undertakings to meet their capitalrequirements, which is not allowed for creditinstitutions.

The conglomerate as a whole is also subject tosolvency requirements. The purpose of this is toavoid cross-sectoral double (or multiple)counting of the same capital by several groupentities. Such a situation, termed “double (ormultiple) gearing”, can occur when one groupentity uses (part of its) capital to acquire capitalof another group entity. In these circumstances,the capital generated outside the group (the

7 S P E C I F I C R EGU L ATORY AND S U P E RV I S O RYI S S U E S

correct measure of the group’s real solvency) isless than the sum of the capital in the differentgroup entities. The common concept underlyingall approaches to measuring group-wide capitaladequacy consists therefore of comparing theaggregate of the different sectoral requirements(or their proxies) with the sum of the group-wide capital, adjusted to eliminate doublecounting.34 To achieve this objective, theFinancial Conglomerates Directive lists threecalculation methods, which can be used alone orin combination.35 These methods are alreadyused in sectoral regulations to address similarconcerns about “double gearing”.

The accounting consolidation method is theonly method that uses the consolidated accountsof the conglomerate. However, whereasDirectives have laid down minimumharmonised rules on how the consolidatedaccounts of banking and insurance groups haveto be prepared,36 such rules are still missing forconglomerates. Then, on the basis of theconsolidated accounts, if available, theconsolidated own funds of the group arecalculated. Since intra-group transactions arecancelled out in the consolidation process, theconcerns about double gearing are dealt with.These consolidated own funds have then tocover the sum of the solvency requirements foreach different financial sector represented in thegroup.

Under the deduction and aggregation method,the sum of the own funds of each regulated andnon-regulated entity in the group is calculated,if needed with a correction for double gearing.Then the solvency requirements for eachregulated and non-regulated entity in the group,and the book value of the participations in other

32 In this paper, the terms “capital” and “own funds” are usedinterchangeably unless it is clear form the text that capital onlyrefers to a sub-category of own funds.

33 The “Basel II” project for banks and “Solvency II” project forinsurance undertakings.

34 Joint Forum (2001b).35 For more details on the technical calculations, see Article 6 and

Annex I of the Financial Conglomerates Directive.36 See the Insurance Accounts Directive and the Banking Accounts

Directive.


group entities, are added together. The firstfigure (available own funds) has to be at least ashigh as the second (requirements). Includingthe book value of participations in the solvencyrequirements acknowledges the fact that theparticipating entity may not be able to useexcess capital in the related entity to cover agroup-wide capital deficit.

Finally, the starting point of the book value/requirement deduction method are the ownfunds of the group’s parent (again possiblycorrected for double gearing). Then whicheveris greater out of the book value of the parentundertaking’s participation in other groupentities and the solvency requirements of thoseentities is added to the solvency requirement ofthe parent. The own funds of the parent have tobe at least as high as this sum. Using whicheveris the greater out of the book value and thesolvency requirement acknowledges the factthat the parent may lose more on a participationthan the amount at which it is valued in itsbooks.

For all three methods, only the group’sfinancial sector entities are included in thecalculation. For non-regulated entities, anotional capital requirement is calculated.37

Capital requirements at the conglomerate levelcan only be met through “cross sector” capital,i.e. own funds which are eligible under each ofthe sectoral rules. The underlying idea is thatone cannot cover a capital deficit in one entitywith the surplus capital of another entity if thissurplus capital is not recognised under the firstentity’s sectoral rules. Authorities should alsotake into account the extent to which capital istransferable and available across the differentgroup entities. In addition to the quantitativerequirements, adequate capital adequacypolicies need to be in place at the level of theconglomerate.

Common to the three methods is that thesolvency requirements of the different groupentities are summed up. In doing so, no accountis taken of the possible risk reduction achieved

through the diversification of theconglomerate’s activities. Although theindustry has defended the position that oneshould take such diversification effects intoaccount, there are good arguments not to do so.First, this would result in an effective poolingof capital in each of the conglomerate’sbusinesses and using it to underwrite the entireconglomerate. This could increase moral hazardand systemic risk, and decrease marketdiscipline.38 Second, it has been argued thatdiversification effects are the greatest within asingle risk factor, decrease at the business leveland are the smallest across business lines.Dependent on the business mix, the incrementaldiversification benefits at the latter level wouldonly be about 5 to 10% of the capitalrequirements.39

7.2 INTRA-GROUP TRANSACTIONS AND LARGEEXPOSURES

Intra-group transactions and large exposureshave to be monitored for the level or volume ofrisk, possible contagion, conflicts of interest,and the risk of circumventing sectoral rules. Tothat end there is the requirement for the group’sregulated entities or mixed financial holdingcompany to report on a regular basis, and atleast annually, any significant riskconcentration at the level of the conglomerate aswell as all significant intra-group transactionsof regulated entities in the group. The FinancialConglomerates Directive remains vague on theconcrete reporting modalities, such as the typesof risk to be reported or the thresholds thatapply. An important role is given to thecoordinator to define these modalities further.

37 This is the capital requirement that such an entity would have tocomply with according to the relevant sectoral rules if it were aregulated entity of that particular financial sector.

38 Morrison (2002).39 See Kuritzkes et al. (2002) and Oliver, Wyman & Company

(2001). Bikker and van Lelyveld (2002), however, findsubstantial diversification effects that are possibly higher thanthe quoted 5 to 10%.

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7 SPECIFICREGULATORY AND

SUPERVISORYISSUES

The reason for this lack of prescription isprobably the absence of an established industryor supervisory standard for aggregating risks.40

Intra-group transactions are defined astransactions where the regulated entities rely onother group entities (or natural/legal personsclosely linked to them) for the fulfilment of anobligation. This broad definition covers, forexample, loans, guarantees, derivatives andservice agreements. The point of reference isalways the involvement of a regulated entitythat relies on the performance under thetransaction. Transactions where this entity hasto deliver instead of receive would therefore notbe covered. It is left to the authorities to definewhat “significant” means. In the absence of anyother agreement, a minimum threshold of nolower than 5% of the conglomerate’s capitalrequirements applies.

The sectoral requirements show some markeddifferences to the Financial ConglomeratesDirective. The combined banking and securitiesgroups are subject to quantitatively largeexposures limits, but there are no harmonisedEuropean rules on intra-group transactions. Forinsurance groups, on the other hand, no rules onlarge exposures apply, but intra-grouptransactions have to be supervised. Theobjective of this latter supervision is morelimited than in the case of conglomerates, sinceauthorities are only required to take action whenthe solvency position of the insurance companyis threatened.

7.3 ORGANISATIONAL REQUIREMENTS

The Financial Conglomerates Directiveintroduces a number of organisational rules forfinancial conglomerates, which relate inparticular to risk management processes andinternal control mechanisms, as well as to some“fit and proper” requirements.

The conglomerate’s risk management processesmust include policies with respect to risksassumed, capital adequacy and the integration

of risk monitoring systems. This is the firsttime in EU rules on group supervision thatintegrated risk management systems have beenrequired. The internal control mechanisms haveto include adequate mechanisms to identify andmeasure the material risks incurred andappropriately relate the own funds to theserisks. Reporting and accounting procedureshave to be in place to capture intra-grouptransactions and risk concentrations. Finally,the necessary mechanisms must be in place toproduce the information relevant for thesupplementary supervision.

The regulated entities’ shareholders and themembers of the management bodies are subjectto sectoral suitability (“fit and proper”)requirements. In this way, the requirementsindirectly also apply to the conglomerate. Sinceconglomerates are often managed on a top-down basis, the management would escape the“fit and proper” requirements if theconglomerate were headed by a non-regulatedentity. For this reason, the Directive alsorequires that the persons who effectively directthis entity’s business are of a sufficiently goodrepute and have sufficient experience toperform their duties.

7.4 THE COORDINATOR AND COOPERATION/INFORMATION EXCHANGE BETWEENAUTHORITIES

The coordinator is the competent authorityresponsible for exercising supplementarysupervision at the level of conglomerates. Morespecifically, the coordinator has the followingtasks (without prejudice to the tasks of thesectoral supervisors):

40 “Economic capital” seems to be developing as a commonmeasure for risk, irrespective of where the risk is incurred.Economic capital defines the need for capital for all risk factorsin probabilistic terms at a common point (solvency standard) in aloss (or value) distribution. However, many issues in thismodelling approach remain unresolved: data quality, modelvalidation possibilities, accounting for the diversification effectsacross different business areas, modelling of operational risk,etc. See Oliver, Wyman & Company (2001), Bikker and vanLelyveld (2002).


(i) to propose certain technical decisionsrelated to the identification of a financialconglomerate, to inform the group that ithas been identified as such and of theidentity of its coordinator and to alsoinform other relevant authorities of thisidentification outcome;

(ii) to coordinate the gathering anddissemination of information regarding theconglomerate to the other relevantauthorities, in particular on capitaladequacy, risk-concentration and intra-group transactions;

(iii) to take technical decisions, sometimesafter consultation with the other relevantauthorities, regarding reporting on capitaladequacy, risk concentration and intra-group transactions;

(iv) to perform a supervisory overview andassessment of the conglomerate’s financialsituation, as well as its risk managementand internal control mechanisms;

(v) to plan and coordinate supervisory actionsin cooperation with the relevantauthorities; and

(vi) to take enforcement measures with respectto the mixed financial holding company.

The law of the coordinator’s Member State willdetermine the rules that apply to thesupplementary supervision. The FinancialConglomerates Directive lists a number ofcriteria regarding the appointment of the singlecoordinator from among the competentauthorities that supervise the conglomerate’sregulated entities on an individual basis. Forexample, if the group is headed by a regulatedentity, the coordinator will be the authority thathas authorised this entity. If the group is notheaded by a regulated entity, various elementscome into play, such as the number, locationand balance sheet totals of the group’s regulatedentities, and the number and location of holdingcompanies within the group, etc. The relevantauthorities may also overrule the criteria listedin the Directive if they are of the opinion thatthis is appropriate.

The coordinator and the sectoral authoritieshave to cooperate closely, providing each otherwith essential information (at their owninitiative) or relevant information (uponrequest) for the exercise of their tasks. This isparticularly the case for areas such as theconglomerate’s group structure, strategicpolicies, financial situation, major shareholdersand management, organisation, riskmanagement and internal control systems,information collection and verificationprocedures, adverse developments, majorsanctions and exceptional measures taken. TheDirective provides for procedures to befollowed by the authorities to obtaininformation or to verify information related toentities in another country.

7.5 PARENT UNDERTAKINGS OUTSIDE THE EU

For groups with their centre of control outsidethe EU, it is necessary to verify whether suchgroups are subject to supplementarysupervision equivalent to that provided forunder the Financial Conglomerates Directive.This has to be done by the authority that wouldbe the coordinator if the group were based in theEU. In the absence of such equivalentsupervision, Member States may apply to theregulated entities by analogy the provisionsconcerning the supplementary supervision.Alternatively, other methods may be applied toensure the supplementary supervision, such asrequiring the establishment of a mixed financialholding company with its head office in the EUand then applying the supervision to this(sub)group. The potential extra-territorialimpact of the “equivalence” issue and its effecton competition has raised some concernsoutside the EU, in particular in the UnitedStates.41

41 See for example Pitt (2002).

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8 REGULATORYAND SUPERVISORY

STRUCTURESDEALING WITH

FINANCIALCONGLOMERATES

8 R EGU L ATORY AND S U P E RV I S O RY S T RU C TUR E SD E A L I NG W I TH F I N ANC I A L CONG LOMERAT E S

8.1 AT THE EUROPEAN LEVEL

8.1.1 FORUMS FOR INFORMATION EXCHANGEAND COOPERATION

European financial markets and financialinstitutions have become more integrated andinter-linked, especially since the introduction ofthe euro. Prudential supervision, however, isstill the prerogative of national authorities andis based on the principle of “home countrycontrol”. In order to remove potential obstaclesto further financial integration, severalinstitutional arrangements have been set up topromote the exchange of information andcooperation between national authorities.Table 6 provides an overview of thesecommittees for the different financial sectorsbefore the implementation of the “Lamfalussyframework”. The Mixed Technical Group(MTG), which is active in the area of financialconglomerates, was created by the EuropeanCommission following the Joint Forum’srecommendations. It consists of experts fromregulatory and supervisory authorities forbanking, insurance and securities, the European

Commission (chair) and the European CentralBank (ECB). The MTG reports to its sectoralparent committees.

An important step in streamlining the Europeanregulatory and supervisory arrangements wastaken by adopting the recommendations of the“Lamfalussy Committee”.42 The Committeeproposed a four-level top-down approach toregulating securities markets, the “Lamfalussyframework”. This was to be complemented bymore consultation and transparency among thedifferent institutions involved. The newframework provides for the involvement of so-called regulatory (“level 2”) and supervisory(“level 3”) committees. The ECOFIN Councilrecommended in December 2002 to extend thearrangement to all other financial sectors,resulting in the committee architecture shown inTable 7. In the area of financial conglomerates,a European Financial Conglomerates Committeewas provided for as a “level 2” committee. InNovember 2003 the European Commissionadopted a series of measures to implement the

Insurance andBanking Securities and UCITS occupational pensions Financial conglomerates

– Banking Advisory – High Level Securities – Insurance Committee (IC) – Mixed Technical GroupCommittee (BAC) Supervisors Committee (MTG)

– Groupe de Contact – Forum of European Securities – Conference of InsuranceCommissions (FESCO) Supervisors (CIS)

– The ESCB’s Banking – Securities Contact CommitteeSupervision Committee – UCITS Contact Committee(BSC)

Table 6 Institutional arrangements for regulation and supervis ion (pre-Lamfalussy)

Insurance andBanking Securities and UCITS occupational pensions Financial conglomerates

Level 2 committee European Banking European Securities European Insurance and European FinancialCommittee (EBC) Committee (ESC) Occupational Pensions Conglomerates Committee

Committee (EIOPC) (EFCC)

Level 3 committee Committee of European Committee of European Committee of EuropeanBanking Supervisors Securities Regulators Insurance and(CEBS) (CESR) Occupational Pensions

Supervisors (CEIOPS)

Table 7 Institutional arrangements for regulation and supervis ion (post-Lamfalussy)

42 Committee of Wise Men (2001).


Level 2 committee Level 3 committee

Nature work Political, regulatory Technical, supervisory

Chair European Commission National supervisor

Members Ministry representatives – National supervisors– Only banking: ECB + non-supervisory national central banks

(non-voting)

Tasks – Regulation (through “comitology”) – Information exchange– Advice to the Commission – Supervisory convergence

– Supervisory best practices– Advice to the Commission

Table 8 Key characterist ics of the new regulatory and supervisory committees

ECOFIN Council’s recommendations. Table 8compares the new committees on the basis ofsome key elements. No decision has been takenyet on the role of the MTG in the new set-up, soit continues to exist for the time being.

8.1.2 THE EUROPEAN FINANCIALCONGLOMERATES COMMITTEE

The Financial Conglomerates Directiveestablished a “level 2” regulatory committee,the European Financial ConglomeratesCommittee (EFCC), specifically for financialconglomerates. A “level 3” supervisorycommittee was not envisaged from the outset,nor established by the European Commission inits November 2003 decisions. The rationale forthis position is that financial conglomerates arenot considered to be a fourth, separate financialsector and that their supervision issupplementary to existing sectoral supervision.

The EFCC, chaired by the EuropeanCommission, is composed of one high-levelMinister representative and one technical expertper country. The Chairperson of the “level 3”committee (if such committee were set-up) andthe ECB have an observer role. Neither nationalcentral banks, nor supervisors are members ofthis committee. The Directive gives a threefoldrole to the EFCC: (i) assisting the EuropeanCommission in its legislative work, (ii) givingguidance to Member States on certain technicalissues, and (iii) receiving information to beprovided by the Member States or theCommission.

The EFCC gives opinions to the EuropeanCommission on technical changes that the latterwants to introduce in the Directive. Theseopinions have to be provided in accordance withthe general “comitology” procedures.43 Whenthe Commission wants to change the Directive,it has to hold a public consultation beforesubmitting the draft changes to the EFCC. Theopportunity for the EFCC to give guidance toMember States relates to the “equivalence” ofthe supplementary supervision arrangements inthird countries for financial conglomerates.44

The EFCC is also obliged to keep such guidanceunder review. Finally, the Directive stipulatesthat the Member States and/or the Commissionhave in certain cases an information duty to theEFCC, in particular regarding:

– the supervisory principles applied to intra-group transactions and risk concentration atthe conglomerate level;

– the definitions and requirements regardingsuch intra-group transactions and riskconcentration;

– the implementation of the Directive withregard to asset management companies;

– the capital adequacy methods applied toassess solvency; and

– the reporting frequencies for capitaladequacy requirements and riskconcentration in national legislation.

43 Article 5 of the Council Decision of 28 June 1999 laying down theprocedures for the exercise of implementing powers conferredon the Commission (1999/468/EC).

44 Such guidance has already been given on the supervisory regimein the United States and Switzerland, see European FinancialConglomerates Committee (2004).

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With regard to the four latter points, by August2007 the Commission must submit a report tothe EFCC on the Member States’ practices,possibly also with a proposal for furtherharmonisation.

8.2 AT THE NATIONAL LEVEL

8.2.1 THE INTEGRATED FINANCIAL SUPERVISOR

The growing role of financial conglomerates isan important element in the debate about thereform of supervisory structures. Morespecifically, the debate relates to the issue of anintegrated financial supervisor, separate fromthe central bank, with responsibility for allmarkets and intermediaries. Other argumentsthat are put forward for such a supervisory set-up are economies of scale and scope, increasedefficiency for the supervised entities, and thelower risk of regulatory arbitrage. But a singleregulator also poses certain risks: conflictingsupervisory objectives may be difficult toreconcile, there is more scope for moral hazardand collusive behaviour between the supervisorand the supervised entities (“regulatorycapture”), and the decision-making process inthe authority may be slowed down because oforganisational diseconomies.45

The first integrated financial supervisors inEurope emerged in the Scandinavian countries.An important impetus for the further evolutiontowards such a model took place in 1997 withthe creation of the Financial Services Authority(FSA) in the United Kingdom. The UK examplewas emulated in 2002 by Germany and Austriawith the creation of the Bundesanstalt fürFinanzdienstleistungsaufsicht (BaFin) and theFinanzmarktaufsicht. In 2003 this was followedby the establishment of the Irish FinancialServices Regulatory Authority (IFSRA). Morerecently, Belgium integrated its sectoralsupervisors into the Banking, Finance andInsurance Commission (2004) and work is nowunderway in the Netherlands to integrate theprudential supervision on the banking andinsurance sectors into the central bank. As a

result, in eight out of the fifteen “old” EUMember States there is now (or will soon be) asingle supervisory authority. The mandate andregulatory responsibilities of these integratedauthorities, however, vary widely. The samegoes for the way they supervise conglomerates.

In all the EU Member States that do not have anintegrated financial supervisor, insurancesupervision is allocated to a separate, specialisedauthority. Supervision of investment firms andsecurities markets, by contrast, is sometimescombined with banking supervision. Theadoption of the universal banking model in theEU and the legal requirement to performinsurance activities in a distinct legal entity arefactors that explain this particular arrangement.

Another notable feature is that very often thecentral bank is in one way or another involvedin banking supervision. This is of course due to

Country Banking Insurance Securities

AT FSA FSA FSABE FSA FSA FSADE FSA/CB FSA FSADK FSA FSA FSAES CB I SFI B/CB I SFR B/CB I SGR CB I SIE FSA/CB FSA/CB FSA/CBIT 1) CB I SLU BS I BSNL 2) CB CB CBPT CB I SSE FSA FSA FSAUK FSA FSA FSA

Table 9 Supervision of banking, insuranceand securit ies in the EU

Source: updated from K. Lannoo (2002).Note: CB = central bank. B = specialised banking supervisor. BS =specialised banking and securities supervisor. S = specialisedsecurities supervisor. FSA = single financial supervisory authority.1) CB supervises banks and investment firms on financialstability and prudential grounds. S supervises these institutionson conduct of business grounds.2) Envisaged structure to be adopted in the course of 2004. CBwill supervise banks, investment firms and insurance companieson prudential grounds. Supervision on conduct of businessgrounds will for all f irms be conducted by a separate authority.

45 For a more extensive discussion on integrated financialsupervisors, see, for example, Briault (1999), OECD (2002) andTaylor and Fleming (1999).


the pivotal role of banks in the financial system,in particular with regard to the implementationof monetary policy and ensuring the properfunctioning of payment systems. In the past,this involvement has rarely extended to theprudential supervision of insurance companies.A clear illustration of this point is Article105(6) of the Treaty establishing the EuropeanCommunity. This article provides for asimplified procedure to confer upon the ECBspecific tasks concerning policies relating to theprudential supervision of credit institutions andother financial institutions, but at the same timeexplicitly excludes insurance undertakings.

However, the Netherlands is now the first EUMember State in which the central bank willbecome directly responsible for the supervisionof insurance companies, thus taking over theresponsibilities of the separate insurancesupervisor. This break with a long supervisorytradition is due to the major role that financialconglomerates play in the Netherlands, therebychanging the nature of the financial system andsystemic risk. To the extent that such changesreach a material degree, the direct involvementof the central bank in insurance supervisionmight indeed be warranted.

8.2.2 ALTERNATIVE COORDINATIONMECHANISMS

In order to meet the challenges of supervisingfinancial conglomerates and the blurring oftraditional boundaries between financialproducts, countries that have not movedtowards an integrated supervisor are usingalternative solutions. Such solutions include(i) the conclusion of memoranda ofunderstanding (MoUs)46 based on the principlesof information-sharing and cooperation, (ii)mutual board representation, (iii) theintroduction of formal consultation procedures,and (iv) the establishment of specific cross-sectoral committees. Often the central bank,even when it is not directly responsible forbanking supervision, is involved in sucharrangements, in particular where the area offinancial stability is concerned.

For example, in France a committee comprisingsupervisory authorities from the differentsectors of the financial industry (the “collègedes autorités de contrôle des entreprises dusecteur financier”) was established. Thepurpose of this committee is to facilitate theexchange of information among supervisoryauthorities of financial conglomerates and toraise issues of common interest pertaining tothe coordination of control of suchconglomerates. Similarly, before theaforementioned reform in the Netherlands, theCouncil of Financial Supervisors was the mainorganisational set-up for cooperation betweenthe three sectoral supervisory authorities(banking, insurance and pension funds,securities). The Council was also responsiblefor the coordination of policy and regulations innon-sector-specific areas of financialsupervision. Committees and working groupswere set-up to deal with specific topics, such asthe supervision of financial conglomerates.Moreover, the cooperation between the centralbank or banking supervisor and the insurancesupervisor was formalised through a covenantand mutual representation at the levels of themanagement committee and the supervisoryboard.47

Some EU countries, such as Finland, theNetherlands and Spain,48 developed their ownlegal framework for the supervision of financialconglomerates well before the FinancialConglomerates Directive. In the Netherlands,the supervision of such groups is under reviewand a proposal is being discussed that will givethe supervisory authorities more direct powersto supervise the top holding company of aconglomerate;49 this review will now becombined with the implementation of theFinancial Conglomerates Directive. EUMember States have to adjust their legalframework by August 2004 to comply with theDirective, so countries which do not yet have a

46 A memorandum of understanding is a non-legally binding formalagreement between authorities which sets out their respectivetasks and responsibilities.

47 De Nederlandsche Bank (2003).48 Vargas (1998).49 De Nederlandsche Bank (2002).

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specific regime for the supervision of suchgroups will have one soon. In addition toexisting general legal frameworks, specificmemoranda of understanding have beenconcluded on a cross-sector, and sometimescross-border, basis to deal with the supervisionof specific financial groups. This has been thecase, for example, for the Sampo-Leonia Group,the Nordic Baltic Holding Group and Fortis.50

Also outside the EU, countries such asAustralia, Canada, Switzerland and the UnitedStates have adopted regulation or adapted theirsupervisory practices with the aim ofsupervising financial conglomerates.51

50 For an example of an MoU covering the supervision such groups,see the case of the Nordic Baltic Holding Group. An unofficialtranslation of this MoU is available on the website of theFinancial Supervision Authority of Finland.

51 Van Cauter (2003).


9.1 THE GLASS-STEAGALL ACT AND BANKHOLDING ACT

The United States has traditionally beencharacterised by a strict separation betweentraditional banking (“commercial banking”),securities activities (“investment banking”) andinsurance. The legal basis for this separationwas the Glass-Steagall Act (1933) and the BankHolding Company Act (1956). Under theGlass-Steagall Act, banks were prohibited fromdirectly or indirectly engaging in theunderwriting of or dealing in securities. TheAct was introduced in the wake of the GreatDepression. The banking crisis thataccompanied it had led to the belief that thesecurities activities of banks were an importantcause of their collapse, as well as to accusationsthat banks had exploited conflicts of interest.52

Under the Bank Holding Company Act bankswere also prohibited from affiliating withinsurance underwriters and non-financial firms.The Act was adopted in response to concernsthat financial conglomerates could amass toomuch power and that banks could becomeexposed to losses from insurance underwriting.

Sections 16, 20, 21 and 32 are the relevantprovisions of the Glass-Steagall Act. Sections16 and 21 refer to the direct operations of banksand Sections 20 and 32 to bank affiliations.Section 16 bars national banks53 from investingin shares, limits them to buying and sellingsecurities as an agent, and prohibits them fromunderwriting and dealing in securities. Section20 prohibits Federal Reserve member banksfrom affiliating with a company principallyengaged in the underwriting of or dealing insecurities. Section 21 makes it unlawful forsecurities firms to accept deposits. Section 32further prohibits a Federal Reserve memberbank from having director, officer or employeeinterlocks with a company principally engagedin the underwriting of or dealing in securities.Certain securities, called “bank eligiblesecurities” (e.g. US government bonds), areexempted from the Act.54

9 TH E S U P E RV I S I ON O F F I N ANC I A LCONG LOMERAT E S I N T H E UN I T ED S TAT E S

Over time, the prohibitions gradually becameeroded because of decisions by regulators andcourts. A landmark decision was that taken bythe Federal Reserve Board in 1987 to allowsecurities subsidiaries of bank holdingcompanies to underwrite and deal in certainbank ineligible securities in so far as revenuegenerated through these activities did notexceed certain revenue thresholds and“firewalls” were respected. Since thesesubsidiaries were allowed by the FederalReserve under its power to define what“principally engage in securities business”meant, they were commonly known as “Section20 subsidiaries”.55 As time went by, the powerof the securities subsidiaries was furtherexpanded. In the area of insurance, there wasalso an erosion when the Office of theComptroller of the Currency (OCC) allowedinsurance to be sold by national banksanywhere in towns with fewer than 5,000residents. Insurance underwriting, on the otherhand, continued to be prohibited.

9.2 THE GRAMM-LEACH-BLILEY ACT

9.2.1 EXPANDED POWERS FOR BANK HOLDINGCOMPANIES AND BANKS

Deregulation reached a high-point in 1999 withthe adoption of the Gramm-Leach-Bliley Act(“GLB”),56 which, among other things, repealedSections 20 and 32 of the Glass-Steagall Actwhich prohibited affiliations between banks andsecurities firms. Banks and securities firms

52 Later research has shown that these concerns were based moreon anecdotal evidence than on generalised facts or practices.Santos (1997), Zaretsky (2000).

53 National banks are chartered, supervised and regulated by theOffice of the Comptroller of the Currency (OCC), a sub-agencyof the US Treasury. State-chartered banks which are members ofthe Federal Reserve System are supervised and regulated by theFederal Reserve Board. State-chartered banks which are notmembers of the Federal Reserve System are supervised andregulated by the Federal Deposit Insurance Corporation (FDIC).

54 Kwan (1997).55 For more information about these subsidiaries, see Santos (1997)

and Kwan (1997).56 For an overview of the Act, see Federal Reserve Bank of

Philadelphia (2000), Peabody & Arnold (1999) and US SenateCommittee on Banking, Housing and Urban Affairs.

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9 THE SUPERVISIONOF FINANCIAL

CONGLOMERATESIN THE

UNITED STATES

continued to be prohibited from directlyengaging in each other’s business. GLB createda new category of bank holding company57

called a “financial holding company”,58 whichhad to be registered with the Federal ReserveBoard. This has to be accompanied with(self-)certification that all the depositorysubsidiaries are well capitalised and managed.The same process has to be followed by foreignbank holding companies whose US bankingpresence is solely through subsidiary banks.For foreign banks operating in the United Statesthrough branches or agencies, the certificationprocess requires them to meet the same risk-based capital standard as US financial holdingcompanies, but a lower leverage standard.59 Atthe end of January 2003, the Board hadrecognised 641 top-tier financial holdingcompanies, of which 19 were located in the EU.

Financial holding companies are allowed toengage in an expanded range of activities,including in particular:

(i) Financially related activities. This coverssecurities underwriting and dealing,insurance agency and underwriting

activities, and merchant banking. Merchantbanking activities can only be performedthrough a securities or insurance affiliate.

(ii) Other financial activities. If they aredeemed by the Federal Reserve Board(after consultation with the US Treasury)to be financial in nature or incidental tofinancial activities.

(iii) Complementary activities. If the FederalReserve Board determines that they arecomplementary to a financial activity anddo not pose a substantial risk to the safetyor soundness of depository institutions orthe financial system.

In principle, financial holding companiescontinue to be barred from commercial, non-financial activities. But they can engage inactivities with commercial characteristics, suchas the aforementioned complementary activitiesand merchant banking. Moreover, a limitedamount of commercial activity by non-bankingcompanies that become financial holdingcompanies is allowed. Merchant banking,which is broadly defined to include investmentsin non-financial companies, is not allowedthrough a depository institution or itssubsidiaries.

GLB expanded the activities permitted to banks.Through financial subsidiaries, national bankscan engage in financial activities permitted tofinancial holding companies and which thebanks are not allowed to perform directly, suchas securities business. They continue to beexcluded from underwriting insurance, realestate development, merchant banking and theabove-mentioned complementary activities. Ifthe activities are pursued through a bank

Name group Country of origin

Abbey National PLC UKABN Amro Holding, N.V. NLBanque Federale de Banques Populaires FRBarclays PLC UKBNP Paribas FRCaja de Ahorros de Vigo, Ourense e Pontevedra ESCaja de Ahorros y Monte de Piedad de Madrid ESCERA Stichting BEDen Danske Bank DKDeutsche Bank AG DEDexia S.A. BEDresdner Bank AG DEFortis BEHBOS PLC UKHSBC Holdings PLC UKRabobank Group – Rabobank Nederland NLSantander Central Hispano ESSociete Generale FRUnicredito Italiano S.P.A. IT

Table 10 US f inancial holding companieswhose country of origin is in the EU

Source: The Federal Reserve Board. The list includes only thetop-tier holding company in each organisation. Situation as ofJanuary 2003.

57 A “bank holding company” is a company that controls, directly orindirectly (through another bank holding company), a bank.

58 GLB also allows the creation of “investment banking holdingcompanies” under the supervision of the SEC. Such a companyowns or controls one or more registered brokers or dealers, butdoes not control any commercial bank or thrift. Investment bankholding companies are not discussed further in the text.

59 Meyer (2000). For the procedures to follow, see Board ofGovernors of the Federal Reserve System (2000a and 2001).


subsidiary, they are subject to more safety andsoundness restrictions than is the case forsubsidiaries of financial holding companies.Similar rules apply to state banks that aremembers of the Federal Reserve System.

In practice, almost all of the new activitiesundertaken by the financial holding companieshave been in insurance sales and merchantbanking. The previous “Section 20subsidiaries” have been converted intotraditional securities subsidiaries. Smallerholding companies have used their new powersto acquire insurance brokerage entities. Theyalso see their status as financial holdingcompany as a relatively low-cost option forfuture expansion. However, a dramatictransformation of the financial servicesindustry has not occurred. GLB brought therules more in line with market practice ratherthan creating opportunities for entry into newmarkets. Bank holding companies whichwanted to be active in the securities businesswere already doing so before GLB and,although banks have been engaged in sellinginsurance in the past, it is not clear that they arealso interested in underwriting insurance.60

9.2.2 SUPERVISORY STRUCTURE

GLB has made the Federal Reserve Board the“umbrella supervisor” of financial holdingcompanies. In this capacity, the Board focuses

on the holding company’s financial strength andstability, its consolidated risk-managementprocess and its overall capital adequacy, withthe specific goal of assuring the safety andsoundness of the affiliated depositoryinstitutions.61 Areas that are particularlyimportant are intra-group exposures and riskconcentrations. Under the new framework,formal “firewalls” have become less common,but are at the same time more critical. In thatrespect, Sections 23A and B of the FederalReserve Act have become key provisions asthey limit the credit flows from banks to theiraffiliates and require that such transactions becollateralised and made at market prices.62 GLBalso authorises the banking regulators to adoptprudential standards and restrictions onrelationships or transactions betweendepository institutions and their subsidiariesand affiliates. Non-bank subsidiaries offinancial holding companies which are engagedin securities, insurance or commoditiesactivities continue to be supervised by their“functional regulator”.

In its supervision of financial holdingcompanies, the Federal Reserve Board relies on

Chart 7 Supervisory structure for US Financial Holding Companies

Federal Reserve Board(Umbrella supervisor)

FDIC, FRB, OCC, OTS(Primary bank and

thrift regulators)

SEC and state securitiesauthorities

(Functional regulator)

State InsuranceCommissioners

(Functional regulator)

CFTC(Functional regulator)

Banking activities Securities activities Insurance activities Commodities activities

60 Olson (2002a) and Santomero (2001).61 Ferguson (2000). For a more detailed discussion on the

framework of financial holding company supervision, see Boardof Governors of the Federal Reserve System (2000b).

62 Meyer (2000) and Moskow (2000). Some have expressed doubtsabout the effectiveness of these rules, see Wilmarth (2001).

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information exchange and cooperation with theprimary bank, thrift and functional regulators,and foreign supervisors. The Board reliessubstantially on reports already filed with/prepared by these authorities, as well as onpublicly available information. Finally, itssupervisory approach is risk-focused and iscoupled with market discipline.63

The supervisory powers of the Federal ReserveBoard over entities that are supervised by theirfunctional regulators are limited. The Board hasto rely largely on information already gatheredby the functional regulator and cannot imposecapital requirements on functionally regulatedsubsidiaries. Moreover, it may not require suchsubsidiaries to provide funds or assets to anaffiliated depository institution except in verylimited circumstances. If the functionalregulator does not provide the requestedinformation in a timely manner, the Board mayin certain circumstances seek it directly fromthe subsidiary. This will be the case when theinformation is necessary to assess a materialrisk to the financial holding company or any ofits affiliated depository institutions. Othercircumstances are when the information isneeded to assess compliance with laws enforcedby the Board, or to assess the compliance of theholding company’s systems for monitoring andcontrolling risks that may pose a threat to anaffiliated depository institution.64 Under similarconditions, the Board may also directly examinefunctionally regulated subsidiaries.

9.2.3 COMPARISON BETWEEN THE US AND EUSITUATION

A striking feature of the supervisory frameworkof financial conglomerates in the United Statesis that it is very bank-orientated, which is lessthe case in the EU. This feature is particularlymanifest in the central role of the FederalReserve Board as the “umbrella supervisor” andin its powers and ultimate objective tosafeguard the depository institutions in thegroup. In fact, the presence of a bank in thegroup is a precondition for falling under therules of a financial holding company, which is

by definition a special type of bank holdingcompany. Because of this bank-focus, there is arisk that securities and insurance subsidiariesmay be subject to a “quasi-bank” regulatorystructure that effectively requires them tosatisfy both a functional and a modified form ofbank supervisory requirements.65 On the otherhand, because of the systemic concernsconglomerates may create, the closeinvolvement of the central bank in thesupervision of such institutions is clearly anadvantage.66

In the EU framework, it is at least theoreticallypossible (although less likely in practice) tohave a group without a credit institution thatqualifies as a financial conglomerate. Here, thepresence of an insurance or reinsuranceundertaking in the group is the essential elementfor such qualification. In general, it also seemsthat there can be a much larger non-financialcomponent in an EU financial conglomeratethan in a US one. Moreover, the EU rules on theappointment of the coordinator do not guaranteethat this will function will be assumed by abanking supervisor, whether or not it is acentral bank.

Another difference is that the US regulationposes more organisational restrictions. At thelevel of shareholders of the financial holdingcompany, non-financial commercial companiescontinue to be barred from owning banks.Financial holding companies that werepreviously not banking holding companies arenevertheless permitted to retain limitedcommercial activities at the level of the parentcompany, but only under strict restrictions.Another example is the prohibition againstbanks engaging directly or indirectly ininsurance underwriting or merchant banking, or

63 Board of Governors of the Federal Reserve System (2000b). TheBoard’s approach is based on the procedures and practices itdeveloped as part of the “Large Complex BankingOrganizations” program in the mid-1990s, see Half et al. (2002).

64 Ferguson (2000).65 Half et al. (2002).66 This argument was also advanced by the European Central Bank

(2001a) in the debate on the role of central banks in prudentialsupervision.


directly in securities business. Such restrictionshave the advantage of providing additionalsafeguards against possible spill-over effectson depository institutions in the event offinancial difficulties. But they also imply costsfor the group and may only provide protectionthat is more apparent than real.67 In the EUframework, there are no special requirementsregarding the shareholders of the financialconglomerate apart from the indirectrequirements through the specific sectoralrules. In addition, banks can own insurancecompanies (and vice versa) and directly orindirectly build up substantial activities insecurities business and merchant banking.

67 These arguments have been advanced by Santos (1997) in thecontext of the debate on where banks should locate theirsecurities business.

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10 OPEN ISSUES10 OP EN I S S U E SWith the adoption of the FinancialConglomerates Directive, the EU now has avery important additional regulatory element inplace for the supervision of financial servicesgroups. The increasing importance of mixedfinancial groups, in particular bancassurancegroups, and the often systemic relevance ofsuch groups underscore the need for anappropriate micro-prudential framework.However, the Directive does not offer ananswer to all concerns related to conglomerates.In particular, the following areas might requirefurther attention from authorities.

SCOPE OF THE DIRECTIVE

The Financial Conglomerates Directive definesquite strictly which groups fall under its regimeof supplementary supervision. However, theremight also be mixed financial groups that do notmeet the strict definition of a financialconglomerate, for example because theirfinancial or cross-sectoral activity does notreach the minimum thresholds provided for inthe Directive. In such cases, it is up to nationalauthorities to decide whether a supervisoryregime for mixed financial groups that falloutside the scope of the Directive is needed. Inany case, the framework introduced by theDirective will be a useful reference point fordefining such a national regime.

Similarly, mixed-activity groups that combinecommercial or industrial activities withfinancial services also fall outside the scope ofthe Directive and are not subject to harmonisedrules. Nevertheless, there might also besupervisory concerns related to banksembedded in such groups which nationalauthorities might want to address by, forexample, introducing limits on intra-groupexposures and large exposures or building insafeguards to ensure the independence of thebank’s management.

TRANSPARENCY

The Financial Conglomerates Directive is quitedetailed on the criteria for a group to qualify asfinancial conglomerate. For those who onlyhave access to public information, it is verydifficult to check whether a particular groupindeed falls under the supplementarysupervision. With a general trend towardsincreased transparency and a growing role formarket discipline, it is unfortunate thatauthorities are not obliged (although they retainthe freedom to do so) to publish a list of groupsthat fall under the scope of the Directivetogether with their regulated entities. In theUnited States, by contrast, the Federal ReserveBoard, in its role as umbrella supervisor,publishes a list of financial holding companiesthat fall under its supervision, as well asfinancial information on those companies.

Another cause of insufficient transparency isthe absence of common rules regarding thefinancial statements of financial conglomerates.Whereas directives have laid down reportingrules for homogenous banking groups andinsurance groups, there are at present no suchcommonly agreed rules for conglomerates. Itwould be worthwhile to investigate moreclosely the existing reporting and disclosurepractices of such groups, which are most likelyto differ widely. The lack of minimumharmonisation hampers comparability acrossgroups and the effective working of marketdiscipline. It may also result in a higher fundingcost as investors will demand a premium for theensuing uncertainty related to the financialreporting.

The situation might improve with theforthcoming adoption of internationalaccounting standards IAS/IFRS by EUcompanies, which would introduce accountingrules that are applicable to both the banking andinsurance sectors. However, these sectors havealso expressed serious reservations about someof the standards as they are currently drafted,and the tricky problem of aggregating insurancedata and banking data remains.


SUPERVISORY COOPERATION

The Financial Conglomerates Directiveaddresses the main areas that were identified bythe Joint Forum as relevant for the supervisionof financial conglomerates. The most developedarea is that of the capital adequacyrequirements, and in particular the methods foraddressing concerns of “double gearing”. Forother areas, such as large exposures and intra-group transactions, the Directive is much lessprescriptive, and supervisors retain a largedegree of freedom to define the concreteelements. This might be the right way toproceed due to factors such as the need toaccommodate the peculiarities of individualgroups or the lack of clear market standards, butthis flexibility also opens the door to an unevenplaying field.

In addition, it seems that so far authorities haveonly concluded memoranda of understanding,which detail the modalities of their cooperation,for a few conglomerates. No systematic studyhas been made of the content of such MoUs toidentify what they have in common and what ispotentially missing. For example, it is unclearto what extent these MoUs sufficiently addresscrisis management issues.

Finally, the mandates, approaches and concreteexperiences of supervisors in dealing withmixed financial groups vary widely acrosscountries. For example, several EU MemberStates have now adopted the model of anintegrated supervisor, but for some (such as theScandinavian countries) this is already a long-established model, while for others (such asBelgium, Germany and the Netherlands) theexperience is much shorter.

The above leads to the conclusion that therewould be merit in increasing the efforts toenhance supervisory cooperation with the aimof pursuing supervisory convergence in the areaof financial conglomerates. In this respect, ithas to be noted that no “level 3” or supervisorycommittee has been established under theLamfalussy framework for such groups. The

three sectoral “level 3” committees shouldtherefore provide enough space in their workschedules to deal with supervisory issuesrelated to financial conglomerates. Moregenerally, a specific forum to discuss cross-sectoral issues, such as financialconglomerates, hybrid financial products, risktransfer instruments and open distributionmodels, in a more structured way might bedesirable.

THE ROLE OF THE COORDINATOR

The coordinator should play an important rolein the supplementary supervision ofconglomerates. The coordinator acts as aninterface with the conglomerate in receivinginformation and passing it on to the othersupervisors; conducts a supervisory assessmentof the conglomerate’s financial situation, risksmanagement and internal control mechanisms;and sometimes takes technical decisions.

The law of the Member State in which thecoordinator is located will determine the rulesof his supplementary supervision. Minimumrules have been laid down in the FinancialConglomerates Directive, but, as pointed outearlier, these minimum rules are very general,thus leaving room for ample national discretion.In view of this, it should be pointed out that thecoordinator does not necessarily have to bebased in the same country in which the grouphas its economic centre of gravity. For example,if a conglomerate is headed by a holdingcompany that is based in the same Member Stateas that of a regulated entity, the latter’ssupervisory authority will also haveresponsibility for the supplementarysupervision of the group. This rule would applyregardless of the importance of the local entitywithin the group, although the relevantauthorities can waive this rule by mutualagreement.

The risk therefore exists that group structureswill be set-up in order to minimise the perceivedregulatory burden related to the supplementary

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10 OPEN ISSUES

supervision. This risk may increase when it iseasier to shift the corporate seat across borders,as is the case, for example, under the EuropeanCompany Statute68 and the planned Directive oncross-border transfers of registered offices.69

Authorities should be aware of the possibilityof such “regulatory arbitrage”, which is anadditional argument for supervisorycooperation and convergence.

It should be stressed that the supervision ofconglomerates is only a supplementary layer ofsupervision. Any decisions taken by thecoordinator therefore leave the responsibilitiesof the different national supervisors in the areaof the supervision of individual regulatedentities intact. Although the coordinator cannotinstruct an individual national authority to takeany specific measure with respect to a regulatedentity in the latter’s jurisdiction, thesupervisors of the individual entitiesnevertheless have a collective responsibility forensuring that the conglomerate meets therequirements of the supplementary supervision,and they also have a legal obligation tocooperate to achieve this end result. In thatrespect, it is important that supervisors do notake a narrow national view and that anynational obstacles that would prevent a nationalsupervisor from complying with the aboveobligations are effectively removed when theDirective is transposed into national law.

It has been argued that the concept ofcoordinator should be introduced for otherfinancial groups, in particular in the context ofthe review of capital requirements for banks andinvestment firms (“Basel II” and “CAD3”projects).70 This call has been inspired by theindustry’s desire to reduce the administrativeburden of groups having to deal with amultitude of different authorities and(reporting) rules in Europe. The coordinatorwould have clearly defined tasks and powers ina wide range of areas, including at least thenecessary powers to, for example, coordinateprudential reporting and validate internalmodels used for capital requirements purposes.

FINANCIAL STABILITY ISSUES

Due to their size, presence in financial markets,and the structural linkages they introducebetween different financial sectors, financialconglomerates are particularly relevant forfinancial stability, not only at the national butalso at the international level. For example, ithas been argued that as individualconglomerates become more diversified acrossbusiness lines, the financial sector as a wholebecomes less diversified as the largestinstitutions are more similar in their riskexposures. As a result, a single large shockcould adversely affect several major groups atthe same time, potentially leading to macro-economic problems.71

At present, there is no systematic and regularmonitoring of such groups at the Europeanlevel, which would be the starting point forassessing their relevance for financial stability.Supervisors are currently in the process ofcollecting information to identify groups thatwould qualify as financial conglomerates underthe Financial Conglomerates Directive, but thisinformation is restricted to the supervisorsconcerned and therefore serves exclusivelymicro-prudential purposes. No systematic andregular pooling of information on individualgroups in a multilateral forum is planned,although such pooling would be useful formicro-prudential purposes (e.g. to perform peeranalyses) as well as for financial stabilitymonitoring.72

An important tool to limit systemic risk is theexistence of ex ante arrangements to deal withcrisis situations resulting from financialconglomerates. Since crisis situations are likelyto require the intervention of central banksthrough emergency liquidity assistance, it isimportant that central banks are also involved insuch arrangements.

68 The European Company is governed by the Council Regulation(EC) No. 2157/2001 of 8 October 2001.

69 European Commission (2004).70 European Commission (2003).71 Bank for International Settlements (2003).72 Padoa-Schioppa (2004).


Crisis situations are typically characterised bycommunication and coordination problems andconflicts of interest. Such difficulties increaseexponentially with the number of authoritiesinvolved especially when they are fromdifferent countries and have differentmandates,73 as is the case when financialconglomerates are involved. Although theseproblems can never be completely eliminated,their negative impact can be minimised byanalysing in advance possible crisis situationsand conflicts of interest that may arise.Moreover, ex ante structures to deal with criseshave to be in place and tested.

It is unclear to what extent present national andEuropean structures are geared towards dealingwith potential problems emanating fromfinancial conglomerates. The earlier suggestionto perform a systematic review of existingMoUs would clarify the extent to which theyalso provide for crisis situations. At the EUlevel, an MoU has been concluded on high-levelprinciples of cooperation between bankingsupervisors and central banks in crisismanagement situations74 but insurancesupervisors are not party to the MoU so itsapplication to financial conglomerates islimited.

Finally, the Financial Conglomerates Directivecreates the opportunity, but not a legalobligation, for the competent authorities toexchange information with central banks, theEuropean System of Central Banks (ESCB) andthe ECB, as such information may be needed forthe performance of their respective tasks.Central banks should indeed have the means toassess the possible systemic implications of thebehaviour of such conglomerates for financialmarkets as well as for payment and settlementsystems. In this context, it is worth mentioningthe recommendation of the “Brouwer I” reportthat the cooperation between supervisors andcentral banks should be strengthened to ensurethat if the emergence of financial problems at amajor group could have contagion effects inother EU Member States this will is reported tothe relevant authorities.75

73 On this, see for example Holthausen and Rønde (2004).74 European Central Bank (2003).75 Economic and Financial Committee (2000).

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11 CONCLUSION

Due to structural factors such as deregulationand the development of financial markets, thelinkages between financial sectors in the EU, inparticular the banking and insurance sectors,have increased over time. These linkages nowhave a multitude of different forms: distributionagreements, credit exposures, credit andoperational risk transfers, shareholdings, etc.This paper focussed on a particular form ofinstitutionalised relationship between financialsectors, the financial conglomerate, which isoften created via shareholder links betweenbanks and insurance firms. The combination ofdifferent financial services in one and the samegroup offers some clear revenue synergiesthrough the exploitation of a common customerbase and common distribution networks, whichexplains why this particular business model hasbecome increasingly popular in the EU. Inrecent years, in the wake of the poorperformance of financial markets, some groupshave had to provide financial support to theircross-sector subsidiaries or have even disposedof them. Nevertheless, the business modelexhibits strengths that are likely to underpin itscontinued long-term attractiveness.

However, such mixed financial services groupsalso create certain risks to which the groupsand public authorities have to respondappropriately. These risks relate in particular tothe transmission of problems from one groupentity to another one via intra-group exposures.Insufficient capital at the group level resultingfrom excessive leveraging and multiple gearingmay result in financially vulnerable groups. Atthe macro-level, concerns relate in particular tothe impact of such complex groups on financialmarkets, on payment and settlement systemsand, more generally, on financial stability. Anadequate supervisory framework thereforeneeds to be in place to address these risks. Withthe adoption of the Financial ConglomeratesDirective, this micro-prudential framework isnow to a large extent in place in the EU.However, there are still a number of openissues, some of which this paper has identified,which will have to be addressed in theimplementation of the Directive. One specific

area for further work could be the regularcollection of information on and monitoring ofsuch groups for financial stability purposes.Given the systemic relevance of many of thesegroups, it is also important that central banksare involved in this process.

11 CONCLU S I ON


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Ancillary banking services undertakingAncillary banking services undertakingAncillary banking services undertakingAncillary banking services undertakingAncillary banking services undertaking(EU)(EU)(EU)(EU)(EU): An undertaking whose principal activityconsists in (i) owning or managing property,(ii) managing data-processing services, or(iii) any other similar activity which is ancillaryto the principal activity of one or more creditinstitutions.76

Asset management company (EU)Asset management company (EU)Asset management company (EU)Asset management company (EU)Asset management company (EU) : Anycompany whose regular business is themanagement of undertakings for collectiveinvestment in transferable securities (UCITS).These UCITS can be in the form of unit trusts/common funds and/or of investmentcompanies.77

Bank holding company (US)Bank holding company (US)Bank holding company (US)Bank holding company (US)Bank holding company (US): A company thatcontrols a bank, either directly or indirectly(through another bank holding company).78

Competent authority (EU)Competent authority (EU)Competent authority (EU)Competent authority (EU)Competent authority (EU) : Nationalauthority empowered to supervise creditinstitutions , and/or insurance undertakings,and/or investment firms on an individual orgroup-wide basis.79

Coordinator (EU)Coordinator (EU)Coordinator (EU)Coordinator (EU)Coordinator (EU) : Competent authorityresponsible for exercising supplementarysupervision on the regulated entities in afinancial conglomerate.80

Credit institution (EU)Credit institution (EU)Credit institution (EU)Credit institution (EU)Credit institution (EU) : An undertakingwhose business is to receive deposits or otherrepayable funds from the public and to grantcredits for its own account.81

Double gearing (multiple gearing)Double gearing (multiple gearing)Double gearing (multiple gearing)Double gearing (multiple gearing)Double gearing (multiple gearing) : The dual(or multiple) use of the same capital within agroup of (supervised) undertakings as a coverfor the supervisory capital requirements ofdifferent undertakings within that group.

Excessive gearing (leveraging)Excessive gearing (leveraging)Excessive gearing (leveraging)Excessive gearing (leveraging)Excessive gearing (leveraging) : Excessivedebt level of the group compared to itsactivities. Includes situations of double gearingand the downstreaming of debt by the parent asequity to the subsidiary.

ANNEX 1

G L O S S A RYFinancial conglomerate (EU)Financial conglomerate (EU)Financial conglomerate (EU)Financial conglomerate (EU)Financial conglomerate (EU) : A group thatmeets the following conditions: (i) it has at leastone regulated entity in the EU, (ii) if it is headedby a regulated entity, it must be the parent of,hold a participation in or be linked through ahorizontal group with a entity in the financialsector, (iii) if the group is not headed by aregulated entity , its activities should occurmainly in the financial sector, (iv) it has at leastone entity in the insurance sector and at leastone entity in the banking or investment servicessector, and (v) it has significant cross-sectoralactivities.82

Financial conglomerate (Joint Forum)Financial conglomerate (Joint Forum)Financial conglomerate (Joint Forum)Financial conglomerate (Joint Forum)Financial conglomerate (Joint Forum) : Aconglomerate whose primary business isfinancial and whose regulated entities engage toa significant extent in at least two of theactivities of banking, insurance and securities.

Financial holding company (EU)Financial holding company (EU)Financial holding company (EU)Financial holding company (EU)Financial holding company (EU): A financialinstitution which is not a mixed financialholding company. Its subsidiary undertakingsare exclusively or mainly credit institutions/investment firms or financial institutions and atleast one of the subsidiaries is a creditinstitution/investment firm.83

Financial holding company (US)Financial holding company (US)Financial holding company (US)Financial holding company (US)Financial holding company (US) : A bankholding company that is allowed to engage inexpanded financial activities. These are:(i) financially related activities (includinginsurance agency and underwriting activities,securities underwriting and dealing, andmerchant banking), (ii) other financial activities(if allowed to do so by the Federal ReserveBoard, after consultation with the Treasury),and (iii) complementary activities (if allowed todo so by the Federal Reserve Board).84

76 Art. 1(23) Consolidated Banking Directive.77 Art. 2(5) Financial Conglomerates Directive.78 Sec. 2(a) Bank Holding Company Act.79 Art. 2(16) Financial Conglomerates Directive.80 Art. 10(1) Financial Conglomerates Directive.81 Art. 1(1) Consolidated Banking Directive.82 Art. 2(14) Financial Conglomerates Directive.83 Art. 1(21) Consolidated Banking Directive. Art. 7(3) Capital

Adequacy Directive.84 Sec. 2(p) Bank Holding Company Act.

49ECB


GLOSSARY

Financial institution (EU)Financial institution (EU)Financial institution (EU)Financial institution (EU)Financial institution (EU) : An undertaking,other than a credit institution, whose principalactivity consists of (i) acquiring holdings or(ii) carrying out one or more of the activitiesthat are subject to mutual recognition under theConsolidated Banking Directive, with theexception of acceptance of deposits and otherrepayable funds. This includes activities thatare also permitted to an investment firm, butdoes not include insurance activities.85

Financial sector (EU)Financial sector (EU)Financial sector (EU)Financial sector (EU)Financial sector (EU) : A sector composed ofone or more of the following entities: (i) a creditinstitution, financial institution or an ancillarybanking undertaking (= banking sector), (ii) aninsurance or reinsurance undertaking or aninsurance holding company (= insurancesector), (iii) an investment firm or financialinstitution (= investment services sector), (iv) amixed financial holding company.86

FirewallsFirewallsFirewallsFirewallsFirewalls (Tripartite Group)(Tripartite Group)(Tripartite Group)(Tripartite Group)(Tripartite Group) : Method ofaddressing contagion risk caused by intra-group exposures whereby regulated entitieswithin a conglomerate are prevented fromhelping other entities in the same group if theprovision of such help resulted in the providerbeing in breach of its capital requirements.

Horizontal group (EU)Horizontal group (EU)Horizontal group (EU)Horizontal group (EU)Horizontal group (EU) : Also calledconsortium. The entities in such group are notconnected through direct or indirect (via acommon holding company) capital links. Butthey can be considered to belong to the samegroup because pursuant to a contract or toprovisions in the memorandum/articles ofassociation they are managed on a unified basis,or because their corporate bodies consist for themajority of the same persons.87

Insurance holding company (EU)Insurance holding company (EU)Insurance holding company (EU)Insurance holding company (EU)Insurance holding company (EU) : A parentundertaking, other than a mixed financialholding company , whose main business is toacquire and hold participations in subsidiaryundertakings. The subsidiary undertakings areexclusively or mainly insurance or reinsuranceundertakings and at least one has to be aninsurance undertaking.88

Insurance undertaking (EU)Insurance undertaking (EU)Insurance undertaking (EU)Insurance undertaking (EU)Insurance undertaking (EU) : An insuranceundertaking within the meaning of the LifeAssurance Directive or the Non-Life InsuranceDirective.

Investment firm (EU)Investment firm (EU)Investment firm (EU)Investment firm (EU)Investment firm (EU) : Any legal personwhose regular occupation or business consistsof the provision of investment services for thirdparties on a professional basis. The investmentservices covered are, among others, thereception, transmission and execution oforders, underwriting and portfolio management.The instruments these services relate to aretransferable securities, UCITS, money marketinstruments and derivatives.89

Mixed-activity holding company (EU)Mixed-activity holding company (EU)Mixed-activity holding company (EU)Mixed-activity holding company (EU)Mixed-activity holding company (EU) : Aparent undertaking, other than (i) a financialholding company, (ii) a credit institution/investment firm, or (iii) a mixed financialholding company. Its subsidiary undertakingsmust include at least one credit institution/investment firm.90

Mixed-activity insurance holding companyMixed-activity insurance holding companyMixed-activity insurance holding companyMixed-activity insurance holding companyMixed-activity insurance holding company(EU)(EU)(EU)(EU)(EU): A parent undertaking, other than (i) aninsurance or reinsurance undertaking, (ii) aninsurance holding company (iii) or a mixedfinancial holding company. Its subsidiaryundertakings must include at least oneinsurance undertaking.91

Mixed financial holding company (EU):Mixed financial holding company (EU):Mixed financial holding company (EU):Mixed financial holding company (EU):Mixed financial holding company (EU): Aparent undertaking, other than a regulatedentity, which heads a financial conglomerate.92

Regulated entity (EU)Regulated entity (EU)Regulated entity (EU)Regulated entity (EU)Regulated entity (EU) : A regulated entity is(i) a credit institution, (ii) an insuranceundertaking, or (iii) an investment firm.93

85 Art. 1(5) Consolidated Banking Directive.86 Art. 2(8) Financial Conglomerates Directive.87 Art. 12 Consolidated Accounts Directive.88 Art. 1(i) Insurance Groups Directive.89 Art. 1(2) Investment Services Directive.90 Art. 1(22) Consolidated Banking Directive. Art. 7(3) Capital

Adequacy Directive.91 Art. 1(j) Insurance Groups Directive.92 Art. 2(15) Financial Conglomerates Directive.93 Art. 2(4) Financial Conglomerates Directive.


94 Art. 1(c ) Insurance Groups Directive.95 Art. 1(2) UCITS Directive.

ReinsuranceReinsuranceReinsuranceReinsuranceReinsurance : Insurance placed by anunderwriter in another company to cut down theamount of the risk assumed under the originalinsurance.

Reinsurance undertaking (EU)Reinsurance undertaking (EU)Reinsurance undertaking (EU)Reinsurance undertaking (EU)Reinsurance undertaking (EU) : Anundertaking, other than an insuranceundertaking, whose main business consists inaccepting risks ceded by an insuranceundertaking or other reinsuranceundertakings.94

Technical provisionsTechnical provisionsTechnical provisionsTechnical provisionsTechnical provisions : The amounts set asideon the balance sheet that are estimated to beappropriate to meet liabilities arising out ofinsurance contracts.

Technical riskTechnical riskTechnical riskTechnical riskTechnical risk : Synonym for underwritingrisk.

Undertakings for collective investment inUndertakings for collective investment inUndertakings for collective investment inUndertakings for collective investment inUndertakings for collective investment intransferable securities or UCITS (EU)transferable securities or UCITS (EU)transferable securities or UCITS (EU)transferable securities or UCITS (EU)transferable securities or UCITS (EU) :Undertakings whose sole object is the collectiveinvestment in transferable securities of capitalraised from the public and which operate on theprinciple of risk-spreading. They can beconstituted according to the law of contract (ascommon funds) or trust law (as unit trusts) orunder statute (as investment companies).95

UnderwritingUnderwritingUnderwritingUnderwritingUnderwriting : The process by which aninsurance company determines whether or notand on what basis it will accept an applicationfor insurance.

Underwriting riskUnderwriting riskUnderwriting riskUnderwriting riskUnderwriting risk : Risk that the actuarial orstatistical calculations used in estimatingtechnical provisions and setting premiums arewrong. Also called technical risk.

51ECB


KEY DIRECTIVES

Number

2002/87/EC

2002/83/EC

2000/12/EC

98/78/EC

95/26/EEC

93/22/EEC

93/6/EEC

92/30/EEC

91/674/EEC

86/635/EEC

85/611/EEC

83/350/EEC

83/349/EEC

78/660/EEC

73/239/EEC

Full name

Directive 2002/87/EC of the European Parliament and of the Council of16 December 2002 on the supplementary supervision of credit institutions,insurance undertakings and investment firms in a financial conglomerate andamending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC,93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/EC of theEuropean Parliament and of the Council

Directive 2002/83/EC of the European Parliament and of the Council of5 November 2002 concerning life assurance

Directive 2000/12/EC of the European Parliament and of the Council of20 March 2000 relating to the taking up and pursuit of the business of creditinstitutions

Directive 98/78/EC of the European Parliament and of the Council of 27 October1998 on the supplementary supervision of insurance undertakings in an insurancegroup

European Parliament and Council Directive 95/26/EC of 29 June 1995 amendingDirectives 77/780/EEC and 89/646/EEC in the field of credit institutions,Directives 73/239/EEC and 92/49/EEC in the field of non-life insurance,Directives 79/267/EEC and 92/96/EEC in the field of life assurance, Directive93/22/EEC in the field of investment firms and Directive 85/611/EEC in the fieldof undertakings for collective investment in transferable securities (UCITS),with a view of reinforcing prudential supervision

Council Directive 93/22/EEC of 10 May 1993 on the investment services in thesecurities field

Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy ofinvestment firms and credit institutions

Council Directive 92/30/EEC of 6 April 1992 on the supervision of creditinstitutions on a consolidated basis

Council Directive 91/674/EEC of 19 December 1991 on the annual accounts andconsolidated accounts of insurance undertakings

Council Directive 86/635/EEC of 8 December 1986 on the annual accounts andconsolidated accounts of banks and other financial institutions

Council Directive 85/611/EEC of 20 December 1985 on the coordination of laws,regulations and administrative provisions relating to undertakings for collectiveinvestments in transferable securities (UCITS)

Council Directive 83/350/EEC of 13 June on the supervision of credit institutionson a consolidated basis

Seventh Council Directive of 13 June 1983 based on the Article 54 (3) (g) of theTreaty on consolidated accounts

Fourth Council Directive 78/660/EEC of 25 July 1978 based on the Article 54 (3)(g) of the Treaty on the annual accounts of certain types of companies

First Council Directive 73/239/EEC of 24 July 1973 on the coordination of laws,regulations and administrative provisions relating to the taking-up and pursuit ofthe business of direct insurance other than life assurance

Abbreviated name

Financial ConglomeratesDirective

Life Assurance Directive

Consolidated BankingDirective

Insurance Groups Directive

Post-BCCI Directive

Investment Services Directive

Capital Adequacy Directive

Second Directive on theConsolidated Supervision ofCredit Institutions

Insurance Accounts Directive

Banking Accounts Directive

UCITS Directive

First Directive on theConsolidated Supervision ofCredit Institutions

Consolidated AccountsDirective

Annual Accounts Directive

Non-Life Insurance Directive

Key direct ives

A NNEX 2


Top 5 banks and insurers in each of the EU countries and their bancassurance groups

Banks

Total Total Name of most Totalassets Name of assets important related assets

Name of bank (€ millions) bancassurance group (€ millions) insurance company (€ millions)

AT 1 Bank Austria Creditanstalt AG 159,596 Munich Re Group 190,059 Victoria Volksbank 761,9Versicherungsa.g

AT 2 Erste Bank der Oesterr. S. AG 86,033 X X X XAT 3 BAWAG PSK Group 47,941 BAWAG PSK Group 47,941 BAWAG Versicherungs AG 486AT 4 Raiffeisen Zentralbank 44,583 Raiffeisen Zentralbank 44,583 Uniqa Versicherungen AG 12,452

Oesterr. AG Oester. AGAT 5 Oesterreichische 11,982 BAWAG PSK Group 47,941 BAWAG Versicherungs AG 486

Postsparkasse AG

BE 1 Fortis Bank 378,000 Fortis 475,411 Fortis NABE 2 Dexia Bank Belgique 222,000 Dexia 351,250 DVV De Volksverz. – Les AP 5,556BE 3 KBC Bank NV 216,000 Almanij 259,302 KBC Insurance NV NABE 4 Bank Brussel Lambert – BBL 160,653 ING Group 705,119 BBL Life 1,450BE 5 Axa Bank Belgium 14,089 AXA 474,000 Axa Belgium SA 15,259

DE 1 Deutsche Bank AG 917,669 Deutsche Bank AG 917,669 X XDE 2 Bayerische Hypo- und 715,860 Munich Re Group 190,059 ERGO Versicherungsgr. AG 101,439

Vereinsbank AGDE 3 Dresdner Bank AG 506,345 Allianz 942,925 Allianz Lebensversicherung 95,793DE 4 Commerzbank AG 500,980 X X X XDE 5 WestLB AG 423,218 X X X X

DK 1 Danske Bank A/S 184,155 Danske Bank A/S 208,961 Danica Liv & Pension 22,554Livsfors.a.s.

DK 2 Realkredit Danmark A/S 71,690 Danske Bank A/S 208,961 Danica Liv & Pension 22,554Livsfors.a.s.

DK 3 Nykredit A/S 69,386 X X X XDK 4 Nordea Bank Danmark 66,986 Nordea AB 241,549 Tryg Forsikring 2,432

Group A/S Livsforsikringss.DK 5 BRF Kredit A/S 19,370 X X X X

ES 1 Santander Central Hispano 355,903 Santander Central Hispano 355,903 Aseguradora Banesto Com. 1,922de Segur.

ES 2 Banco Bilbao Vizcaya 305,470 Banco Bilbao Vizcaya 305,470 BBVA Seguros SA de 8,543Argentaria Argentaria Seguros. y Reas.

ES 3 Caja de Ahorros y Pens. 87,504 Caja de Ahorros y Pens. 87,504 Caixa de Barcelona Seg. 2,362de Barc. de Barc. de Vida

ES 4 Caja de Ahorros y Monte 66,559 X X X Xde P. de M.

ES 5 Banco Español de Crédito SA, 44,689 Santander Central Hispano 355,903 Aseguradora Banesto Com. 1,922Banesto de Segur.

FI 1 Nordea Bank Finland Plc 215,851 Nordea AB 241,549 Nordea Life Assurance Finland 6,037FI 2 Sampo Bank Plc 20,812 Sampo Plc 29,399 Varma Sampo Mutual Pension 16,826

Insuran.FI 3 OKO Bank 12,649 Okobank Group 30,030 Aurum Life Insurance 1,635FI 4 Aktiva Savings Bank Plc 3,331 X X X XFI 5 Alandsbanken Abp 1,813 X X X X

FR 1 BNP Paribas 825,288 BNP Paribas 825,288 Natio Vie 32,980FR 2 Credit Agricole CA 563,288 Credit Agricole 563,288 Predica 83,930FR 3 Societe Generale 512,499 Societe Generale 512,499 Sogecap 34,383FR 4 Groupe Caisse d’Epargne 285,896 Groupe Caisse d’Epargne 285,896 Ecureuil Vie 51,500FR 5 Credit Mutuel Centre Est 218,800 Credit Mutuel – CIC 218,801 Groupe des Assurances 20,531

Europe du Cr.Mutuel

GR 1 National Bank of Greece SA 52,648 National Bank of Greece SA 52,648 The Ethniki Hellenic 1,251Insurance Co

GR 2 Alpha Bank AE 29,904 Alpha Bank AE 30,684 Alpha Insurance Company AE 290GR 3 EFG Eurobank Ergasias SA 19,617 X X X XGR 4 Commercial Bank of Greece 18,143 Commercial Bank of Greece 18,143 Phoenix General 366

Insurance Co. SAGR 5 Agricultural Bank of Greece 16,243 X X X X

ANNEX 3

53ECB


TOP 5 BANKSAND INSURERS

IN EACH OF THEEU COUNTRIES

AND THEIRBANKASSURANCE

GROUPS

Top 5 banks and insurers in each of the EU countries and their bancassurance groups (cont’)

Banks


Name of bank (€ millions) bancassurance group (€ millions) insurance company (€ millions)

IE 1 Allied Irish Banks Plc 86,327 Allied Irish Banks Plc 86,327 ARK Life Assurance Company 1,045IE 2 Bank of Ireland 81,643 X X X XIE 3 DePfa-Bank Europe Plc 44,962 X X X XIE 4 Rabobank Ireland Plc 18,682 X X X XIE 5 Anglo Irish Bank Corporation 15,720 X X X X

IT 1 Banca Intesa Spa 313,220 Banca Intesa Spa 313,220 Compagnia di Ass. i Riass. 6,368Sulla Vita

IT 2 UniCredito Italiano Spa 208,172 UniCredito Italiano Spa 208,172 Creditras Vita Spa 4,394IT 3 San Paolo IMI 169,347 San Paolo IMI 169,347 San Paolo Vita Spa 10,181IT 4 Capitalia Spa 131,415 X X X XIT 5 Banca Monte dei Paschi 116,768 Gruppo Monte dei Paschi 116,768 Montepaschi Vita Spa 6,244

di Siena Spa di Siena

LU 1 Deutsche Bank Luxembourg SA 48,885 Deutsche Bank AG 917,669 X XLU 2 Dexia Banque Intern. a 44,708 Dexia 351,250 X X

LuxembourgLU 3 HVB Banque Luxembourg SA 40,650 Munich Re Group 190,059 X XLU 4 Banque Generale du 38,996 Munich Re Group 190,059 X X

Luxembourg SALU 5 BNP Paribas Luxembourg 37,009 BNP Paribas 825,288 X X

NL 1 ABN Amro Holding NV 597,363 ABN Amro Holding NV 597,363 ABN Amro Levensverzekering 2,966NL 2 ING Bank NV 443,356 ING Group 705,119 Nationale Nederl. 55,949

Levenverz.MNL 3 Rabobank Nederland 363,619 X X X XNL 4 Fortis Bank Nederland 80,002 Fortis 475,411 AMEV St. Rotterdam 4,405

(Holding) NV Verz. GroepNL 5 SNS Bank NV 32,416 SNS – Reaal Groep NV 43,761 SNS – Reaal Groep NV 43,761

PT 1 Caixa Geral de Depositos 66,462 Caixa Geral de Depositos 66,462 Companhia de Seg. Fidelidade 3,781PT 2 Banco Comercial Portugues SA 62,952 X X X XPT 3 Banco Espirito Santo SA 38,523 Espirito Santo Financial Group 42,748 Companhia de Seg. 4,282

Tranquilidade VidaPT 4 Banco Totta & Acores 27,366 Santander Central Hispano 355,903 X XPT 5 Banco BPI SA 24,791 Banco BPI SA 24,791 BPI Vida – Comp. de Seguros NA

de Vida

SE 1 Svenska Handelsbanken 124,841 Svenska Handelsbanken 124,841 SPP Livforsakring AB 10,257SE 2 Skandinaviska Enskilda 118,650 Skandinaviska Enskilda 118,650 SEB Trygg Liv 6,836

Banken AB Banken ABSE 3 Foereningssparbanken – 99,196 Foereningssparbanken – 99,196 X X

Swedbank SwedbankSE 4 Nordea Bank Sweden AB 66,384 Nordea AB 241,549 Nordea Life Assurance NA

Sweden I, IISE 5 Stadshypotek AB 38,815 Svenska Handelsbanken 124,841 SPP Livforsakring AB 10,257

UK 1 Barclays Bank Plc 573,477 Barclays Plc 573,476 Barclays Life Assurance 11,151Company Ltd

UK 2 Royal Bank of Scotland PLC 338,825 Royal Bank of Scotland Group 590,034 Royal Scottish Assurance Plc 3,405UK 3 HSBC Bank Plc 327,353 HSBC Holdings Plc 778,591 HSBC Life (UK) Ltd 5,100UK 4 Lloyds TSB Bank Plc 315,769 Lloyds TSB Group Plc 312,889 Lloyds TSB General Insurance 1,500

LimitedUK 5 Abbey National Plc 303,313 Abbey National Plc 303,313 Abbey Life Assurance 19,132

Company Ltd

Source: Based on information from Bankscope and Isis. Assets are on a consolidated basis where available.


Top 5 banks and insurers in each of the EU countries and their bancassurance groups

Insurance companies


Name of insurance company (€ millions) bancassurance group (€ millions) bank (€ millions)

AT 1 Uniqa Versicherungen AG 12,452 Raiffeisen Zentralbank 44,583 Raiffeisen Zentralbank 44,583Oester. AG Oester. AG

AT 2 Wiener Stadt. Allgemeine Vers. 10,652 X X X XAT 3 Generali Versicherung AG 5,305 Generali Group 222,936 X XAT 4 Uniqa Personenversicherung 5,049 Raiffeisen Zentralbank 44,583 Raiffeisen Zentralbank 44,583

Oester. AG Oester. AGAT 5 Raiffeisen Versicherung AG 4,942 Raiffeisen Zentralbank 44,583 Raiffeisen Zentralbank 44,583

Oester. AG Oester. AG

BE 1 Fortis NA Fortis 475,411 Fortis Bank 378,000BE 2 KBC Insurance NV NA ALMANIJ 259,302 KBC Bank NV 216,000BE 3 AXA Belgium SA 15,259 AXA 474,000 Axa Bank Belgium 14,089BE 4 SMAP Societe Mutuelle des A.P 9,886 X X X XBE 5 SMAP Pensions 6,267 X X X X

DE 1 ERGO Versicherungsgr. AG 101,439 Munich Re Group 190,059 Bayerische Hypo-und 715,860Vereinsbank AG

DE 2 Allianz Lebensversicherung 95,793 Allianz 942,925 Dresdner Bank AG 506,345DE 3 AMB Generali Holdings AG 78,587 Generali Group 222,936 Deutsche Bausparkasse Badenia 5,043DE 4 Wuestenrot & Wuertembergis. 53,141 Wuestenrot & 52,943 Wuestenrot Bausparkasse AG 4,312

Wuertembergisse AGDE 5 Gerling Konzern Vers. 40,323 X X X X

Beteil. AG

DK 1 Danica Liv&Pension Livsfors. 22,554 Danske Bank 208,961 Danske Bank 208,961DK 2 PFA Pension Forsikringsa.s. 20,734 X X X XDK 3 Codan A/S 11,882 X X X XDK 4 Kommunernes Pensionsfors. 8,872 X X X XDK 5 Magistrenes Pensionskasse 5,171 X X X X

ES 1 Caifor SA 8,916 Fortis 475,411 X XES 2 Vida-Caixa SA de Seg. y Reaseg 8,807 Fortis 475,411 X XES 3 BBVA Seguros SA de Seg. y Rea 8,543 Banco Bilbao Vizcaya 305,470 Banco Bilbao Vizcaya 305,470

Argentaria ArgentariaES 4 Mapfre Vida SA Seguros y Rea. 8,415 X X X XES 5 Allianz Comp. de Seguros y Rea. 4,921 Allianz 942,925 X X

FI 1 Varma Sampo Mutual Pension In. 16,826 Sampo Plc 29,399 Sampo Bank Plc 20,812FI 2 Ilmarinen Mutual Pension Ins. 13,786 X X X XFI 3 Nordea Life Assurance Finland 6,073 Nordea AB 241,549 Nordea Bank Finland Plc 215,851FI 4 Suomi Mutual Life Assurance Co 5,892 X X X XFI 5 Tapiola Mutual Pension Ins. Co 4,610 X X X X

FR 1 CNP Assurances 142,055 X X X XFR 2 Predica 83,930 Credit Agricole 563,288 Credit Agricole 563,288FR 3 Groupama 60,056 Groupama 60,056 Banque Finama 2,312FR 4 Ecureuil Vie 51,450 Groupe Caisse d’Epargne 285,896 Groupe Caisse d’Epargne 285,896FR 5 CGU France 47,594 Aviva Plc 300,851 X X

GR 1 The Ethniki Hellenic Insurance Co 1,250 National Bank of Greece SA 52,648 National Bank of Greece SA 52,648GR 2 Phoenix General Insurance Co. 366 Commercial Bank of Greece 18,143 Commercial Bank of Greece 18,143GR 3 X X X X X XGR 4 X X X X X XGR 5 X X X X X X

IE 1 Hibernian Life and Pensions Ltd 5,230 Aviva Plc 300,851 X XIE 2 Hannover Reinsurance (Ireland) 3,274 X X X XIE 3 Eagle Star Life Assurance Co 2,510 X X X XIE 4 Scottish Mutual International Plc 1,792 Abbey National Plc 303,313 Abbey National Plc 303,313IE 5 Allianz Irish Life Holdings Plc 1,508 Allianz 942,925 Dresdner Bank (Ireland) Plc 1,887

55ECB


TOP 5 BANKSAND INSURERS

IN EACH OF THEEU COUNTRIES

AND THEIRBANKASSURANCE

GROUPS

Top 5 banks and insurers in each of the EU countries and their bancassurance groups (cont’)

Insurance companies


Name of insurance company (€ millions) bancassurance group (€ millions) bank (€ millions)

IT 1 Riunione Adriatica 43,146 Allianz 942,925 X Xdi Sicurta Spa

IT 2 Alleanza Assicurazioni Spa 22,638 Generali Group 222,936 Banca Generali Spa – Generbanca 895IT 3 INA Vita Spa 19,549 Generali Group 222,936 Banca Generali Spa – Generbanca 895IT 4 Toro Assicurazioni Spa 18,387 X X X XIT 5 Compagnia Assicuratrice Unipol 16,341 Compagnia Assicuratrice 16,341 Unipol Banca Spa 1,588

Unipol

LU 1 Lombard International Assurance 2,888 X X X XLU 2 PanEuro Life SA 2,648 X X X XLU 3 Foyer Compagnie Lux. SA 1,751 X X X XLU 4 Scottish Equitable Intern. SA 1,739 Aegon NV 264,061 X XLU 5 Vitis Life Luxembourg SA 1,130 ALMANIJ 259,302 Kredietbank S.A. 30,695

Luxembourgeoise

NL 1 Aegon NV 264,061 Aegon NV 264,061 Aegon Bank NV 5,872NL 2 Nationale Nederl. Levenverz.M 55,949 ING Group 705,119 ING Bank N.V. 443,356NL 3 SNS – Reaal Groep NV 43,761 SNS – Reaal Groep NV 43,761 SNS Bank NV 32,416NL 4 Achmea Holding NV 39,876 Eureko B.V. 53,204 Achmea Bank Holding NV 15,710NL 5 Delta Lloyd NV 34,239 Aviva Plc 300,851 Delta Lloyd Bankengroep NV 4,577

PT 1 Seguros e Pensoes Gere SGPS 8,283 Eureko B.V. 53,204 X XPT 2 Companhia de Seg. Tranquilidade 4,282 Espirito Santo Financial Group 42,748 Banco Espirito Santo SA 38,523PT 3 Companhia de Seg. Fidelidade 3,781 Caixa Geral de Depositos 66,462 Caixa Geral de Depositos 66,462PT 4 Mundial Confianca Comp. de Seg. 2,790 Caixa Geral de Depositos 66,462 Caixa Geral de Depositos 66,462PT 5 X X X X X X

SE 1 Skandia Insurance Co. Ltd 64,121 Skandia Insurance Co. Ltd 64,121 Skandiabanken 3,515SE 2 Alecta Pensionsforsakring Oms. 36,962 X X X XSE 3 Arbetsmarkn. Pensionsfoers.a.b. 22,841 X X X XSE 4 Gamla Livfoers.a.b. Seb 18,127 Skandinaviska Enskilda 118,650 Skandinaviska Enskilda 118,650

Trygg Liv Banken AB Banken ABSE 5 Folksam Mutual Life Insurance 6,570 X X X X

UK 1 Legal and General Group Plc 176,569 X X X XUK 2 Prudential Assurance Co. Ltd 136,222 Prudential Plc 255,846 Prudential Banking Plc 12,742UK 3 Standard Life Assurance Co. 130,387 Standard Life Assurance Co. 130,387 Standard Life Bank Ltd. 8,049UK 4 CGU International 128,252 Aviva Plc 300,851 X X

Insurance PlcUK 5 Royal & Sun Alliance 100,982 X X X X

Insurance Plc

Source: Based on information from Bankscope and Isis. Assets are on a consolidated basis where available.


Element of comparison Banking groups Insurance groups Investment firm groups Financial conglomerates

Legal basis Consolidated Banking Insurance Groups Capital Adequacy Financial ConglomeratesDirective Directive Directive Directive

Scope of harmonisation Minimum Minimum Minimum Minimumand nature of standards harmonisation/standards harmonisation/standards harmonisation/standards harmonisation/standards

Entry point for Credit institution Insurance undertaking Investment firm Regulated entitysupervision

Nature of supervision Consolidated supervision “Solo plus” supervision 3) Consolidated supervision “Solo plus” supervision 3)

Areas of supervision – Solvency 1) – Solvency 1) – Solvency 1) – Solvency 1)

– Own funds to cover – Intra-group – Own funds to cover – Intra-groupmarket risk 1) transactions 2) market risk 1) transactions 2)

– Large exposures 1) – Internal control – Large exposures 1) – Risk-concentration– Non-financial systems for – Non-financial – Risk management

qualifying holdings 1) information qualifying holdings 1) processes– Internal control production – Internal control – Internal control

systems for systems for systems forinformation production information production information production

Types of entity included – Credit institutions – Insurance – Investment firms Regulated entitiesin supplementary – Financial institutions undertakings – Financial institutionssupervision – Ancillary banking – Other undertakings

services undertakings (financial or non-financial)

Entities within scope of – Entities within scope – Related entities of – Entities within scope – Entities heading asupervision of consolidation insurance undertaking of consolidation financial

(parent and – Participating entities in (parent and conglomeratesubsidiaries) insurance undertaking subsidiaries) – Entities, the parent of

– Related entities of which is an EU mixedparticipating entities in financial holdinginsurance undertaking company

– Entities linked withanother financialsector entity through ahorizontal group

Comparison of the supervision of f inancial groups

1) Quantitative requirements.2) It may be assumed that both positions and transactions (i.e. changes in positions) are covered. See Helsinki Protocol for InsuranceGroups.3) In contrast to consolidated supervision, “solo plus” supervision uses the group entities’ individual financial statements as a startingpoint and corrects them for the group effect.

ANNEX 4

57ECB


EUROPEAN CENTRAL BANKOCCASIONAL PAPER SERIES

1 “The impact of the euro on money and bond markets” by J. Santillán, M. Bayle andC. Thygesen, July 2000.

2 “The effective exchange rates of the euro” by L. Buldorini, S. Makrydakis and C. Thimann,February 2002.

3 “Estimating the trend of M3 income velocity underlying the reference value for monetarygrowth” by C. Brand, D. Gerdesmeier and B. Roffia, May 2002.

4 “Labour force developments in the euro area since the 1980s” by V. Genre andR. Gómez-Salvador, July 2002.

5 “The evolution of clearing and central counterparty services for exchange-tradedderivatives in the United States and Europe: a comparison” by D. Russo,T. L. Hart and A. Schönenberger, September 2002.

6 “Banking integration in the euro area” by I. Cabral, F. Dierick and J. Vesala,December 2002.

7 “Economic relations with regions neighbouring the euro area in the ‘Euro Time Zone’” byF. Mazzaferro, A. Mehl, M. Sturm, C. Thimann and A. Winkler, December 2002.

8 “An introduction to the ECB’s survey of professional forecasters” by J. A. Garcia,September 2003.

9 “Fiscal adjustment in 1991-2002: stylised facts and policy implications” by M. G. Briotti,February 2004.

10 “The acceding countries’ strategies towards ERM II and the adoption of the euro:an analytical review” by a staff team led by P. Backé and C. Thimann and includingO. Arratibel, O. Calvo-Gonzalez, A. Mehl and C. Nerlich, February 2004.

11 “Official dollarisation/euroisation: motives, features and policy implications of current cases”by A. Winkler, F. Mazzaferro, C. Nerlich and C. Thimann, February 2004.

12 “Understanding the impact of the external dimension on the euro area: trade, capital flows andother international macroeconomic linkages“ by R. Anderton, F. di Mauro and F. Moneta,March 2004.

13 “Fair value accounting and financial stability” by a staff team led by A. Enria and includingL. Cappiello, F. Dierick, S. Grittini, A. Maddaloni, P. Molitor, F. Pires and P. Poloni,April 2004.

14 “Measuring Financial Integration in the Euro Area” by L. Baele, A. Ferrando, P. Hördahl,E. Krylova, C. Monnet, April 2004.


15 “Quality adjustment of European price statistics and the role for hedonics” by H. Ahnert andG. Kenny, May 2004.

16 “Market dynamics associated with credit ratings: a literature review” by F. Gonzalez, F. Haas,R. Johannes, M. Persson, L. Toledo, R. Violi, M. Wieland and C. Zins, June 2004.

17 “Corporate ‘Excesses’ and financial market dynamics” by A. Maddaloni and D. Pain, July 2004.

18 “The international role of the euro: evidence from bonds issued by non-euro area residents” byA. Geis, A. Mehl and S. Wredenborg, July 2004.

19 “Sectoral specialisation in the EU a macroeconomic perspective” by MPC task force of theESCB, July 2004.

20 “The supervision of mixed financial services groups in Europe” by F. Dierick, August 2004.

the supervision of mixed financial services groups in europe

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