Evento: High level meeting on the implementation of Basel II in Asia and other regional supervisory authoritie

Roldán Alegre, José María

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Repositorio Institucional de la Biblioteca del Banco de España

FINANCIAL CONGLOMERATES, A VANISHING PROBLEM?José María RoldánDirector General of Banking Regulation, Bank of SpainMember of Committee of European Supervisors, andMember of the Basel Committee on Banking SupervisionHIGH LEVEL MEETING ON THE IMPLEMENTATION OF BASEL II IN ASIA AND OTHER REGIONAL SUPERVISORY AUTHORITIESHong Kong11-12 December 20062DEFINITION OF A FINANCIAL CONGLOMERATE (FC)ActivityBanking + Securities + Insurance (JF Definition: any of two)Insurance + any of other (Banking/Securities) (EU)– ThresholdIf one activity is non-material, not a FC3WHAT IS SPECIAL ABOUT F.C.1. Products, firms not tagged as sectoral- Similar financial product can be packed as an insurance product, abanking product, a securities product- Same business financial activity can be undertaken by a bank, aninvestment bank or an insurance company2. Convergence in risk management practices- Private sector advances in risk aggregation- Public sector consolidated supervision as the best practice3. But differences still exit- Risk Management actuaries in insurance- Regulation capital adequacy, definition of capitalCHALLENGE: KEEP DIFFERENT WHAT NEEDS TO BE DIFFERENT, BUT AVOID REGULATORY ARBITRAGE OR IMPROPER RISK MANAGEMENT PRACTICES4WHAT HAVE WE DONEi. Global Level- JF Risk Management Practices and Regulatory Capital – Cross-sectoral comparison-Risk integration and aggregation; Op risk transfer across sectors, credit risk transfer,…ii. Regional Level- EU F.C. Directive- USA Umbrella Supervision (Gramm-Leach-Bliley Act)CONTENTA. Avoid double gearing- Same capital, covering different financial riskB. Coordinate supervisorsC. Have a global picture of FC (“Consolidated or group-wide”)5DOUBLE GEARING -EXAMPLEi. Insurance company in country A with € 6,000 capital…ii. …establishes a securities firm in country B with € 3,000 of capitaliii. Insurance supervisor in A, if only looks at the insurance company, mightconclude that it has € 6,000 to cope with risksiv. Securities supervisor in B, if only sees the securities house, mightconclude that the firm has € 3,000 of available capitalv. The problem is that the consolidated company has € 6,000 of available capital to deal with risks of both, the insurance and the securities firmsvi. Therefore, there is a need for consolidated or group-wide supervision buttaking into account that capital needs differ by sector (i.e. banks, insurersand securities)6WHAT NEEDS TO BE DONE• Industry: best practices in risk management, extend them acrossjurisdictions, across groups, across sectors• Regulators: promote sound regulatory convergence (avoidarbitrage)- Definition of capital- Risk Based Regulation: EU, from B II to Solvency II7THE PARADOX: CONGLOMERATES, A VANISHING PROBLEM? • FUNNY THING: NEGATIVE CONNOTATION OF THE WORD F.C.• NOT ONLY THERE ARE FEWER F.C., BUT EVEN F.C. DO NOT WANT TO BE   CALLED F.C. !!• WHY? NOT CLEAR– BECAUSE OF REGULATION:IF ELIMINATION OF CAPITAL/REGULATORY ARBITRAGE: NO   REGRETOTHER REASONS– SIMPLE: INDUSTRY TREND8• IF F.C. NOT SO RELEVANT, SHOULD WE GIVE UP EFFORTS?• ANSWER: NO!• RATIONALE FOR REGULATION IS THERE1. SAME FINANCIAL INSTRUMENTS DYNAMICSSAME RISK MANAGEMENTSAME REGULATIONIRRESPECTIVE OF SECTORAL TAG2. COORDINATION OF SUPERVISORSLOOK AT THE BROAD PICTURE: FC AS A WHOLE3. AVOID DOUBLE GEARING9CONCLUSIONRATIONALE FOR EFFORTS: RIGHT TRACKSTEP BY STEP: REGULATORS/INDUSTRYNOT CONFUSE “INDUSTRY TRENDS” WITH A “SOUND REGULATORY FRAMEWORK”THANK YOU FOR YOUR ATTENTION

Financial conglomerates: a vanishing problem?

https://repositorio.bde.es/bitstream/123456789/22167/1/IIPP-2006-042.pdf

Financial conglomerates: a vanishing problem?

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