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| European Union - Financial Conglomerates Directive Question: What is common in the Capital Requirements Directive (Basel ii in the EU) and the Financial Conglomerates Directive? Answer: The need for the prudential supervision of financial conglomerates and financial groups involved in cross-sectoral activities to foster the stability of the financial system. Both directives try to ensure that: 1. Financial conglomerates are adequately capitalised 2. The same capital is not being counted twice – is not used as a buffer against risks in different entities 3. Conglomerates calculate their overall solvency position 4. There is ONE lead regulator for financial conglomerates, and not many national regulators that understand only a part of what is really in the conglomerate In the Financial Conglomerates Directive we have the “co-ordinating supervisor”, not so different from the “consolidating supervisor” we have in Basel ii / Capital Requirements Directive. The co-ordinating supervisor for financial conglomerates can be the same with the consolidating supervisor. The “co-ordinating supervisor” exercises supplementary supervision: • requires adequate capital resources to be available at the level of the financial conglomerate • monitors significant risk concentrations at the level of the financial conglomerate; • monitors significant intra-group transactions According to the Financial Conglomerates Directive, the consolidated group must be subject to supervision and minimum capital standards by an EU member state authority. Firms that are headquartered outside the EU, and are operating in EU markets, must be subject to supervision at the holding company level by a competent home country authority, which supervision is equivalent to that provided for by the provisions of the Directive. The EU's national supervisors will be responsible to decide about it (equivalency determinations) on a group-by-group basis, in accordance with guidance issued by the European Commission What has happened? The Joint Forum on Financial Conglomerates (Joint Forum) was established in early 1996 under the aegis of the Basel Committee on Banking Supervision (Basel Committee), the International Organisation of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS). In chapters D and E of the “Supervision of Financial Conglomerates”, from the Bank for International Settlements, there is a framework and principles of supervisory information sharing. These principles help assure that there are no material gaps in supervisors' understanding of inter-affiliate relationships within a financial group that could ultimately result in financial instability. There are also approaches to the supervisory information sharing, especially between G-10 and non-G-10 supervisors. The Joint Forum “has reviewed various means to facilitate the exchange of information between supervisors within their own sectors and between supervisors in different sectors and has investigated legal or other barriers which could impede the exchange of information between supervisors within their own sectors and between supervisors in different sectors” In June 2006, in another publication, the “Home-Host Information Sharing in Effective Implementation of Basel II” we read the responsibilities for home and host supervisors and the high-level principles for the cross-border implementation of Basel ii. Every time we read the words “framework” and “principles” in a new paper from the Basel Committee, we do not need to be prophets to expect a directive from the European Union. |
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