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Basel Committee on Banking
Supervision, The Joint Forum
Review of the Differentiated
Nature and Scope of Financial Regulation
Key Issues and
Recommendations (January 2010)
V. Recommendations to reduce key differences in regulation
across the banking, securities, and insurance sectors
Financial supervision and regulation is
sector-specific, as
evidenced by the independent development of core principles and
standards for the banking, securities, and insurance sectors.
Such principles do not specifically take into account
systemic risk or financial system stability in a consistent
manner.
In addition, differences exist with respect to
the relative importance attached to prudential or market conduct
regulation by supervisors across the three sectors.
Even
though the boundaries of activities among the three sectors have
become increasingly blurred over time, this sector-specific
approach comes at the risk of more differentiated financial
supervision among sectors.
The Joint Forum
recommends a
more coordinated approach among the three sectors.
Recommendation n° 1:
The BCBS, IOSCO, and IAIS should review and revise their core
principles to ensure that the principles appropriately take into
account systemic risk and the overall stability of the financial
system.
Work should also be carried out to update and
make more consistent principles related to market conduct,
consumer protection, and prudential requirements.
In the
March 2009 report on Enhancing Sound Regulation and
Strengthening Transparency, the G-20 recommended that, as a
supplement to their core mandate, the mandates of all
international financial bodies and standard setters (the IASB,
BCBS, IOSCO, and IAIS) should take account of financial system
stability.
The Joint Forum agrees that maintaining
overall financial system stability and reducing systemic risk is
a cross-sectoral principle of financial supervision and
regulation that should be further developed in each sector’s
core principles.
The Joint Forum agrees with the G-20
recommendation and encourages BCBS,IOSCO, and IAIS to review and
revise, as necessary, their respective core principles to take
into account financial system stability.
The extent to
which concerns over systemic risk and financial stability play a
role in the development of supervisory policies and approaches
should be made clearer for each sector, possibly to include an
overarching principle addressing overall financial system
stability.
Generally, the Joint Forum believes that
increasing the consistency of the sectors’ core principles will
contribute to reducing regulatory gaps and work should also be
carried out to strengthen consistency in core principles related
to market conduct, consumer protection, and prudential
requirements.
For example, ensuring that there are
adequate principles regarding market conduct and customer
protection would be for the benefit of customers and would
enhance confidence.
This assurance would also help
reduce the possibilities for regulatory arbitrage regarding
product manufacturing and distribution across sectors.
Recommendation n° 2:
International prudential frameworks for minimum capital adequacy
should be in place within each sector to reduce regulatory
arbitrage across countries and to facilitate the supervision of
cross-border groups.
A uniform minimum global capital
standard does not exist for the securities and insurance
sectors.
The BCBS’s core principles alone incorporate
the requirement for a uniform risk-based capital standard to
reduce competitive inequalities across countries and to
safeguard financial stability.
IOSCO and IAIS expect
supervisors to promulgate capital requirements, but they do not
have a single global capital standard for their respective
sectors.
It is the Joint Forum’s view that the lack of a
uniform global standard for capital adequacy within each sector
can contribute to regulatory arbitrage, competitive inequalities
across jurisdictions, and, in some cases, financial system
instability.
Striving for a single global standard,
however, should not result in the lessening of existing
prudential standards.
Recommendation n° 3:
In addition to making core principles more consistent across
sectors, the BCBS, IOSCO, and IAIS should work together to
develop common crosssectoral standards where appropriate so that
similar rules and standards are applied to similar activities,
thereby reducing opportunities for regulatory arbitrage and
contributing to a more stable financial system.
The G-20
noted that, in order to avoid regulatory arbitrage, there is a
need for greater consistency in the regulation of similar
instruments and of institutions performing similar activities,
both within and across borders.
The Joint Forum agrees
with this need for greater consistency.
Comparable
high-quality cross-sectoral standards should be developed with
the goal of reducing opportunities for regulatory arbitrage by
ensuring, to the extent possible, that similar activities are
subject to similar rules and standards.
Recommendations
for mortgage origination and credit risk transfer products, as
outlined in Chapters 3 and 5 of this report, provide examples of
possible crosssectoral standards.
Further work is needed
to identify additional instances where similar standards should
be applied to similar activities, regardless of the sector in
which the activities are conducted.
Chapter 2
Supervision and Regulation of Financial Groups
I.
Introduction
Financial groups offer services in
banking, insurance, or securities, in various combinations.
They often operate across multiple jurisdictions, have
multiple interdependencies, and comprise both regulated and
unregulated entities.
They use an array of legal
entities and structures to derive synergies and cost savings,
and they take advantage of differences in taxation, supervision,
and regulation.
These overlaps and linkages blur the
traditional supervisory and regulatory boundaries across the
three sectors.
While international standards guide the
supervision and regulation of financial groups, the combination
of blurring distinctions between the sectors, the presence of
unregulated entities, different supervisory approaches, and a
scarcity of information, presents major challenges.
Because of these issues, supervisors and central banks have
struggled to evaluate risks posed by financial groups and
significant costs have been incurred trying to mitigate the
potential impact of their activities on global and national
financial stability.
Prime examples include the bailout
of American International Group (AIG) and the demise of Lehman
Brothers, both in the United States, along with the bailout of
Fortis in the Netherlands and other financial groups benefiting
from state support.
This chapter examines differences in
the supervision and regulation of financial groups and the
problems arising from those differences. The focus is on
differences in the treatment of:
• Unregulated entities
when calculating group capital adequacy.
• Intra-group
transactions and exposures, including those involving
unregulated entities.
• Unregulated entities,
particularly unregulated parent companies of regulated entities.
These differences, irrespective of the frameworks used,
resulted in supervisory and regulatory requirements that failed
to fully capture the significance or potential costs of all the
risks that financial groups face, especially with regard to
unregulated entities.
Accessing and sharing information
about these unregulated entities is another important challenge.
Responses to the financial crisis and proposals for reform
have emphasised supervisors’ need to address such differences.
Indeed, the financial crisis precipitated a flurry of
policy initiatives aimed at reducing the risk and impact of
future crises in the financial sectors.
The G-20
Leaders, the Financial Stability Board, and the Joint Forum’s
parent committees have all been working to strengthen financial
regulation and in particular prudential requirements for the
regulated entities.
Without commensurate attention to
unregulated entities, these concerted efforts could result in an
undesired effect, that is, providing incentives to operate
outside the traditional boundaries of supervision and regulation
for the three sectors.
In this regard, it is noted that
the IAIS is finalising a Guidance paper on treatment of
non-regulated entities in group-wide supervision.
II. Background
A financial group is a collection of legal entities linked
together by control or influence.
Through the use of
separate regulated and unregulated entities, financial groups
can take advantage of supervisory and regulatory differences.
(For the purposes of this report, “unregulated” refers
to unregulated or lightly regulated entities or subsectors
within the financial system.)
An unregulated entity may
be established for a variety of reasons, may engage in financial
or nonfinancial activities or a combination of the two, may not
be in the same jurisdiction as the
related regulated entity,
and may have no direct connection to the related regulated
entity.
Financial groups establish unregulated entities
in foreign jurisdictions for a number of reasons.
The
most obvious reasons are tax neutrality, cost, and the
development of business specialties within jurisdictions.
For example, some jurisdictions specialise in the formation
and administration of unregulated special purpose entities
(SPE).
The absence of regulation of SPEs invariably
means that limited information is available in the jurisdiction
of SPEs, as little is required to be provided or maintained.
Legal structures in some jurisdictions may hinder group-wide
supervision.
A company may have its own board of
directors, and there may be no requirement for the board to
provide company information to unrelated third parties, such as
foreign supervisors.
Importantly, the company may not
even possess information desired by the supervisor, if, for
example, the board of an unregulated entity is under no
obligation to conduct stress testing to manage
risk.
This chapter focuses on two types of unregulated entities:
SPEs
The unregulated financial system experienced rapid growth in
the past two decades, especially between 2000 and 2008, as
discussed in the Joint Forum’s Report on Special Purpose
Entities, published in September 2009.
Helping to fuel
this growth was the use of unregulated SPEs, which allowed
groups to raise funds from capital markets for lending and
investing, rather than through the use of bank balance sheets.
Just as SPEs grew rapidly, use of SPEs declined during the
financial crisis, which focused attention on how little was
known about SPEs, let alone how to manage their risks.
The report found that financial groups were motivated to use
unregulated SPEs for a number of reasons: advantages related to
risk management, funding and liquidity, off-balance sheet
accounting, regulatory capital, and investor motivations.
The report noted that there is no consistency in the
treatment of SPEs despite their influence on the related
regulated entity or group.
Non-operating holding companies
Another type of entity that is particularly relevant for
this report is the unregulated parent holding company within a
financial group. Jurisdictional differences in powers and
requirements over an unregulated parent holding company, also
known as a non-operating holding company, or NOHC, pose
challenges.
While NOHCs are often at the top of the
structure of a financial group, they can also be positioned
elsewhere in the group, for example, at the head of a sub-group.
Supervisory and regulatory requirements for NOHCs
vary
greatly and sometimes do not exist.
When the parent
company of a financial group is a regulated entity, it is
subject to some form of supervision.
There are
legitimate
reasons for financial groups to use intra-group transactions and
other arrangements (referred to here as intra-group transactions
and exposures, or ITEs).
ITEs can be used by financial
groups to reconcile business lines with the legal structures.
ITEs can create certain synergies and efficiencies among
the various parts of the group, such as in the use of capital
and other resources and in the management of risk exposures.
ITEs also can pose risks and create “avenues of contagion,”
especially among internationally active groups, groups involved
in different kinds of financial services, and groups having both
regulated and unregulated entities.
The issue is
particularly relevant for supervisors when ITEs are conducted
between regulated and unregulated entities, including SPEs and
NOHCs, within a financial group.
Examples include
intergroup lending and provision of guarantees or other forms of
support.
III. Key issues and gaps
This section is organised in four subsections that address
the key issues and gaps that challenge the supervision and
regulation of financial groups.
Addressing these issues
should help improve supervision and regulation of financial
groups and mitigate any risks they create.
A. Differences in the treatment of unregulated entities when
calculating group capital adequacy
The assessment of capital adequacy of a financial group is
intended to capture all of the risks in a group, including those
of unregulated entities and to eliminate double gearing of
capital and excessive leveraging.
This assessment,
combined with any performed at the individual entity level,
should ensure that all of the risks in a group are covered by an
adequate amount of capital.
How financial groups are
defined differs among supervisors and standard setters.
How group capital adequacy is calculated also varies, for
example, the manner in which regulated and unregulated entities
are regarded in this calculation.
Annex 5 shows that
international standards vary greatly in how they define key
components of a group (eg participation or subsidiary).
In 1999, the Joint Forum published principles for financial
conglomerates, which proposed solutions to the problems
associated with assessing capital adequacy.
The Joint
Forum defines a financial conglomerate as any group of companies
under common control whose exclusive or predominant activities
consist of providing significant services in at least two
different financial sectors (banking, securities, or insurance).
The principles on capital adequacy defined approaches in
dealing with the differences in calculating capital adequacy
among sectors and in ensuring that the risks posed by the
sectors are accounted for at the highest level.
Generally, any approach to supervision and regulation has to
balance two views of financial groups.
One view is that
a financial group is a single, diversified economic unit that
pools risks.
The other is that a financial group
comprises a set of separate legal entities.
Existing
supervisory frameworks can be divided into two broad approaches:
• A consolidated approach in which the view of the financial
group is based on capital requirements applied to the
consolidated assets and liabilities at the parent company level.
The assumption is that these assets and liabilities are
freely transferable around the group.
• A risk-based
aggregation approach that aggregates the capital requirements
that apply to individual regulated entities within the financial
group and attributes specific treatment for unregulated
entities.
In practice, supervisors implement these
approaches differently. For example, U.S. banking supervisors
explicitly require a bank holding company to serve as a source
of strength, standing behind its U.S. depository institution
subsidiaries in times of stress.
Some European
supervisors favour supervision of financial groups operating in
their jurisdictions almost exclusively at the group-wide (or
consolidated) level and impose few, if any, capital
requirements on an individual entity basis.
Whichever
approach to group supervision is used, supervisors remain
responsible for the individual regulated entities operating in
their jurisdiction.
Supervisors should understand the
effects and implications of regulated entities’ membership in a
financial group.
Supervisors are responsible for
providing input and verifying data on risks and capital derived
from regulated entities’ operations that contribute to the
group.
One of the challenges regarding capital adequacy
at the group level is the treatment of unregulated entities. The
Joint Forum report on SPEs identified two issues:
•
use
of unregulated entities to lower individual capital requirements
of regulated entities and to take advantage of the possible
netting of intra-group risk positions on consolidation to reduce
the group capital adequacy requirement;
• blurring of the
distinction across sectors between capital charges for
individual risks, particularly between credit risk and market
risk for securitisation or credit risk transfer products.
Other Joint Forum analyses supported this observation,
noting that some supervisors have had difficulties assessing the
level of capital needed to account for risks posed by major
unregulated affiliates in a financial group.
The
difficulties occurred despite the adoption of a framework for
assessing group-wide capital adequacy consistent with the Joint
Forum’s capital adequacy principles.
The use of the
accounting consolidation approach to calculating group capital
adequacy has compounded these problems for supervisors. This
approach treats the group as a single economic unit and:
• assumes that intra-group transactions are risk-free for the
group even if transactions cross borders;
• allows some
offsetting of risk between group members, particularly in the
area of market risk; and
• is independent of the
distribution and transferability of risks and resources between
the legal entities that comprise the group.
Individual
supervisors responsible for different sectors or legal entities
within a financial group have challenged the assumption that a
financial group functions as a single economic unit.
Studies
conducted after the financial crisis, such as the BCBS’s 2009
Report and Recommendations of the Cross-Border Bank Resolution
Group,34 found that this assumption does not take into account
the likely actions of individual supervisors responsible for
different parts of a group and the possibilities of separating
different parts of the group for the purposes of resolution.
The difficulty lies in understanding not only the
calculation of group capital adequacy under the various
supervisory frameworks, but also the interaction between group
capital adequacy and the position of individual regulated
entities in the group’s hierarchy.
Case in point: the
collapse of Lehman Brothers and the support given to AIG.
The Joint Forum believes that a clear and consistently
applied treatment for including and assessing unregulated
entities ensures that risks are properly captured at both the
group and entity levels and are not offset inappropriately
against other risks of the group. This treatment would enable
all supervisors to understand and assess the structure and risks
of a group, and the implications for the businesses, regulated
or unregulated, operating in various jurisdictions.
B. Differences in the treatment of ITEs, including unregulated
entities
How well a financial group manages ITEs can affect the
viability of the business model of the group and its individual
legal entities. However, extensive use of ITEs (within a
jurisdiction or cross-border) can obscure the supervisor’s
view of the group and its entities.
Also, a company
itself can experience difficulty evaluating whether a business
model is sustainable.
Supervisors’ ability to understand
and monitor ITEs is critical in effectively supervising a
financial group.
ITEs can become a source of supervisory
concern when, among other things:
• ITEs are not
conducted in a transparent manner and all relevant supervisors
are thus not aware of their existence or do not have access to
pertinent details;
• The economic substance of ITEs is
obscured;
• ITEs result in capital or income being
inappropriately transferred from a regulated entity to an
unregulated entity or from one regulated entity to another
regulated entity under a different regulatory regime;
•
ITEs are not conducted at an arm’s length basis, particularly if
they result in terms that are disadvantageous to the regulated
entity;
• ITEs adversely affect the solvency, liquidity,
or profitability of regulated entities within a group;
•
ITEs are used as a form of supervisory arbitrage, such as when
ITEs have no valid business purpose but are pursued to avoid
capital charges or regulatory restrictions;
• Risks that
ITEs represent - including contagion - are not well understood
by the group or by supervisors.
Joint Forum analyses
indicate that different sectoral rules may exacerbate some of
these problems.
To date, some jurisdictions have set
minimum notification or other requirements, limits, or guidance
on certain aspects of ITEs, either for individual entities in
their jurisdictions or group-wide.
Requirements tend to
differ considerably across sectors and across jurisdictions.
Sectoral differences may be explained in part by the
different objectives of capital adequacy within each of the
sectors.
Reasons for other differences are less clear.
The December 1999 Joint Forum report Intra-Group
Transactions and Exposures Principles set forth five principles
on ITEs in the context of supervision of financial
conglomerates.
These principles relate to risk
management, monitoring, transparency, supervisory cooperation,
and supervisory action.
In light of the lessons learned
from the financial crisis, these basic principles should be
strengthened to ensure the adequate supervision of financial
groups.
C. Differences in the treatment of unregulated parent companies
of regulated entities
Jurisdictional differences in powers and in requirements
over unregulated entities, particularly NOHCs, pose other
supervisory challenges.
Minimum standards and
requirements vary for the supervision and regulation of holding
companies in financial groups.
A regulated parent
holding company within a group is subject to some form of
supervision; NOHCs often are not.
Assessing potential
risks under these circumstances can be difficult as supervisors
may not have meaningful information on risks or may not have the
authority to take appropriate action.
Few supervisors
are empowered to require a NOHC to disclose information or to
take action against it if an institution’s strategy fails to
account for risks posed to regulated entities within a financial
group.
Often these supervisors manage to gain some
indirect supervisory authority over NOHCs mainly through
indirect regulation of regulated entities.
The
jurisdictional differences in supervisory powers and
requirements over NOHCs, together with fiscal incentives, can
encourage financial groups to establish a NOHC that controls the
regulated entities in a different jurisdiction that has a less
rigorous supervisory approach, has no regulated entities
operating in that jurisdiction, or does not exercise any
surveillance over NOHCs.
This presents problems for
supervisors of regulated entities and the group in accessing the
necessary information to assess the group, its risks, and its
strategies and in taking appropriate risk mitigation action.
Any international framework for group-wide supervision
should consider how to reduce the opportunity for regulatory
arbitrage by reducing gaps in regulations and requirements that
apply to NOHCs within a financial group.
There are
considerable differences across jurisdictions and sectors
regarding the intensity or stringency of NOHC regulation.
Jurisdictions with robust supervisory frameworks are those
in which parent holding companies must be financial institutions
or must be subject to comparable regulatory requirements.
Parent holding companies operating under lighter regulation
may have greater flexibility to insulate financial activities
from supervisory purview.
In the banking sector, for
example, NOHCs are treated as banks in some countries and
consequently must meet all capital and risk management
requirements applicable to banks.
NOHCs that are treated
as banks are included in the consolidated banking supervision
process.
In jurisdictions where parent holding
companies, particularly NOHCs, are subject to more stringent
regulation, supervisors generally have a range of tools for
applying consolidated supervision.
In some
jurisdictions, supervisors have authority to require a financial
group to restructure if the existing structure cannot be
supervised effectively.
Irrespective of this power, the
Joint Forum believes that supervisors should devote more
attention to the link between regulated and unregulated
entities.
On the other hand, there are countries where
NOHCs are not consolidated for supervisory purposes.
Lack
of transparency within complex ownership structures involving
unregulated holding companies can impede supervisors from
carrying out such functions as fit and proper testing or
assessing corporate governance and compliance frameworks.
Impediments such as these mean that a regulated entity may
not be able to fully meet its regulatory requirements if
governance and compliance functions are controlled at the NOHC
level.
D. Challenges to obtaining meaningful information on unregulated
entities
A contributing factor to the financial crisis is that
supervisors lack relevant information about unregulated
entities.
The BCBS, IOSCO, and IAIS core principles
address the supervisory responsibility of obtaining information
on a group-wide basis.
In practical terms,
regulated
entities often have difficulty complying with such requests
because the entities themselves may not have access to
group-wide information.
Supervisors may be able to
obtain information about regulated entities within a group from
supervisors in charge of other regulated entities, but gaps
remain with regard to accessing information about unregulated
entities.
The difficulty that supervisors experience in
obtaining and sharing information on unregulated entities
generally increases when unregulated entities are located in
foreign jurisdictions.
None of the sectors’ core
principles refers explicitly to unregulated entities.38 For the
most part, the core principles concentrate on chains of direct
ownership rather than on a financial group as a whole.
Therefore, adherence to the core principles alone does not help
identify unregulated entities that pose risk to a financial
group or to the stability of regulated entities within certain
jurisdictions.
Additionally, while the core principles
related to group-wide supervision may be effectively implemented
by the home supervisor, host supervisors experience more
difficulty obtaining meaningful information because they do not
have jurisdiction over entities higher up in the organisational
hierarchy, nor do they have a direct link to the unregulated
entity in their jurisdiction.
International expectations
regarding the exchange of information should include information
on any unregulated entities within the ownership chain above the
regulated entity.
An important mechanism for addressing
cross-jurisdictional issues and cooperation and information
exchange among supervisors is the establishment of supervisory
colleges, which comprise supervisors involved in the oversight
of entities that are part of a financial group.
Colleges
now exist for each of the largest global financial institutions.
A supervisory college can take various forms depending
on the structure and organisation of the group and the
jurisdictions involved in its supervision.
These
colleges can help to establish a working relationship among
supervisors and facilitate the exchange of information.
A
key function of colleges is to identify the most important
relationships within a financial group and assess the risks
posed by different entities to each other.
A particular
problem arises when there are only unregulated entities in a
particular jurisdiction.
In this case, there is no
supervisor who can participate in the college and take action at
the level of the unregulated entity.
Traditionally,
supervisory colleges have been established along sectoral lines
(ie involving only one supervisory discipline). In October 2009,
the IAIS issued Guidance Paper on the Use of Supervisory
Colleges in Group-Wide Supervision,39 and work on colleges is
ongoing in the banking sector.
The FSB is actively
promoting consistency in supervisory college approaches and
identifying best practices.
Because financial groups are
operating increasingly across sectors, developing colleges of a
cross-sectoral nature or ensuring that supervisory colleges
consider cross-sectoral issues would help draw a full picture of
financial groups.
IV. Recommendations to strengthen supervision and regulation of
financial groups
The Joint Forum believes that all financial groups,
particularly those that are active across borders, should be
subject to supervision and regulation that captures the full
spectrum of their activities and risks.
A
variety of
regulatory frameworks and approaches have contributed to
financial groups being subject to supervision and regulation
that did not fully capture the significance or potential costs
of their risks.
Frameworks for supervision and regulation
of financial groups should be clear and applied consistently,
and should cover all financial activities and risks within
groups, irrespective of where they may arise or whether those
activities are conducted through regulated or unregulated
entities within each group.
These frameworks should
clearly set out the powers and responsibilities of supervisors
and supplement the supervision and regulation applicable to
individual regulated entities or activities within the group.
As noted in the previous section, common cross-sectoral
standards should be developed whenever justified.
These
standards would supplement the recommendations that aim at
strengthening supervision and regulation of financial groups.
These standards should also be applied with particular
intensity when a group or any single entity within a group is
identified as systemically important.
Any differences in
the supervision and regulation of financial groups should be
justified.
Identifying and addressing these differences
will improve the ability of supervisors to monitor and, as
appropriate, mitigate the potential risks and threats financial
groups can create.
Recommendation n° 4:
Policymakers should ensure that all financial groups
(particularly those providing cross-border services) are subject
to supervision and regulation that captures the full spectrum of
their activities and risks.
The cost of the failure or
near-failure of financial groups, together with lessons learned
from the financial crisis, has reaffirmed the importance of the
supervision and regulation of financial groups.
As the
financial crisis has shown, risks assumed by unregulated
companies within a group may significantly affect the whole
group, including in particular its regulated entities.
To be effective, the supervision of financial groups should seek
to ensure full capture and treatment of all risks and entities
of the groups.
This implies that financial groups should
be subject primarily to group-wide supervision.
Given the
diversity across sectors for the supervisory and regulatory
frameworks of financial groups, group-wide supervision should be
fully implemented and practiced by each sector while also
recognising the critical importance of supervision and
regulation of the individual entities within the group.
The IAIS underscored the importance of appropriate supervision
of financial groups by assigning a task force in 2009 to
consider the merits of designing a common framework for the
supervision of insurance groups.
In this context,
substantial progress toward strengthening the supervision and
regulation of financial groups, including unregulated risk, is
expected to be achieved.
Recommendation n° 5:
The 1999 Joint Forum principles on the Supervision of Financial
Conglomerates should be reviewed and updated.
The Joint
Forum defines a financial conglomerate as any group of companies
under common control whose exclusive or predominant activities
consists of providing significant services in at least two
different financial sectors (banking, securities, and
insurance).
In 1999, the Joint Forum issued a
comprehensive set of principles covering capital adequacy, sound
and prudent management, supervisory information sharing,
intra-group transactions and exposures, and risk concentration.
The recommended review should focus on the supervisory
powers over unregulated parent holding companies, the oversight
and access to information of unregulated entities within a
group, the calculation of capital adequacy on a group basis with
regard to unregulated entities and activities (such as special
purpose entities), the oversight of intra-group transactions and
exposures involving regulated entities, the coordination among
supervisors of different sectors, and the governance and risk
management systems and practices of groups.
The
principles should be updated to:
-
ensure that the
principles properly address developments in sectoral frameworks
(eg Basel II) and in the markets since 1999;
- facilitate
more effective monitoring of activities and risks within a
financial group, particularly when these activities span borders
and the boundaries across the regulated and unregulated areas of
the financial system;
- provide a basis for increased
intensity of supervision and regulation of financial groups,
particularly when a group or any of its institutions are
identified as systemically important;
- improve
international collaboration, coordination, and cooperation among
supervisors across sectors;
- clarify the responsibility
and power of supervisors with respect to the risks in their
jurisdictions stemming from an entity being part of a financial
group;
- ensure that financial groups’ structures are
transparent, consistent with their business plans, and do not
hinder sound risk management; and
- provide, to the
extent possible, credible and effective options for action
during a crisis or to avoid a crisis.
Recommendation n° 6:
The BCBS, IOSCO, and IAIS should work together to enhance the
consistency of supervisory colleges across sectors and ensure
that cross-sectoral issues are effectively reviewed within
supervisory colleges, where needed and not already in place.
Independent of the development of common standards and
principles across sectors, actions are needed to improve
coordination and cooperation with regard to the supervision, and
potential cross-border resolution, of financial groups.
Actions are also needed for accessing and sharing information,
notably for unregulated entities.
The FSB, BCBS, IOSCO,
and IAIS have identified supervisory colleges as a major tool to
improve this supervisory coordination and cooperation.
The Joint Forum recognises that work is being done on a sectoral
basis but believes that there is merit in developing colleges of
a cross-sectoral nature or in making supervisory colleges
consider effectively cross-sectoral issues.
Basel Committee on
Banking Supervision, The Joint Forum
Review of the Differentiated
Nature and Scope of Financial Regulation
Key Issues and
Recommendations (January 2010)
Conglomerates
- Part 1:
Introduction, Mandate, Focus and guiding principles of this study,
Key issues and gaps
Conglomerates - Part 2:
Supervision and regulation of financial groups. Mortgage
origination. Hedge funds
Conglomerates - Part 3:
Recommendations and options for effective and consistent
financial regulation across sectors. Reducing key regulatory
differences across the banking, securities, and insurance sectors.
Strengthening supervision and regulation of financial groups.
Promoting consistent and effective underwriting standards for
mortgage origination. Broadening the scope of regulation to hedge
fund activities
Conglomerates - Part 4:
Strengthening regulatory oversight of credit risk transfer
products. Key differences in regulation across the banking,
securities, and insurance sectors.
Background and approach adopted by the Joint Forum. Key issues
and gaps
Conglomerates - Part 5:
Recommendations to reduce key differences in regulation across
the banking, securities, and insurance sectors. Supervision and
Regulation of Financial Groups. SPEs. Key issues and gaps.
Recommendations to strengthen supervision and regulation of
financial groups
Conglomerates - Part 6:
Mortgage Origination. United Kingdom, United States, Spain,
Canada, Germany. Key issues and gaps. Recommendations to promote
consistent and effective underwriting standards for mortgage
origination
Conglomerates - Part 7:
Hedge Funds. Key issues and gaps
Conglomerates - Part 8:
Recommendations and policy options to broaden the scope
of regulation to hedge fund activities.
Credit Risk Transfer Products.
Key issues and gaps common to both CDS and FG insurance (CDS - Credit
default swaps, FG - Financial guarantee)
Conglomerates - Part 9:
Key issues and gaps specific either to CDS or FG insurance.
Recommendations and policy options to strengthen regulatory
oversight of credit risk transfer products
Conglomerates - Part 10:
Annex 1-9
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