coordination of supervision of financial groups roundtable on the review of the financial...
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COORDINATION OF SUPERVISION OF FINANCIAL GROUPS
Roundtable on the Review of the Financial Conglomerates Directive
8 September 2008
Freddy Van den SpiegelChief Economist FORTIS
Chairman Consultative Panel CEBS
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The excellent experience of FORTIS
• Long tradition of supervisory cooperation in Benelux
• 4-Party Memorandum on supervisory cooperation for FORTIS (2002)– Supplementary supervision of Fortis group organised jointly
– Periodical and occasional consultation processes
– Clear role for coordinator
– Clear goal/ambition of supervisors: “The supervisors aspire to organize their co-operation and their consultation in such a way that it leads to a better understanding of and insight into each others working methods and prudential approach”
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• The organisation of financial groups is changing fundamentally
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The changing organisation of financial groups
The old model
A financial group as a number of rather independent (stand alone) local companies owned by a holding company
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MotherCompany
Subsidiary (branch)
Country AFront + back
Subsidiary (branch)
Country BFront + back
Subsidiary (branch)
Country CFront + back
The old model.
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The changing organisation of financial groups
The new model
A financial group as a fully integrated chain of support and front office functions organised in several countries
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Support function A
Support function B
Support function C
CFO CRO TreasuryManagement
Subsidiary (branch)
Country A
Mother Company
Subsidiary (branch)
Country C
Subsidiary (branch)
Country B
The new model
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The new model: a gradual development
• Banking groups: done/implementation
• Insurance groups: implementation/design
• Mixed groups: implementation starts/design
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The changing organisation of financial groups
The new model
A financial group as a fully integrated chain of support and front office functions
• Key responsibilities at Exco group level, organised by business line and support line
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Functions increasingly organised at group level
• Strategy
• Capital management and allocation
• Risk Management
• Audit
• HR
• M & A
• Operations/support (COO)
• Liquidity Management
• ALM
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• The organisation of financial groups is changing fundamentally…
• … which requires a change of supervisory approach.
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Actual supervisory approach
• Essentially Solo supervision.
• Additional supervision at (sub) consolidated level.
• Cross border overlapping and inconsistency reduced by “home/host” principle and under further discussion
• Cross business coordination almost inexisting
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Actual supervisory approach…
…is becoming increasingly problematic
• Inefficient because inconsistencies increase costs without improving supervisory quality.
• Ineffective because the “solo” operation can only be fully understood as part of the consolidated group.
… and this inefficiency and ineffectiveness will only increase in the future as financial integration continues
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Some examples of increasing complexity.
• Cross border/cross business organisation requires Outsourcing.
- centralisation of functions requires outsourcing of activities to sister/mother company
- supervisors have to approve
WHICH SUPERVISOR DECIDES?
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Some examples of increasing complexity.
• Cross border/cross business organisation = Outsourcing.
• National discretions/definitions
- same transaction gets different supervisory treatment, depending on the country/business, which is against the principle of consistent supervision
HOW TO HANDLE THIS DIVERSITY AT THE CONSOLIDATED LEVEL?
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Some examples of increasing complexity.
• Cross border/cross business organisation = Outsourcing.
• National discretions/definitions
• Model validation / Pillar II in CRD versus Solvency 2
- models are approved by home (consolidated) supervisor, but implementation is under control of host supervisors
- Pillar II still separately under discussion in CRD and Solvency 2 but concepts like “economic capital” are calculated at central level
HOW TO AVOID INCONSISTENCIES, CROSS BORDER/ CROSS BUSINESSES?
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Some examples of increasing complexity.
• Cross border/cross business organisation = Outsourcing.
• Reporting.
• National discretions/definitions
• Model validation / Pillar II in CRD versus Solvency 2.
• Cross border mergers.
- cross border mergers require agreement of supervisor(s) of acquirer and of supervisor(s) of the acquired institution
WHO WILL DECIDE?
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Some examples of increasing complexity.
• Cross border/cross business organisation = Outsourcing.
• National discretions/definitions
• Model validation / Pillar II in CRD versus solvency 2.
• Cross border mergers.
• Supervisory process.
- Administrative processes are organised at consolidated level
HOW TO COPE WITH UNCOORDINATED SUPERVISORY ACTIVITIES OF SUPERVISORS
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Some examples of increasing complexity.
• Cross border organisation = Outsourcing.
• National discretions/definitions
• Model validation / Pillar II in CRD versus Solvency 2.
• Cross border mergers.
• Supervisory process.
• Crisis management
- Which supervisor(s) will take decisions in case of crisis of a group?
HOW TO AVOID CHAOS?
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The way forward: a Copernican revolution.
From
Solo supervision +
additional checks and balance at consolidated level
ToFull consolidated supervision +
Additional checks and balances at solo level
URGENTLY NEEDED NOW FOR BANKING GROUPSURGENTLY NEEDED NOW FOR INSURANCE GROUPSGRADUALLY NEEDED FOR MIXED GROUPS
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Which future model for supervision of financial groups?
SHOULD BE IN LINE WITH POLITICAL CHOICES
• If “light touch” supplementary supervision of limited issues (double’ gearing, concentration,…)
ONLY MARGINAL CHANGES REQUIRED
– Avoid inconsistency/incoherence
– Avoid unproductive overlaps
• If towards more consolidated supervision
IMPORTANT REDESIGN REQUIRED
– Cross border harmonisation/coordination
– Cross business consistency/coordination
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Which future model for supervision of financial groups?
SOME PRIORITIES: LEARNING FROM CRD AND SOLVENCY 2
• Harmonise/clarify definitions (Capital)
• Harmonise/clarify leading role of consolidating/coordinating/group supervisor
• Harmonise/clarify role of college
• Coordinate 3 Pillar approach (Pillar2)
• Harmonise/clarify role of level III Committees
• Cross business supervisory convergence: how far should it go?