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IP/01/609

Brussels, 26 April 2001

Financial services: Commission proposes Directive on prudential supervision of financial conglomerates

The European Commission has presented a proposal for a Directive that would introduce group-wide supervision of financial conglomerates. The proposal would require closer co-operation and information sharing among supervisory authorities across sectors. The proposal would also introduce initial steps to align the rules for financial conglomerates with those for homogeneous financial groups (dealing in a single financial sector, such as banking) so as to ensure equivalence of treatment and a level playing-field. The proposal, a priority measure under the Financial Services Action Plan (see IP/00/1269), has been prompted by continuing consolidation in the financial services sector that has created cross-sectoral financial groups with activities in both the banking/investment services and insurance sectors The emergence of these groups, known as financial conglomerates, requires an appropriate regulatory framework.

Internal Market Commissioner Frits Bolkestein, said: "This proposal represents an important step forward towards an integrated European financial market and enhanced financial stability. The proposed regulatory framework would benefit consumers, depositors and investors in the European Union by stimulating financial market efficiency and increasing competition."

The creation of financial conglomerates calls for careful consideration of measures for containing and supervising risks arising in such groups. Cross-sector structures and operations may amplify existing risks in one specific sector, as well as create new risks. These risks should be adequately supervised. Where appropriate, inconsistencies between sectoral financial legislation that give rise to loopholes and opportunities for inappropriate circumvention of the regulations should be removed. The Commission's proposal would therefore introduce specific legislation for the prudential supervision of financial conglomerates. The three main objectives are:

  • To ensure that the financial conglomerate has adequate capital. In particular the proposed rules would prevent the same capital being counted twice over and so used simultaneously as a buffer against risk in different entities in the same financial conglomerate ('multiple gearing'). The proposal would also prevent "downstreaming" by parent companies whereby they issue debt and then use the proceeds as equity for their regulated subsidiaries ("excessive leveraging");

  • To introduce methods for calculating a conglomerate's overall solvency position and

  • To deal with the issues of intra-group transactions, exposure to risk and the suitability and professionalism of management at financial conglomerate level.

The proposal would also require Member States to ensure that an authority was designated to coordinate between the different supervisors involved in the group-wide supervision of financial conglomerates. The proposal thereby aims to enhance effective supervision of supervisors, both within and across financial sectors and borders. Finally, the proposal takes the necessary minimum steps to remove unnecessary inconsistencies between the regulations for homogeneous financial groups and for financial conglomerates, in order to ensure a minimum of equivalence in the treatment of these groups.

Background

Current financial regulation is still very much sector-based and addresses primarily homogeneous financial groups, namely those groups whose activities are limited either to banking/investment or to insurance. The ongoing consolidation of financial institutions, one of the most notable trends in financial markets over recent years, has led to the creation of cross-sectoral groups across the EU. Financial conglomerates hold a substantial share of the domestic financial markets in certain Member States. Some financial conglomerates belong to the biggest groups in the EU financial markets and provide financial services on a global basis. If the regulated entities in such a financial conglomerate were to face financial difficulties, these could seriously destabilise the financial system as a whole and adversely affect depositors, policy holders and investors throughout the EU. Currently these cross-sector financial groups are inadequately covered by existing legislation.

The implications for the supervision of banks, insurance undertakings and investment firms that are part of a financial conglomerate are now well recognised. The G-10 Joint Forum on financial conglomerates issued in 1999 a set of recommendations on the supervision of financial conglomerates. The proposal for a Directive takes account of consultations with Member States' experts and authorities and of the EU financial services industry (consultation paper issued in December 2000 - see IP/00/1488). The need for such an initiative was mentioned by the Economic and Finance Committee in its report on Financial Stability, which was endorsed by the Economic and Financial Affairs Council in May 2000.

The full text of the proposal is available for downloading from the Europa website at http://ec.europa.eu/internal_market/en/index.htm (click on What's New)


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