COORDINATION OF SUPERVISION OF FINANCIAL GROUPS Roundtable on the Review of the Financial Conglomera

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COORDINATION OF SUPERVISION OF FINANCIAL
GROUPSRoundtable on the Review of the Financial
Conglomerates Directive8 September 2008

• Freddy Van den Spiegel
• Chief 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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The old model.
MotherCompany
Subsidiary (branch)Country AFront back
Subsidiary (branch)Country BFront back
Subsidiary (branch)Country CFront back
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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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The new model
Mother Company
Support function A
Support function B
Support function C
CFO
CRO
TreasuryManagement
Subsidiary (branch)Country A
Subsidiary (branch)Country C
Subsidiary (branch)Country B
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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
To Full consolidated supervision Additional
checks and balances at solo level
URGENTLY NEEDED NOW FOR BANKING GROUPS URGENTLY
NEEDED NOW FOR INSURANCE GROUPS GRADUALLY 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?