Financial Conglomerates, What are the Inherent Risks

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Financial Conglomerates,What are the Inherent
Risks?

• 2006 CIAB Conference
• Port-of-Spain, Trinidad Tobago
• November 16, 2006
• Thordur Olafsson, CARTAC

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Content of the Presentation

• Definitions
• Main Systemic Risks
• Risk Management
• LCFIs Nordea Group
• Supervision of the Financial Sector in the Nordic
  Countries
• Supervisory Cooperation MoUs their coverage
  and responsibilities of regulators
• Other relevant issues for consideration
• Latin- and Central America regulatory
  arrangements
• The Caribbean
• Conclusion

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Definition of Financial Conglomerate

• Financial Institution which is engaged in at
  least two of the following activities banking,
  insurance and securities.
• Domestic cross-sectoral
• International/Regional cross-sectoral and
  cross-border

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Definition of Financial Conglomerate

• A Large Complex Financial Institution (LCFI) is a
  cross-border financial institution, which is also
  cross-sectoral, engaged in at least two of the
  following activities banking, insurance, and
  securities transactions with the potential to
  threaten regional or global financial stability
  owing to their size in more than one
  jurisdiction.

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Main Systemic Risks

• Concentration and cross-sectoral
  creditmarketliquidityand technical (insurance)
  risks arising from interbank and other funding
• Securities, OTC derivatives, and other market
  activities
• Creditmarketand insurance risk-sharing between
  LCFIs

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Main Systemic Risks

• Large settlement and payment systems exposures
• Enforceability of contracts (legal issues)
• Poor transparency
• Market distortion and transaction arbitrage

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Main Systemic Risks

• Differences in prudential regulations, monetary
  policy, market distortions, and arbitrage
  encouraged by differences in home and host
  country taxation regimes
• The heavy emphasis on cross-border financial
  activity raises issues for regulators responsible
  for supervision these

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Risk Management

• BCP 7 Risk management process
• Supervisors must be satisfied that banks and
  banking groups have in place a comprehensive risk
  management process (including Board and senior
  management oversight) to identify, evaluate,
  monitor and control or mitigate all material
  risks and to assess their overall capital
  adequacy in relation to their risk profile. These
  processes should be commensurate with the size
  and complexity of the institution.

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Risk Management

• CP 7 - Additional criteria
• 1. The supervisor requires larger and more
  complex banks to have a dedicated unit(s)
  responsible for risk evaluation, monitoring, and
  control or mitigation for material risk areas.
  The supervisor confirms that this unit (these
  units) is (are) subject to periodic review by the
  internal audit function.

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LCFI Nordea Group

• Leading financial services group in the Nordic
  and Baltic Sea region
• Retail banking, corporate and institutional
  banking, and asset management life
• Significant position in Nordic banking markets
• Significant share of assets in Nordic insurance
  market

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LCFI Nordea Group

• Largest customer base of any financial group in
  the region
• Leading asset manager in the Nordic financial
  market
• Most comprehensive distribution network in the
  region

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Supervision of the Financial Sector in the Nordic
Countries

• Supervisory authorities in the Nordic countries
  have a long-standing cooperation which has lasted
  for more than 80 years.
• Considered to be in good order
• Financial sector regulatory authorities are
  accountable to parliaments and governments
• Highly developed bankruptcy and consumer
  protection

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Supervision of the Financial Sector in the Nordic
Countries

• Efficient court system
• Very low corruption
• Accounting standards are compatible with IFRS
  (IAS) standards
• Corporate governance highly developed
• Single independent and autonomous authority

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Supervisory Cooperation - MoUs

• First general MoU 1989 revised few times
• Separate MoU on Nordea Group since 2000 and
  revised few times
• ECB and EU national supervisory authorities
  signed MoU in March 2003
• In June 2003 a MoU between the Nordic central
  banks on Management of a financial crises in
  banks with cross-border establishments.

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MoU Coverage

• Confidentiality and definitions related to each
  supervisory authority
• Establishment of branches in any of the member
  countries
• Cooperation within the Nordic supervisory
• Cooperation on conducting on-site examinations
  region

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Mou Coverage

• Cooperation related to consolidated supervision
  and cross-border financial services
• Cooperation related to establishing of affiliated
  companies
• Dealing with crises
• Technical issues (meetings etc.)

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Responsibilities of Regulatory Bodies

• Draw up joint (annual) supervision plan
• Consolidated risk assessment of the group
• Appropriate exchange of information on a
  continuous basis and especially on
• Imminent crises
• Preparation of contingency plan
• Maintain key contacts
• Regular exchange of supervisory staff

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Responsibilities of Central Banks

• ECB National EU Authorities
• Nordic Central Banks.
• To assess the emergence of potential crises
• To ensure appropriate flow of information
• Coordinate policy actions
• Create a crises management group

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Other Relevant Issues for Consideration

• Deposit insurance schemes
• Lender of last resort (LOR) arrangements and
  emergency loans
• Crises management
• Regulators central banks governments (Ministry
  of Finance)
• Financial stability monitoring

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Latin- and Central America Regulatory Arrangements

• Mainly vested with different sectoral agencies
• Mostly conducted by governmental agencies, but is
  some cases central banks
• Low level of cooperation among regulatory
  agencies cross-border and across sectors
• Relevance and usefulness of MoU in place
  questionable
• Generally not considered a priority in the
  operation of regulatory agencies

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The Caribbean

• Map out which are the financial conglomerates
• Within a jurisdiction
• In multiple jurisdictions
• International
• Regional

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The Caribbean

• What are the main risks for the region if a LCFI
  fails?
• What is the level of supervisory cooperation?
  MoUs ?
• Is there a contingency planning? LOR
  arrangements? MoUs between respective Central
  Banks?
• Crises management ?

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Conclusion

• Growing trend in sector integration and
  cross-border establishments call for special
  supervisory attention
• Need for close cooperation between sectoral
  supervisory agencies (central banks and
  ministries of finance)
• Conduct of market players counts
• Come up with an appropriate model to handle
  eventual regional financial crises
• Nordic model is instructive

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Conclusion

• Thank you