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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
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”
• The organisation of financial groups is changing fundamentally
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
MotherCompany
Subsidiary (branch)
Country AFront + back
Subsidiary (branch)
Country BFront + back
Subsidiary (branch)
Country CFront + back
The old model.
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
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
The new model: a gradual development
• Banking groups: done/implementation
• Insurance groups: implementation/design
• Mixed groups: implementation starts/design
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
Functions increasingly organised at group level
• Strategy
• Capital management and allocation
• Risk Management
• Audit
• HR
• M & A
• Operations/support (COO)
• Liquidity Management
• ALM
• The organisation of financial groups is changing fundamentally…
• … which requires a change of supervisory approach.
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
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
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?
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?
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?
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?
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
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?
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
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
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?