Thomas Wulf

Division: Integrated Financial Markets

Austrian Financial Market Authority (FMA)

Vienna – June 2014

Second Executive IFRS Workshop for

Regulators

„Supervisory challenges of

financial conglomerates“

Thomas Wulf, FMA 2

Topics

Financial conglomerates and types

Idea of supervision

Finanzkonglomerategesetz FKG

Conglomerate supervision in Austria

Cross sector issues

3

Definition

Basically every group which includes both the

insurance and banking sector is called a conglomerate

Dominated by banks

- „Bancassurance“ (such as Deutsche Bank, BNP Paribas)

Dominated by insurer

- „Assurancebanking“ (such as AXA, Generali)

Fully integrated

- Wüstenrot (DE), Sampo (FI), ING (NL), DNB (NO)

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Reasons

Expansion (offensive strategy):

Enlargement of client basic – Cross Selling

Diversification (defensive strategy)

Declining profit in core business

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Thomas Wulf, FMA Vienna, 11 September 2008 5

Forms of organisation

Full integration

Cross holding of capital

(cross shareholding)

Joint Ventures

Contractual basis

6

Reasons for consolidated

supervision

Groups are important players – financial

stability

Protection for clients, policy-holders and

investors

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Idea of supervision

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Development of supervision

Insurance sector Banking sector

Cre

dit

institu

tion

Ris

k p

oin

t o

f vie

w

Insu

ran

ce

co

mp

an

y

CR

D

CR

D re

vie

w

So

lven

cy II

Ris

k b

ased

inte

rnal m

od

els

So

lven

cy I

FCD

Ban

kin

g

gro

up

s

Insu

ran

ce

gro

up

s

CR

R

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Consolidated Supervision Consolidated Supervision

Insurance group Banking group

Group supervision

• Banking/insurance consolidated supervision consolidation of

group

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Financial

Holding

Credit

institution

Ancillary

service

Insurance

Holding

Insurance

company

Car

producer

Car

producer

Occupational

pension fund

Financial conglomerate

10

Conglomerate Supervision in Austria

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11

Basis

Basis: EU-RL 2002/87/EG – Financial Conglomerates

Directive - FCD

Specific group wide supervision exists, BUT

- Interdepencies between different financial sector not

taken into consideration (e.g. own funds)!

Austria: „Finanzkonglomerategesetz FKG“

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Basis

Supplementary supervision for entities which

belong to both financial sectors

Avoid double gearing

Avoid contagion effects

Limit of risk concentration

Integrated risk management

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Basis

Definition financial sector:

Insurance sector (Basis: EU-RL 73/289/EWG; 2002/83/EG und

98/78/EWG)

- Insurance company, Re-insurance, Insurance holding

company

Banking sector (Basis: EU-RL 2000/12/EG; 85/611/EWG;

2001/107/EG bzw. 93/22/EWG und 93/6/EWG, CRR)

- Credit institution, Financial institution, Financial holding

company, Asset management firm

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Basis

Regulated entities, but not part of the financial sector

acc. to Art. 2(8) of the FCD:

Pension funds

Mutuals

„Small“ investment service providers

Outsourced service firms for insurance companies (e.g.

asset manager)

Challenge: Mixed financial holding company: now

supervised threefold (Bank, Insurance, Conglomerate)

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Finanzkonglomerategesetz (FKG)

(Financial conglomerates act)

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Thomas Wulf, FMA Vienna, 11 September 2008 16

Identifying a financial conglomerate

Financial entities are

part of a group

At least one entity belongs

to the banking and

insurance sector

Regulated entity on

top of group

Mixed financial

holding on top :

At least one entity is part of

the financial sector

Top of group is parent entity

or participation holder

40%-Test: Min. 40% of groups

balance sheet sum

by financial sector

10%-Test

Balance sheet sums and

solvency requirments of each

financial sector exceeds 10%

6 Mrd. EUR-Test

Balance sheet sum of smallest

sector exceeds

6 Mrd. EUR

Only 6 Mrd-treshold exceeded -

Supplementary supervision

can be postponed.

Financial conglomerate

No

co

ng

lom

era

te

No

Yes

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Own funds

Step 1

Deduction of book value as simplified method

Step 2

Obligation of consolidation within conglomerates acc. to the FCD

Step 3

Conglomerates outside the FCD: Accounting consolidation

method possible if integrated risk management exists

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Accounting consolidation

method (Method 1)

Own funds (Basis

group statement)

Minus

Σ capital requirements

of the financial entities

Calculation of capital adequacy

Deduction and aggregation

method (Method 2)

Σ of own funds of all financial

entities (regulated and not

regulated)

Minus

Σ capital requirements of

regulated entites which belong to

the financial sector and

Σ sum of book values

Definition of own funds acc. to sector rules

Calculation of capital requirements acc. to sector rules

Specification by edict, decrees and publications

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Challenges

Including particpations

Different definitions of own funds (Tier-principles)

CRR

Solvency II

Transferability from one sector to the other

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Risk concentration

Significant risk concentrations have to be reported

ALL risk types

- Credit

- Market

- Insurance

- ALM-Risk

- Operational

Including all entities of the group

Regulated and non-regulated

Subsidaries and participations

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Intra-group transactions

Transactions within group (regulated and not

regulated entities)

FCD: „Significant“ treshold: 5% of capital requirement

on conglomerate level

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FI: 1

Financial conglomerates in EU

ES: 3(7)

PT: 3

FR: 8(9)

GR: 1

UK: 8(12)

IE: 2

HU: 1

SE: 6

FI: 1

ES: 3 PT: 3

FR: 8

IT: 9

GR: 1

CZ: 1

DE: 7*

UK: 7

IE: 2

BE: 3

HU: 1

SI: 1

AT: 4(5)

Number of FC in EU: 52

Incl. Waiver acc. To Art. 3(3): 69

AT: 3

BU: 1

CZ: 1

DK: 2

FI: 2

FR: 7

DE: 7

IT: 6

NL: 5

PT: 1

SI: 1

SE: 7

GB: 4

BE: 3

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Thomas Wulf, FMA Vienna, 11 September 2008 23

Austrian conglomerates in CEE

GRAWE Versicherung – Capital Bank and Hypo-Bank

Burgenland AG

Bausparkasse Wüstenrot – Wüstenrot Versicherung

RZB – UNIQA-participation

(CY)

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Supervision of conglomerates

Supervisor of

conglomerates

• Controlling of own funds

• Capital requirement

• Risk concentration

• Intra-group transactions

• Risk management on

conglomerate level

• Fit and proper-Test

• Coordinator for Austrian FCs

• First contact for coordinator of

foreign Fcs

Internal

Communication

• Supervisory teams which include

all branch supervisors

• Information sharing

External

Communication

• Management interview

with parent entity

• Crises Management

• Basel, CRD

• Solvency II

• Risktransfer

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Challenges for supervisors

Participations

Riskmanagement

Controlling

Infomation-sharing

BUT: they are part of the group

Accounting principles: IFRS vs. national law

Assistance of group entities by law execution

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Calculation of own funds

FMA prefers Method 1 („Accounting consolidation

method“ )

In reality: Method is not clean due to accounting principles –

combination of methods

Combination of methods 1 und 2

Notification of capital adequacy: quarterly

Austria – Own funds

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Close to federal banking act (concept of RWAs)

Parameter for notification is capital requirement on

conglomerate level

Parameter (threshold) is depending on group structure (share of

banking part): currently between 2% and 3%

Notification: quarterly

Regulated via national edict

Hard limit:

25% of own funds on conglomerate level with one client or group of

connected clients

Austria – Risk concentration

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Following insurance act

Every transaction within a member of the group which does not belong to

the same financial sector has to be notified

Parameter

One transaction exceeds 5% of capital requirement on conglomerate level:

Notification quarterly

Sum of transactions exceeds 5% of capital requirment on conglomerate

level: Notification quarterly incl. list of transactions

Type of transactions

Loans, guarantees and off-balance transactions

Cost sharing agreements

Transactions concerning own funds

(Re)insurance contracts

Credit insurance contracts

Austria – intra group transactions

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Cross sector issues

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Risk profiles

Shortterm liabilities

(saving accounts)

Longterm assets

(credits)

- Opportunities of risk balance: horizontal (banking sector – „Transformation“) and vertical (insurance sector –

„law of large numers“) within one financial sector

- Cross sector balance horizontal (between subsidaries) and vertical (parent-subsidary) balance possible

Financial conglomerate

Cross sector risk balance possible

Risk of contagion effects (e.g. reputational risk, Business risk)

Aim of supervisor: financial stability

Focus of supervisor: capital and dependencies

Bank or banking-group Insurance or insurance-group

Shortterm assets

(bonds, equity)

Longterm liabilities

(insurance contracts)

Risk

• Accumulation of insurance events

• Negative marketmovement of assets

Aim of regulation:

• Protection of clients

Focus of supervisor: liquidity

Risks

• Bank run

• Credit defaults

Aim of regulation:

• Financial stability

Focus of supervisor: capital and liquidity

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Risktypes in conglomerates

Risk position

Insurance risk Op-Risk Investment risk

Credit Market Insurance –

Life

Insurance –

Non-life Management Others

Bank

Insurance

• Correlation

• Dependencies

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Cross sector risk transfer

Insurance Bank

Transfer of sector specific risk to the other branch (direct or via market)

Better capital management

Diversification-effects

Separation of capital- and insurance market declining (Result: „Riskmarket“)

Issues and challenges:

• Hedging

• Regulation

Risk transfer via

- ILS

- ILW

- Swaps

- Contingent capital

- Sidecars

Risk transfer via

- CLN

- Swaps

- Options

- ABS

Combination

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Risk based supervisory model

SOLSEL X?

Minimum capital

Solvency capital

Definition of own funds

Economic capital

Standard/

Internal Model

Pillar I

Risk and capital

Pillar II

Supervision

Pillar III

Disclosure

Supervision Transparancy

Capital adequacy

Risk management

ICAAP/ORSA

Internal Control

Supervisory exams

Model description

Relevant information

Disclosure

Credit-, Market-, OP-Risk, other

Insurance risk

Standard/

Internal Model

(aggregation, diversification and mitigation)

Capital

Solvability/

“Economic Capital”

Thomas Wulf, FMA

Q&A -1-

1. What is a financial conglomerate?

a. A group of entities which consists mainly of the insurance sector

b. A group of entities which consists mainly of the financial sector

(insurance and banking)

c. A group of entities which consists mainly of the banking sector

2. What is conglomerate supervision?

a. Additional supervision

b. New style of supervision

c. Does not exist

3. What is consolidated supervision?

a. Supervisory practice within the EU

b. Supervisory practice where you look at the whole group as „one“ entity

c. Does not exist

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Q&A -2-

4. A financial conglomerate has to comply with the following rules:

a. Solvency II

b. CRR

c. Both of them and FCD

5. What are the main targets of conglomerate supervision?

a. Avoid double gearing

b. Avoid contagion effects

c. Both of them

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Supervisory challenges of

financial conglomerates

Integrated Financial Markets

Thomas Wulf

Thomas.wulf@fma.gv.at