Supervision of Financial Conglomerates - consultation document

February 1998

Introduction

The Joint Forum on Financial Conglomerates (Joint Forum) was established in early 1996 under the aegis of the Basle Committee on Banking Supervision (Basle Committee), the International Organisation of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS) to take forward the work of the Tripartite Group whose report was released in July 1995. The Joint Forum is comprised of an equal number of senior bank, insurance and securities supervisors representing each supervisory constituency. Thirteen countries are represented in the Joint Forum: Australia, Belgium, Canada, France, Germany, Italy, Japan, Netherlands, Spain, Sweden, Switzerland, United Kingdom and United States. The EU Commission is attending in an observer capacity. In accordance with its mandate which was agreed by the Basle Committee, IOSCO and the IAIS (collectively "the parent organisations"), the Joint Forum has reviewed various means to facilitate the exchange of information between supervisors within their own sectors and between supervisors in different sectors and has investigated legal or other barriers which could impede the exchange of information between supervisors within their own sectors and between supervisors in different sectors. Also, based on its mandate, the Joint Forum has examined ways to enhance supervisory coordination, including the benefits and drawbacks to establishing criteria to identify and define the responsibilities of a coordinator, and is working on developing principles toward the more effective supervision of regulated firms within financial conglomerates.

The Joint Forum has prepared a number of papers which have been considered by each of the parent organisations. As the Joint Forum continues to refine these papers, it believes it would be useful to obtain both industry and supervisors' input and therefore has requested the Basle Committee, IOSCO and the IAIS to consult with industry and the supervisory community, as appropriate. The Basle Committee is pleased to transmit the following papers to the banking industry and banking supervisors:

A. Capital Adequacy Principles paper

B. Supplement to the Capital Adequacy Principles paper

C. Fit and Proper Principles paper

D. Framework for Supervisory Information Sharing paper

E. Principles for Supervisory Information Sharing paper

F. Coordinator paper

G. Supervisory Questionnaire

The Capital Adequacy Principles paper outlines measurement techniques and principles to facilitate the assessment of capital adequacy on a group-wide basis for financial conglomerates. The Supplement to the Capital Adequacy Principles paper illustrates situations that can be faced by supervisors in practical applications of the measurement techniques.

The Fit and Proper Principles paper provides guidance to ensure that supervisors of entities within a financial conglomerate are able to exercise their responsibilities to assess whether those entities are soundly and prudently managed.

The Framework for Supervisory Information Sharing paper sets out a general framework for facilitating information-sharing between supervisors of regulated entities within internationally active financial conglomerates.

The Principles for Supervisory Information Sharing paper provides to supervisors involved in the oversight of regulated financial institutions residing in financial conglomerates guiding principles with respect to supervisory information sharing.

The Coordinator paper provides to supervisors guidance for the possible identification of a coordinator or coordinators and a catalogue of elements of coordination from which supervisors can select the role and responsibilities of a coordinator or coordinators in emergency and non-emergency situations.

The Supervisory Questionnaire is a tool to assist supervisors in better understanding each others' objectives and approaches. It is expected that the continuing work of the Joint Forum and experience gained in using the Questionnaire, together with input resulting from this consultative process, will result in changes to enhance its coverage and make it a more useful tool to better understand supervisors' objectives and approaches.

The Basle Committee draws to your attention the interest of the Joint Forum with respect to intra-group transactions and exposures within financial conglomerates. The Joint Forum's continuing work in this area will focus on the application of corporate governance processes relating to and the monitoring of intra-group transactions and exposures in conglomerates and supervisory approaches to such intra-group transactions and exposures. The Joint Forum also intends to pursue work in the area of large exposures.

The purpose of the consultation is to seek the input of industry participants and supervisors; such input will advance the development of the Joint Forum's thinking and approach with respect to the oversight of financial conglomerates. The Joint Forum and the parent organisations recognise that the papers will not be of equal interest to all parties. In particular, the Supervisory Questionnaire (G) would be of more relevance to supervisors than to industry. Further, the Supplement to the Capital Adequacy Principles paper is a working paper provided for general information to assist reviewers to understand the Joint Forum's thinking. Accordingly, reviewers should not feel obligated to comment on all papers in the consultation package.

The Basle Committee invites feedback on the papers of the Joint Forum enclosed herewith. Comments and feedback should be provided by 31st July 1998. Please direct your comments to:

Mr. F.C. Musch, Secretary-General

Basle Committee on Banking Supervision

Centralbahnplatz 2

4002 Basle, Switzerland

(Fax: #41 61 280 9100)