Principles for the supervision of financial conglomerates - final report

September 2012

The Joint Forum's final report on Principles for the Supervision of Financial Conglomerates provides a set of principles which supersedes the compendium of principles on this topic developed in 1999 and published in 2001 by the Joint Forum ('the 1999 Principles').  

These updated principles are a broader and more consolidated set of internationally agreed principles. They include guidance for policymakers on the powers and authority necessary for supervisors of financial conglomerates. They also focus on supervisory responsibility and guidance for supervisors on the governance, capital, liquidity and risk management frameworks of financial conglomerates. Importantly, these updated principles are structured in a manner that should facilitate their implementation across jurisdictions and over time.

The principles are organised into five sections and expand on and supplement the 1999 Principles in a number of ways:  

Supervisory powers and authority

The principles are directed to both policy makers and supervisors highlighting the need for a clear legal framework that provides supervisors with the necessary powers, authority and resources to perform, with independence and in coordination with other supervisors, comprehensive group-wide supervision.

Supervisory responsibility

The principles reaffirm the importance of supervisory cooperation, coordination and information exchange. They clarify the importance of identifying a group-level supervisor whose responsibility is to focus on group-level supervision and the facilitation of coordination between relevant supervisors. New principles have been included which relate to the role and responsibilities of supervisors in implementing minimum prudential standards, monitoring and supervising activities of financial conglomerates and taking corrective action as appropriate.

Corporate governance

The principles reaffirm the importance of fit and proper principles and also provide, through a series of new principles, guidance for supervisors intended to ensure the existence of a robust corporate governance framework for financial conglomerates. These new principles relate to the structure of the financial conglomerate, the responsibilities of the board and senior management, the treatment of conflicts of interest and remuneration policy.

Capital adequacy and liquidity

The principles highlight the role of supervisors in assessing capital adequacy on a group basis, taking into account unregulated entities and activities and the risks they pose to regulated entities. They include new principles on group-wide capital management. The principles also provide guidance on internal capital planning processes that rely on sound board and management decisions, incorporate stressed scenario outcomes, and are subject to adequate internal controls. A new principle on liquidity assessment and management is also introduced - providing guidance for supervisors intended to ensure that financial conglomerates properly measure and manage liquidity risk.

Risk management

The principles set out the need for a financial conglomerate to have a comprehensive risk management framework to manage and report group-wide risk concentrations and intra-group transactions and exposures. Greater emphasis is placed on the financial conglomerate's ability to measure, manage and report all material risks to which it is exposed, including those stemming from unregulated entities and activities. The principles focus on group-wide risk management culture and appropriate tolerance levels; addressing risks associated with new business areas and outsourcing; group-wide stress-tests and scenario analyses for the prudent aggregation of risks; bringing off-balance sheet activities within the scope of group-wide supervision.

Comments received from a public consultation helped the Joint Forum refine this final report of its Principles for the Supervision of Financial Conglomerates. The report is available on the websites of the Bank for International Settlements (www.bis.org), IOSCO (www.iosco.org) and the IAIS (www.iaisweb.org).

The Joint Forum was established in 1996 under the aegis of the Basel Committee on Banking Supervision (BCBS), the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS) to deal with issues common to the banking, securities and insurance sectors, including the regulation of financial conglomerates.