Basle Committee, IOSCO and IAIS release final documents on the Supervision of Financial Conglomerates

The Basle Committee on Banking Supervision (Basle Committee), the International Organisation of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS) today announced the release of documents prepared by the Joint Forum on Financial Conglomerates (Joint Forum) on the supervision of financial conglomerates.

The papers are a significant step forward in addressing some of the most important supervisory issues that arise from the continuing emergence of financial conglomerates and the blurring of distinctions between the activities of firms in each of the banking, securities and insurance sectors. The matters dealt with in the papers include:

• techniques for assessing the capital adequacy of conglomerates including detecting excessive gearing
• facilitating the exchange of information among supervisors
• coordination among supervisors
• testing the fitness and propriety of managers, directors and major shareholders of conglomerate.

The international supervisory community is moving steadfastly to meet the challenges posed by the emergence of financial conglomerates. The Basle Committee and the Technical Committees of IOSCO and the IAIS have urged the members of their organisations to implement the principles set out in the papers.

Prior to developing the papers, the Joint Forum carried out an intensive study of fourteen major international conglomerates. Extensive consultation with industry and the wider supervisory community was carried out before the papers were finalised by the Joint Forum.

Background on the Joint Forum and a synopsis of the documents released are attached.

The Joint Forum documents are accessible on the BIS (http://www.bis.org) and IOSCO (http://www.iosco.org) Websites.

The 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 a predecessor group, the Tripartite Group, in examining supervisory issues relating to financial conglomerates. 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 attends in an observer capacity.

Mr Alan Cameron A.M., Chairman of the Australian Securities and Investments Commission, was appointed Chairman of the Joint Forum effective 27 November 1997. He succeeds Mr Tom de Swaan, formerly Executive Director of De Nederlandsche Bank. The growing emergence of financial conglomerates and the blurring of distinctions between the activities of firms in each financial sector has heightened the need for cooperative efforts to improve the effectiveness of supervisory methods and approaches. The Basle Committee, IOSCO and IAIS consider the coming together of representatives of each supervisory constituency in the Joint Forum to be of great value in building the cooperative spirit necessary to address the supervisory challenges arising from financial conglomerates.

In carrying out its mandate the Joint Forum has, in the past year: (a) pursued practical means at domestic and international levels to facilitate the exchange of information between supervisors within their own sectors and between supervisors in different sectors, (b) investigated any legal or other barriers which could impede the exchange of information between supervisors within their own sectors and between supervisors in different sectors, (c) examined ways to enhance supervisory coordination, including the benefits and drawbacks to establishing criteria to identify and define the responsibilities of a coordinator, and (d) developed principles toward the more effective supervision of regulated firms within financial conglomerates.

The Joint Forum's focus has been, primarily, on diversified financial firms with complex organisational and management structures whose large scale activities cross national borders and sectoral boundaries. However, the Joint Forum believes that the lessons drawn and the guidance prepared could also apply to smaller conglomerates or conglomerates that operate domestically.

Papers on the supervision of financial conglomerates

The following papers prepared by the Joint Forum have been endorsed by the Basle Committee and the Technical Committees of IOSCO and the IAIS and released with a recommendation to the supervisory community that they implement the principles set out in them:

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 measurement techniques are based on a combination of existing approaches used by various supervisors and yield broadly equivalent results. The paper does not promote a single technique for universal application but rather builds on the existing sectoral approaches. The guiding principles address particular issues that should be identified in assessing the capital adequacy of financial conglomerates on a group-wide basis and are intended to assist supervisors, in the exercise of discretion, so that the result will be within a range of acceptable outcomes. The Supplement to the Capital Adequacy Principles paper consists of theoretical examples constructed to illustrate and describe complex situations that can arise in practical applications of the measurement techniques.

The Fit and Proper Principles paper, recognising that the probity and competence of the top management of banks, securities firms and insurance enterprises are critical to the objectives of supervision, provides guidance intended 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. Further, the paper promotes arrangements to facilitate consultation and the exchange of information between supervisors, with respect to individuals and regulated entities.

The Framework for Supervisory Information Sharing paper outlines a general framework for facilitating information-sharing between supervisors of regulated entities within internationally active financial conglomerates. The framework is based on the mapping exercises carried out by a Task Force created by the Joint Forum (the Task Force) to analyse the structures and operations of several financial conglomerates and focuses on two dimensions which tend to have particular implications for the supervision of regulated entities within financial conglomerates namely, 1) the organisation of business activities along business lines versus along the corporate legal structure and 2) the organisation of corporate control functions on a global or centralised basis versus on a local basis. The paper describes the categorisation of financial conglomerates into four "quadrants" and outlines the principal features of each quadrant and the supervisory issues arising for each quadrant.

Annexed to the Framework for Supervisory Information Sharing paper is the Conglomerate Questionnaire which has been developed by the Task Force and is considered a useful tool to assist supervisors in enhancing their understanding of the structure and operations of financial conglomerates. The Questionnaire can be used by supervisors on a unilateral, bilateral or multilateral basis to facilitate discussion with representatives of a conglomerate and to assist supervisors in furthering their understanding of the conglomerate's risk profile, systems of controls and organisational/management structure. Also annexed to the paper is an outline of the types of information that would be useful to supervisors in an emergency situation.

The Principles for Supervisory Information Sharing paper sets out a number of guiding principles intended to assist supervisors in enhancing information sharing arrangements between supervisors that will contribute to a more effective supervisory framework for financial conglomerates. The guidance recognises that the informational needs of supervisors vary considerably depending on many factors, including the objectives and approaches of supervisors themselves and the organisation and structures of individual financial conglomerates. Annexed to the paper are the Ten Key Principles on Supervisory Information Sharing that have been issued by the G-7 Finance Ministers.

The Coordinator paper provides supervisors with guidance on 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 was developed and used by the Task Force. The Questionnaire is a tool to assist supervisors in better understanding each others' objectives and practices. The continuing work of the Joint Forum and experience gained in using the Questionnaire may result in changes to enhance its coverage, making it a more useful tool in better understanding supervisors' objectives and practices, and in facilitating arrangements for the exchange of information relating to financial conglomerates.

Consultation process

The Basle Committee, IOSCO and the IAIS released the papers in mid February 1998 for a period of consultation with industry and the broader supervisory community. The period for comment formally closed on 31 July 1998. About sixty written submissions were received on the papers conveying views from industry, governmental and supervisory bodies and other interested parties worldwide. These submissions were generally supportive of the work of the Joint Forum; and many helpful suggestions for modifying, refining or otherwise clarifying the papers were made. The consultation process was complemented by the Joint Forum conducting practical testing exercises on the capital adequacy principles and further considering the practical issues involved in the identification of coordinators.

The papers were recently finalised by the Joint Forum in the light of the comments received during the consultation process and the results of the testing.

Ongoing work

The Joint Forum has work underway on 1) intra-group transactions and exposures and risk concentrations in financial conglomerates, and on 2) the transparency of conglomerate structures.