Release of final documents by the Joint Forum
The Basel Committee on Banking Supervision (Basel Committee), the International Organization of Securities Commissions (IOSCO) and the International Association of Insurance Supervisors (IAIS) today announced the release of documents prepared by the Joint Forum. The papers released outline principles for banking, securities and insurance supervisors for ensuring through the regulatory and supervisory process, the prudent management and control of (1) risk concentrations (RCs) and (2) intra-group transactions and exposures (ITEs).
The papers being released form part of the compendium of documents that were published in February of this year dealing with the supervision of financial conglomerates. The RC and ITE documents form part of the overall work outlined in the mandate of the Joint Forum and should be read in that context. These documents are a significant step forward in addressing some of the most important supervisory issues arising from the emergence of financial conglomerates and the blurring of distinctions between the activities of firms in each of the banking, securities and insurance sectors.
The international supervisory community is moving forward to meet the challenges posed by the emergence of financial conglomerates. The Basel 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.
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.
Joint Forum documents are accessible on the websites of the BIS (www.bis.org), IAIS (www.iaisweb.org) and IOSCO (www.iosco.org).
Explanatory note
Background of the Joint Forum
The Joint Forum was established in early 1996 under the aegis of the Basel Committee on Banking Supervision (Basel Committee), the International Organization 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 comprises an equal number of senior bank, insurance and securities supervisors representing each supervisory constituency. 13 countries are represented in the Joint Forum: Australia, Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom and the United States. The EU Commission attends in an observer capacity. The Chairman of the Joint Forum is Mr Jarl Symreng, Head of the Insurance Department of Finansinspektionen of Sweden.
The growing emergence of financial conglomerates and the blurring of distinctions between the activities of firms in each financial sector have heightened the need for cooperative efforts to improve the effectiveness of supervisory methods and approaches. The Basel Committee, IOSCO and the 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 towards 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 Risk Concentrations (RC) Principles and Intra-Group Transactions and Exposures (ITE) Principles
The RC principles outline some of the new risks that may arise at the group level when combining entities from different sectors and of apparently unrelated risk factors within a conglomerate. The ITE principles recognise the benefits that can be generated in the use of intra-group transactions and exposures but also take account of the contagion risk associated with ITEs. There is therefore a need for supervisors and conglomerates to achieve an appropriate balance in dealing with ITEs. The RC and ITE principles encourage supervisors to:
- take steps to provide that conglomerates have adequate risk management in place;
- monitor material risk concentrations and intra-group transactions and exposures on a timely basis;
- encourage the public disclosure of RCs and ITEs;
- liaise with other supervisors; and
- deal effectively with material RCs and ITEs having a detrimental effect on regulated entities.
While both documents offer a parallel structure, they also highlight some of the differences between RCs and ITEs and are therefore presented as two separate documents. Most notably, as ITEs constitute a series of bilateral relationships within a conglomerate, they can to a significant extent be monitored and controlled at the regulated entity level. However, RCs reflect the combination and interaction of risk exposures across the conglomerate, making a groupwide approach to RCs essential.
The papers also set out the findings of a study carried out by the Joint Forum of the supervisory practices in the countries represented on the Forum and the practices of 10 major international financial conglomerates in relation to ITEs and RCs.
Consultation process
The Basel Committee, IOSCO and the IAIS released the papers on 8 July 1999 for a period of consultation with the industry and the broader supervisory community. The period for comment formally closed on 30 September 1999. About 20 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.
Ongoing work
The Joint Forum has recently been granted a new mandate from its parent organisations focusing on cross-sectoral issues as well as issues specifically related to the supervision of financial conglomerates. The Joint Forum is also continuing its work from its previous mandate on the transparency of conglomerate structures.