COORDINATION OF SUPERVISION OF FINANCIAL GROUPS Roundtable on the Review of the Financial...

COORDINATION OF SUPERVISION OF FINANCIAL GROUPS

Roundtable on the Review of the Financial Conglomerates Directive

8 September 2008

Freddy Van den SpiegelChief Economist FORTIS

Chairman Consultative Panel CEBS

The excellent experience of FORTIS

• Long tradition of supervisory cooperation in Benelux

• 4-Party Memorandum on supervisory cooperation for FORTIS (2002)– Supplementary supervision of Fortis group organised jointly

– Periodical and occasional consultation processes

– Clear role for coordinator

– Clear goal/ambition of supervisors: “The supervisors aspire to organize their co-operation and their consultation in such a way that it leads to a better understanding of and insight into each others working methods and prudential approach”

• The organisation of financial groups is changing fundamentally

The changing organisation of financial groups

The old model

A financial group as a number of rather independent (stand alone) local companies owned by a holding company

MotherCompany

Subsidiary (branch)

Country AFront + back

Subsidiary (branch)

Country BFront + back

Subsidiary (branch)

Country CFront + back

The old model.

The changing organisation of financial groups

The new model

A financial group as a fully integrated chain of support and front office functions organised in several countries

Support function A

Support function B

Support function C

CFO CRO TreasuryManagement

Subsidiary (branch)

Country A

Mother Company

Subsidiary (branch)

Country C

Subsidiary (branch)

Country B

The new model

The new model: a gradual development

• Banking groups: done/implementation

• Insurance groups: implementation/design

• Mixed groups: implementation starts/design

The changing organisation of financial groups

The new model

A financial group as a fully integrated chain of support and front office functions

• Key responsibilities at Exco group level, organised by business line and support line

Functions increasingly organised at group level

• Strategy

• Capital management and allocation

• Risk Management

• Audit

• HR

• M & A

• Operations/support (COO)

• Liquidity Management

• ALM

• The organisation of financial groups is changing fundamentally…

• … which requires a change of supervisory approach.

Actual supervisory approach

• Essentially Solo supervision.

• Additional supervision at (sub) consolidated level.

• Cross border overlapping and inconsistency reduced by “home/host” principle and under further discussion

• Cross business coordination almost inexisting

Actual supervisory approach…

…is becoming increasingly problematic

• Inefficient because inconsistencies increase costs without improving supervisory quality.

• Ineffective because the “solo” operation can only be fully understood as part of the consolidated group.

… and this inefficiency and ineffectiveness will only increase in the future as financial integration continues

Some examples of increasing complexity.

• Cross border/cross business organisation requires Outsourcing.

- centralisation of functions requires outsourcing of activities to sister/mother company

- supervisors have to approve

WHICH SUPERVISOR DECIDES?

Some examples of increasing complexity.

• Cross border/cross business organisation = Outsourcing.

• National discretions/definitions

- same transaction gets different supervisory treatment, depending on the country/business, which is against the principle of consistent supervision

HOW TO HANDLE THIS DIVERSITY AT THE CONSOLIDATED LEVEL?

Some examples of increasing complexity.

• Cross border/cross business organisation = Outsourcing.

• National discretions/definitions

• Model validation / Pillar II in CRD versus Solvency 2

- models are approved by home (consolidated) supervisor, but implementation is under control of host supervisors

- Pillar II still separately under discussion in CRD and Solvency 2 but concepts like “economic capital” are calculated at central level

HOW TO AVOID INCONSISTENCIES, CROSS BORDER/ CROSS BUSINESSES?

Some examples of increasing complexity.

• Cross border/cross business organisation = Outsourcing.

• Reporting.

• National discretions/definitions

• Model validation / Pillar II in CRD versus Solvency 2.

• Cross border mergers.

- cross border mergers require agreement of supervisor(s) of acquirer and of supervisor(s) of the acquired institution

WHO WILL DECIDE?

Some examples of increasing complexity.

• Cross border/cross business organisation = Outsourcing.

• National discretions/definitions

• Model validation / Pillar II in CRD versus solvency 2.

• Cross border mergers.

• Supervisory process.

- Administrative processes are organised at consolidated level

HOW TO COPE WITH UNCOORDINATED SUPERVISORY ACTIVITIES OF SUPERVISORS

Some examples of increasing complexity.

• Cross border organisation = Outsourcing.

• National discretions/definitions

• Model validation / Pillar II in CRD versus Solvency 2.

• Cross border mergers.

• Supervisory process.

• Crisis management

- Which supervisor(s) will take decisions in case of crisis of a group?

HOW TO AVOID CHAOS?

The way forward: a Copernican revolution.

From

Solo supervision +

additional checks and balance at consolidated level

ToFull consolidated supervision +

Additional checks and balances at solo level

URGENTLY NEEDED NOW FOR BANKING GROUPSURGENTLY NEEDED NOW FOR INSURANCE GROUPSGRADUALLY NEEDED FOR MIXED GROUPS

Which future model for supervision of financial groups?

SHOULD BE IN LINE WITH POLITICAL CHOICES

• If “light touch” supplementary supervision of limited issues (double’ gearing, concentration,…)

ONLY MARGINAL CHANGES REQUIRED

– Avoid inconsistency/incoherence

– Avoid unproductive overlaps

• If towards more consolidated supervision

IMPORTANT REDESIGN REQUIRED

– Cross border harmonisation/coordination

– Cross business consistency/coordination

Which future model for supervision of financial groups?

SOME PRIORITIES: LEARNING FROM CRD AND SOLVENCY 2

• Harmonise/clarify definitions (Capital)

• Harmonise/clarify leading role of consolidating/coordinating/group supervisor

• Harmonise/clarify role of college

• Coordinate 3 Pillar approach (Pillar2)

• Harmonise/clarify role of level III Committees

• Cross business supervisory convergence: how far should it go?