Thomas Wulf
Division: Integrated Financial Markets
Austrian Financial Market Authority (FMA)
Vienna – June 2014
Second Executive IFRS Workshop for
Regulators
„Supervisory challenges of
financial conglomerates“
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Topics
Financial conglomerates and types
Idea of supervision
Finanzkonglomerategesetz FKG
Conglomerate supervision in Austria
Cross sector issues
3
Definition
Basically every group which includes both the
insurance and banking sector is called a conglomerate
Dominated by banks
- „Bancassurance“ (such as Deutsche Bank, BNP Paribas)
Dominated by insurer
- „Assurancebanking“ (such as AXA, Generali)
Fully integrated
- Wüstenrot (DE), Sampo (FI), ING (NL), DNB (NO)
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Reasons
Expansion (offensive strategy):
Enlargement of client basic – Cross Selling
Diversification (defensive strategy)
Declining profit in core business
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Forms of organisation
Full integration
Cross holding of capital
(cross shareholding)
Joint Ventures
Contractual basis
6
Reasons for consolidated
supervision
Groups are important players – financial
stability
Protection for clients, policy-holders and
investors
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Idea of supervision
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Development of supervision
Insurance sector Banking sector
Cre
dit
institu
tion
Ris
k p
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t o
f vie
w
Insu
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co
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an
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CR
D
CR
D re
vie
w
So
lven
cy II
Ris
k b
ased
inte
rnal m
od
els
So
lven
cy I
FCD
Ban
kin
g
gro
up
s
Insu
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s
CR
R
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Consolidated Supervision Consolidated Supervision
Insurance group Banking group
Group supervision
• Banking/insurance consolidated supervision consolidation of
group
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Financial
Holding
Credit
institution
Ancillary
service
Insurance
Holding
Insurance
company
Car
producer
Car
producer
Occupational
pension fund
Financial conglomerate
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Conglomerate Supervision in Austria
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Basis
Basis: EU-RL 2002/87/EG – Financial Conglomerates
Directive - FCD
Specific group wide supervision exists, BUT
- Interdepencies between different financial sector not
taken into consideration (e.g. own funds)!
Austria: „Finanzkonglomerategesetz FKG“
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Basis
Supplementary supervision for entities which
belong to both financial sectors
Avoid double gearing
Avoid contagion effects
Limit of risk concentration
Integrated risk management
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Basis
Definition financial sector:
Insurance sector (Basis: EU-RL 73/289/EWG; 2002/83/EG und
98/78/EWG)
- Insurance company, Re-insurance, Insurance holding
company
Banking sector (Basis: EU-RL 2000/12/EG; 85/611/EWG;
2001/107/EG bzw. 93/22/EWG und 93/6/EWG, CRR)
- Credit institution, Financial institution, Financial holding
company, Asset management firm
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Basis
Regulated entities, but not part of the financial sector
acc. to Art. 2(8) of the FCD:
Pension funds
Mutuals
„Small“ investment service providers
Outsourced service firms for insurance companies (e.g.
asset manager)
Challenge: Mixed financial holding company: now
supervised threefold (Bank, Insurance, Conglomerate)
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Finanzkonglomerategesetz (FKG)
(Financial conglomerates act)
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Identifying a financial conglomerate
Financial entities are
part of a group
At least one entity belongs
to the banking and
insurance sector
Regulated entity on
top of group
Mixed financial
holding on top :
At least one entity is part of
the financial sector
Top of group is parent entity
or participation holder
40%-Test: Min. 40% of groups
balance sheet sum
by financial sector
10%-Test
Balance sheet sums and
solvency requirments of each
financial sector exceeds 10%
6 Mrd. EUR-Test
Balance sheet sum of smallest
sector exceeds
6 Mrd. EUR
Only 6 Mrd-treshold exceeded -
Supplementary supervision
can be postponed.
Financial conglomerate
No
co
ng
lom
era
te
No
Yes
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Own funds
Step 1
Deduction of book value as simplified method
Step 2
Obligation of consolidation within conglomerates acc. to the FCD
Step 3
Conglomerates outside the FCD: Accounting consolidation
method possible if integrated risk management exists
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Accounting consolidation
method (Method 1)
Own funds (Basis
group statement)
Minus
Σ capital requirements
of the financial entities
Calculation of capital adequacy
Deduction and aggregation
method (Method 2)
Σ of own funds of all financial
entities (regulated and not
regulated)
Minus
Σ capital requirements of
regulated entites which belong to
the financial sector and
Σ sum of book values
Definition of own funds acc. to sector rules
Calculation of capital requirements acc. to sector rules
Specification by edict, decrees and publications
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Challenges
Including particpations
Different definitions of own funds (Tier-principles)
CRR
Solvency II
Transferability from one sector to the other
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Risk concentration
Significant risk concentrations have to be reported
ALL risk types
- Credit
- Market
- Insurance
- ALM-Risk
- Operational
Including all entities of the group
Regulated and non-regulated
Subsidaries and participations
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Intra-group transactions
Transactions within group (regulated and not
regulated entities)
FCD: „Significant“ treshold: 5% of capital requirement
on conglomerate level
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FI: 1
Financial conglomerates in EU
ES: 3(7)
PT: 3
FR: 8(9)
GR: 1
UK: 8(12)
IE: 2
HU: 1
SE: 6
FI: 1
ES: 3 PT: 3
FR: 8
IT: 9
GR: 1
CZ: 1
DE: 7*
UK: 7
IE: 2
BE: 3
HU: 1
SI: 1
AT: 4(5)
Number of FC in EU: 52
Incl. Waiver acc. To Art. 3(3): 69
AT: 3
BU: 1
CZ: 1
DK: 2
FI: 2
FR: 7
DE: 7
IT: 6
NL: 5
PT: 1
SI: 1
SE: 7
GB: 4
BE: 3
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Austrian conglomerates in CEE
GRAWE Versicherung – Capital Bank and Hypo-Bank
Burgenland AG
Bausparkasse Wüstenrot – Wüstenrot Versicherung
RZB – UNIQA-participation
(CY)
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Supervision of conglomerates
Supervisor of
conglomerates
• Controlling of own funds
• Capital requirement
• Risk concentration
• Intra-group transactions
• Risk management on
conglomerate level
• Fit and proper-Test
• Coordinator for Austrian FCs
• First contact for coordinator of
foreign Fcs
Internal
Communication
• Supervisory teams which include
all branch supervisors
• Information sharing
External
Communication
• Management interview
with parent entity
• Crises Management
• Basel, CRD
• Solvency II
• Risktransfer
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Challenges for supervisors
Participations
Riskmanagement
Controlling
Infomation-sharing
BUT: they are part of the group
Accounting principles: IFRS vs. national law
Assistance of group entities by law execution
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Calculation of own funds
FMA prefers Method 1 („Accounting consolidation
method“ )
In reality: Method is not clean due to accounting principles –
combination of methods
Combination of methods 1 und 2
Notification of capital adequacy: quarterly
Austria – Own funds
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Close to federal banking act (concept of RWAs)
Parameter for notification is capital requirement on
conglomerate level
Parameter (threshold) is depending on group structure (share of
banking part): currently between 2% and 3%
Notification: quarterly
Regulated via national edict
Hard limit:
25% of own funds on conglomerate level with one client or group of
connected clients
Austria – Risk concentration
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Following insurance act
Every transaction within a member of the group which does not belong to
the same financial sector has to be notified
Parameter
One transaction exceeds 5% of capital requirement on conglomerate level:
Notification quarterly
Sum of transactions exceeds 5% of capital requirment on conglomerate
level: Notification quarterly incl. list of transactions
Type of transactions
Loans, guarantees and off-balance transactions
Cost sharing agreements
Transactions concerning own funds
(Re)insurance contracts
Credit insurance contracts
Austria – intra group transactions
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Cross sector issues
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Risk profiles
Shortterm liabilities
(saving accounts)
Longterm assets
(credits)
- Opportunities of risk balance: horizontal (banking sector – „Transformation“) and vertical (insurance sector –
„law of large numers“) within one financial sector
- Cross sector balance horizontal (between subsidaries) and vertical (parent-subsidary) balance possible
Financial conglomerate
Cross sector risk balance possible
Risk of contagion effects (e.g. reputational risk, Business risk)
Aim of supervisor: financial stability
Focus of supervisor: capital and dependencies
Bank or banking-group Insurance or insurance-group
Shortterm assets
(bonds, equity)
Longterm liabilities
(insurance contracts)
Risk
• Accumulation of insurance events
• Negative marketmovement of assets
Aim of regulation:
• Protection of clients
Focus of supervisor: liquidity
Risks
• Bank run
• Credit defaults
Aim of regulation:
• Financial stability
Focus of supervisor: capital and liquidity
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Risktypes in conglomerates
Risk position
Insurance risk Op-Risk Investment risk
Credit Market Insurance –
Life
Insurance –
Non-life Management Others
Bank
Insurance
• Correlation
• Dependencies
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Cross sector risk transfer
Insurance Bank
Transfer of sector specific risk to the other branch (direct or via market)
Better capital management
Diversification-effects
Separation of capital- and insurance market declining (Result: „Riskmarket“)
Issues and challenges:
• Hedging
• Regulation
Risk transfer via
- ILS
- ILW
- Swaps
- Contingent capital
- Sidecars
Risk transfer via
- CLN
- Swaps
- Options
- ABS
Combination
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Risk based supervisory model
SOLSEL X?
Minimum capital
Solvency capital
Definition of own funds
Economic capital
Standard/
Internal Model
Pillar I
Risk and capital
Pillar II
Supervision
Pillar III
Disclosure
Supervision Transparancy
Capital adequacy
Risk management
ICAAP/ORSA
Internal Control
Supervisory exams
Model description
Relevant information
Disclosure
Credit-, Market-, OP-Risk, other
Insurance risk
Standard/
Internal Model
(aggregation, diversification and mitigation)
Capital
Solvability/
“Economic Capital”
Thomas Wulf, FMA
Q&A -1-
1. What is a financial conglomerate?
a. A group of entities which consists mainly of the insurance sector
b. A group of entities which consists mainly of the financial sector
(insurance and banking)
c. A group of entities which consists mainly of the banking sector
2. What is conglomerate supervision?
a. Additional supervision
b. New style of supervision
c. Does not exist
3. What is consolidated supervision?
a. Supervisory practice within the EU
b. Supervisory practice where you look at the whole group as „one“ entity
c. Does not exist
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Q&A -2-
4. A financial conglomerate has to comply with the following rules:
a. Solvency II
b. CRR
c. Both of them and FCD
5. What are the main targets of conglomerate supervision?
a. Avoid double gearing
b. Avoid contagion effects
c. Both of them
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Supervisory challenges of
financial conglomerates
Integrated Financial Markets
Thomas Wulf