A. Introduction and Purpose

The term "financial conglomerate" is used in this paper to refer to a group of two or more legal entities, mainly engaged in financial services activities, that are related by ownership or control. 1/ The different financial services entities within a conglomerate may be subject to different regulations and supervised by different supervisory agencies. Other entities within the group may be subject to little if any regulation, and may not be supervised. Many conglomerates involve a parent entity, which may be regulated or unregulated. Often the parent is a bank. The "parent" of other conglomerates may in fact be an individual or group of individuals.

Financial conglomerates are increasingly prevalent. Technological advances and the deregulation of financial markets have led to increased competition among institutions. In order to efficiently deliver a full range of products, financial organizations have established ownership links among different types of historically-distinct financial institutions. The emerging financial conglomerates might therefore be engaged in retail and commercial banking, securities underwriting and trading, investment management, and insurance underwriting. 2/

Financial conglomerates often have ownership ties to commercial and industrial firms. These linkages may be long-standing, perhaps the consequence of previous financial crises or simply the manner in which a country's financial system evolved. They may be of more recent origin, a result of deregulation, large-scale economic restructuring, or the need to attract capital to support financial market development. The market forces driving the formation of financial conglomerates also are propelling greater crossborder provision of financial services. International integration of financial markets has direct consequences for domestic authorities in their regulation and supervision of financial conglomerates. Specifically, in instances where domestic financial conglomerates wish to expand internationally, the authorities may be asked to adhere to international supervisory standards. Such standards were adopted in 1992 by the Basle Committee on Banking Supervision, with the endorsement of the Governors of the central banks of the Group of Ten countries. 3/ These standards for the supervision of international banking groups apply to bank supervisors in countries whose domestic banks wish to establish operations in the Basle Committee member countries. The standards provide that member countries may impose restrictive measures, including the denial of entry, on banks which are not subject to supervision that meets the established standards. The standards include provisions relating to group-wide supervision. 4/

A basic response to the emergence of financial conglomerates is increased integration and cooperation among the different authorities responsible for the various types of financial institutions which are operating as a group. In some countries, the authorities are taking advantage of this opportunity and are rethinking their regulatory policies. They are adopting objectives such as increased competition and the creation of a level playing field among financial services providers, and are attempting to create an environment that promotes efficiency and permits greater integration among financial services providers and financial markets.

At the same time, authorities in numerous countries are rethinking their basic approach to the supervision of financial institutions They are relying less on rigorous rules-based methodologies, which tend to run counter to the principles of deregulation, and are focusing more on management practices. They are specifying more clearly the responsibilities of financial market participants for the sound operation of financial institutions, and are attempting to hold these parties accountable for their performance. Thus, in recent years many supervisory agencies have articulated more clearly the duties and responsibilities of directors and managers 5/ adopted minimum standards applicable to external auditors, and expanded public disclosure of information regarding financial institutions.

The apparent pervasiveness of the trend toward the formation of financial conglomerates suggests that the authorities increasingly will be confronted with the need to address the issues which conglomerates present. A successful response will require adaptation of the policies and procedures utilized in the regulation and supervision of individual institutions.. The principal purpose of this paper is to highlight the issues raised by financial conglomerates and discuss alternatives for an appropriate regulatory and supervisory response.