Contagion

Contagion refers to the situation where a regulated entity is affected by financial problems, such as insolvency or illiquidity, arising in another regulated or unregulated group member entity. It is the potential consequence of the various tangible and intangible linkages to other group companies. One key concern is the potential transfer of capital from the regulated entity, as might occur when it attempts to rescue another group member from financial difficulties. Such transfers may be evident, as in the case of loans, investments and guarantees, or may be obscured, most often through devises such as the offmarket pricing of intra-group transactions. Another key concern is the potential for negative events involving another group member to trigger a liquidity crisis or substantially diminished flow of business for a regulated entity. 7/

Transparency

Transparency is a concern in relation to the financial condition of individual group members and the combined group, and to the group's corporate and managerial structure. A potential consequence of transactions between the various legal entities that comprise the group is an overstatement of the reported profits and capital of a regulated entity, as well as the likelihood that net group capital is less than the sum of the capital of all group members. Consequently, the effectiveness of prudential requirements and supervisory indicators applicable to individual institutions may be diminished. The increased complexity often inherent in the group context raises concerns regarding the capacity of supervisors to identify and gauge the risks to which a regulated entity is exposed. An unclear corporate or managerial structure can raise concerns regarding the supervisor's ability to identify connected parties 8/, lines of authority, and financial and managerial responsibility within the group.

Autonomy

Where a regulated entity is a component of a larger business organization, a supervisory concern is the autonomy of those individuals responsible for the sound operation of the regulated entity. Supervisors need to be assured that directors and managers can be held accountable for ensuring the sound operation of the institution, responding to supervisory mandates, and ensuring compliance with law and regulatory requirements. The concern is that directors and managers of the regulated entity may lack the necessary authority vis a vis other individuals within the group. For example, directors and managers may not be in a position to commit to taking actions viewed as necessary by the supervisors. They may be compromised in their ability to make objective judgments regarding loans to connected parties. They may be compromised in their treatment of customers in transactions involving conflicts of interest between customers of the regulated entity and customers of other group entities, or between customers of the regulated entity and the other entities themselves. Supervisory concerns regarding autonomy become more acute where the controlling entities are unregulated or beyond the scope the supervisor's mandate. 9/