European Economic Community 13/

To create an common internal market for the provision of financial services, the approach adopted by the EEC has been to achieve only the essential harmonization necessary to secure the mutual recognition by its member states of the authorization and prudential supervision systems they employ. It has applied several principles in these efforts, and in particular its efforts to forge an agreed approach to the regulation and supervision of financial conglomerates. One such principle is that supervisors must accept the market reality of the blurring of the distinctions between historically distinct types of financial institutions and financial products. Another is that special rules for the supervision of financial conglomerates should only be applied where the regulatory problems cannot be effectively tackled through supervision of the individual regulated entities. A third is that respect should be maintained for the peculiar characteristics of the different financial subsectors and the legitimate differences in the way they have traditionally been regulated. 14/

The Commission of the European Communities reached agreements in 1992 that began to establish a framework applicable to conglomerates in which a deposit-taking bank was a member. That framework was enhanced in 1993 by agreements that dealt with investment firms (i.e.. securities companies and investment management firms). The framework distinguishes between financial groups, which are primarily financial services conglomerates, and mixed-activity groups, of which the parent is a commercial or industrial firm, but which includes one or more subsidiary banks or investment firms. 15/

The framework applicable to financial groups requires that supervisors conduct consolidated supervision of those entities within the group which are principally engaged in financial services activities, including any parent financial entity. Consolidated supervision is based, in part, on the application of consolidated regulation. Specifically, consolidated supervision is to include consolidated application of regulations relating to capital adequacy, large exposures and connected lending. Consolidated application of these regulations is based on a requirement for full accounting consolidation of all banks and/or investment firms and, at a minimum, all their financial subsidiaries. 16/ Consolidated supervision is further defined to require that supervisors ensure that all entities included in the scope of consolidated supervision maintain adequate internal control mechanisms so as to be able to provide any data or information relevant for the purpose of such supervision. 17/

For mixed-activity groups, where a parent company which is not a financial services firm or a financial holding company owns a bank or investment firm, consolidated regulation is not extended to all entities within the group, including to any insurance companies. Consolidated regulation is applied only to the bank and investment firm group member entities, and their subsidiaries, in the manner that it is applied to financial groups described above, including a requirement for full accounting sub-consolidation of those regulated entities. Exposures taken by this sub-consolidated financial group on other group members are limited, in aggregate, to 20% of capital. 18/ Supervisors are to require the parent company and its subsidiaries to supply any information relevant for the purpose of supervising the regulated entities, and member governments are to ensure that there are no legal impediments to the flow of this information.

The EEC framework includes several additional provisions relevant to the conglomerate context. For banks and investment firms within either financial or mixed-activity groups, supervisors are to have the capacity to refuse or withdraw authorization in cases where the group structure precludes effective supervision, and member governments are to ensure that enforcement provisions may be imposed on financial holding companies and mixed-activity holding companies, or their effective managers. For individual banks, investment firms and insurance companies, supervisors are to be granted the power to disapprove senior management, as well as any shareholders owning 10% of more of the voting shares of the institution or having the power to significantly influence the institution's management. Supervisors are to establish mechanisms to ensure cooperation among the authorities responsible for different financial sectors, including the insurance industry.

The emerging EEC framework can serve as an important example of the means by which to regulate financial conglomerates, particularly once insurance companies have been brought more fully under its scope. Developments thus far suggest that application of capital adequacy requirements, large exposure limits and connected lending limits on a consolidated basis to all group financial entities will become a broadly accepted component of such regulation.

Basle Committee on Banking Supervision

The Basle Committee on Banking Supervision is comprised of the bank supervisory agencies from the Group of Ten countries. One of the committee's principal aims is to promote the enhancement and harmonization of regulation and supervision of banks operating internationally. As such, its original focus was on banking groups. However, since most banking groups are in fact financial conglomerates, the committee has broadened its focus to encompass the full range of financial activities of such groups. This effort contributed to the formation in 1993 of The Tripartite Group of Securities, Insurance and Banking Regulators.

The Basle Committee's approach to the supervision of international banking groups has been centered around the concept of consolidated supervision. This concept was set forth in the 1983 revised Concordat. 19/ The Concordat states "the principle that banking supervisory authorities cannot be fully satisfied about the soundness of individual banks unless they can examine the totality of each bank's business worldwide through the technique of consolidation." Consolidated supervision was defined as the supervisor monitoring the risk exposures and capital adequacy of the institutions for which they were responsible based on the totality of their business, wherever conducted.

In 1992, the Committee published minimum standards that its members agreed to apply to international banks operating in those countries. 20/ The standards include the provision that "all international banking groups and international banks should be supervised by a homecountry authority that capably performs consolidated supervision". Under the standards, consolidated supervision is defined to include three components. First, the supervisor should "receive consolidated financial and prudential information" on the group's global operations, have the reliability of this information confirmed to its satisfaction, and assess the information as it affects the bank or group. 21/ Second, the supervisor should have the capability to "prevent corporate affiliations or structures that either undermine efforts to maintain consolidated financial information or otherwise hinder effective supervision" of the bank or group. Finally, the supervisor should have the capability to prevent the bank or group "from creating foreign banking establishments in particular jurisdictions. 22/