A. Overview

Financial conglomerates are not encountered only in the world's more advanced financial markets. The authorities in many developing countries are confronted by such organizations as well. Where ownership or control linkages among different types of financial institutions already exist or can be anticipated, the authorities need to develop explicit strategies for regulation and supervision of financial conglomerates. 23/

A basic goal of regulation and supervision is to promote an environment in which individual institutions and financial groups operate in a sound manner, thereby promoting systemic financial soundness. 24/ In financial systems where financial conglomerates are present, attainment of this goal can be promoted by taking steps to mitigate concerns regarding contagion, transparency and autonomy.

An adequate regulatory framework will need to include group-wide capital adequacy, large exposure, connected lending, and perhaps other prudential requirements, the use of shareholder, manager, and external auditor suitability standards, and consolidated regulatory reporting and public disclosure requirements. In pursuing systemic financial soundness, the effectiveness of supervision can be at least as important as the precise nature of the regulatory framework. Individual supervisory agencies will need to adapt the policies and procedures they have utilized in the supervision of individual institutions to ensure their effectiveness in the financial conglomerate context.

Forging a regulatory and supervisory strategy to deal effectively with financial conglomerates likely will require greater integration among the regulatory and supervisory approaches traditionally utilized by bank, securities and insurance supervisors, whose objectives and methods may vary. Bank supervision tends to relate closely to national economic policy, notably monetary policy, and therefore usually involves the central bank. Bank supervisors tend to view consolidated regulation and supervision as the most effective means to accomplish their objectives. In contrast, securities and insurance supervisors often are oriented toward regulation and supervision of separate institutions, focusing more on the ability of those institutions to meet their obligations. Bank supervisors tend to take a more narrow view of what constitutes capital than do securities supervisors; insurance supervisors typically are less concerned regarding liquidity than are bank or securities supervisors; securities supervisors tend to take a more conservative approach to asset valuations than do bank and insurance supervisors. These and other differences exist due to legitimate differences in objectives and supervisory methodologies. Nonetheless, the agencies' objectives and methodologies will need to be harmonized to find a common approach to the shared challenge which financial conglomerates represent.