COORDINATION OF SUPERVISION OF FINANCIAL GROUPS Roundtable on the Review of the Financial Conglomerates Directive 8 September 2008 Freddy Van den Spiegel Chief Economist FORTIS Chairman Consultative Panel CEBS

The excellent experience of FORTIS Long tradition of supervisory cooperation in Benelux 4-Party Memorandum on supervisory cooperation for FORTIS (2002) –Supplementary supervision of Fortis group organised jointly –Periodical and occasional consultation processes –Clear role for coordinator –Clear goal/ambition of supervisors: The supervisors aspire to organize their co-operation and their consultation in such a way that it leads to a better understanding of and insight into each others working methods and prudential approach

The organisation of financial groups is changing fundamentally

The changing organisation of financial groups The old model A financial group as a number of rather independent (stand alone) local companies owned by a holding company

Mother Company Subsidiary (branch) Country A Front + back Subsidiary (branch) Country B Front + back Subsidiary (branch) Country C Front + back The old model.

The changing organisation of financial groups The new model A financial group as a fully integrated chain of support and front office functions organised in several countries

Support function A Support function B Support function C CFO CROTreasury Management Subsidiary (branch) Country A Mother Company Subsidiary (branch) Country C Subsidiary (branch) Country B The new model

The new model: a gradual development Banking groups: done/implementation Insurance groups: implementation/design Mixed groups: implementation starts/design

The changing organisation of financial groups The new model A financial group as a fully integrated chain of support and front office functions Key responsibilities at Exco group level, organised by business line and support line

Functions increasingly organised at group level Strategy Capital management and allocation Risk Management Audit HR M & A Operations/support (COO) Liquidity Management ALM

The organisation of financial groups is changing fundamentally… … which requires a change of supervisory approach.

Actual supervisory approach Essentially Solo supervision. Additional supervision at (sub) consolidated level. Cross border overlapping and inconsistency reduced by home/host principle and under further discussion Cross business coordination almost inexisting

Actual supervisory approach… …is becoming increasingly problematic Inefficient because inconsistencies increase costs without improving supervisory quality. Ineffective because the solo operation can only be fully understood as part of the consolidated group. … and this inefficiency and ineffectiveness will only increase in the future as financial integration continues

Some examples of increasing complexity. Cross border/cross business organisation requires Outsourcing. - centralisation of functions requires outsourcing of activities to sister/mother company - supervisors have to approve WHICH SUPERVISOR DECIDES?

Some examples of increasing complexity. Cross border/cross business organisation = Outsourcing. National discretions/definitions - same transaction gets different supervisory treatment, depending on the country/business, which is against the principle of consistent supervision HOW TO HANDLE THIS DIVERSITY AT THE CONSOLIDATED LEVEL?

Some examples of increasing complexity. Cross border/cross business organisation = Outsourcing. National discretions/definitions Model validation / Pillar II in CRD versus Solvency 2 - models are approved by home (consolidated) supervisor, but implementation is under control of host supervisors - Pillar II still separately under discussion in CRD and Solvency 2 but concepts like economic capital are calculated at central level HOW TO AVOID INCONSISTENCIES, CROSS BORDER/ CROSS BUSINESSES?

Some examples of increasing complexity. Cross border/cross business organisation = Outsourcing. Reporting. National discretions/definitions Model validation / Pillar II in CRD versus Solvency 2. Cross border mergers. - cross border mergers require agreement of supervisor(s) of acquirer and of supervisor(s) of the acquired institution WHO WILL DECIDE?

Some examples of increasing complexity. Cross border/cross business organisation = Outsourcing. National discretions/definitions Model validation / Pillar II in CRD versus solvency 2. Cross border mergers. Supervisory process. - Administrative processes are organised at consolidated level HOW TO COPE WITH UNCOORDINATED SUPERVISORY ACTIVITIES OF SUPERVISORS

Some examples of increasing complexity. Cross border organisation = Outsourcing. National discretions/definitions Model validation / Pillar II in CRD versus Solvency 2. Cross border mergers. Supervisory process. Crisis management - Which supervisor(s) will take decisions in case of crisis of a group? HOW TO AVOID CHAOS?

The way forward: a Copernican revolution. From Solo supervision + additional checks and balance at consolidated level To Full consolidated supervision + Additional checks and balances at solo level URGENTLY NEEDED NOW FOR BANKING GROUPS URGENTLY NEEDED NOW FOR INSURANCE GROUPS GRADUALLY NEEDED FOR MIXED GROUPS

Which future model for supervision of financial groups? SHOULD BE IN LINE WITH POLITICAL CHOICES If light touch supplementary supervision of limited issues (double gearing, concentration,…) ONLY MARGINAL CHANGES REQUIRED –Avoid inconsistency/incoherence –Avoid unproductive overlaps If towards more consolidated supervision IMPORTANT REDESIGN REQUIRED –Cross border harmonisation/coordination –Cross business consistency/coordination

Which future model for supervision of financial groups? SOME PRIORITIES: LEARNING FROM CRD AND SOLVENCY 2 Harmonise/clarify definitions (Capital) Harmonise/clarify leading role of consolidating/coordinating/group supervisor Harmonise/clarify role of college Coordinate 3 Pillar approach (Pillar2) Harmonise/clarify role of level III Committees Cross business supervisory convergence: how far should it go?