1. 5th Annual International Seminar on Policy Challenges for the Financial Sector: International Financial Conglomerates Issues and Challenges Danièle NOUY Secretary General of the French Banking Commission and Vice-Chair of the Committee of European Banking Supervisors - CEBS Section 5: Issues in Supervision of International Financial Conglomerates Washington 2 June 2005

2. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 2 Outline I - The Committee of European Banking Supervisors (CEBS): role and tasks II -The objectives of financial conglomerates supervision III - The European framework

3. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 3 I – CEBS: role and tasks The Committee of European Banking Supervisors (CEBS) is in charge of the efficient and consistent implementation of EU banking rules in Europe CEBS was established on 5 November 2003 and first met in January 2004; its Secretariat is based in London; It has been created within the « Lamfalussy Approach » and is a so- called « Level 3 Committee »; It is comprised of supervisory authorities and central banks; It represents a new, more formalised, and efficient banking supervisory framework in Europe: some kind of EU decentralised banking supervisory model.

4. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 4 I – CEBS: role and tasks The Lamfalussy approach Level 1- Legislative framework: proposals by the Commission to the Council of Ministers and the European Parliament for co-decision. Level 2- Implementation measures are defined, proposed and decided by the Commission with the assistance of level 2 regulatory committees and the technical advice received from the level 3 supervisory committees. Level 3- European supervisors work in close cooperation to ensure consistent implementation of Level 1 and 2 acts within the Member States and to promote convergence of supervisory practices. Level 4- The Commission’s enforcement of Community law.

5. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 5 I – CEBS : role and tasks EBC¹ CEBS² CEIOPS 3 CESR 3 ¹Finance ministries ²Supervisors and Central Banks ³Supervisors ECOFIN Council EBC European Banking Committee EFC Economic and Financial Committee FSC Financial Services Committee FST Financial Stability Table CEIOPS Committee of European Insurance and Occupational Pensions Supervisors CESR Committee of European Securities Regulators European Commission European Parliament FSC¹ European Central Bank (ECB) EFC-FST¹Economic and Monetary Affairs Committee (ECON) Banking Supervision Committee (BSC) Level-3 coordination Advice/ accountability Cooperation CEBS and the Lamfalussy framework

6. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 6 I – CEBS: role and tasks The CEBS organisation CEBS members are high level representatives from the banking supervisory authorities and central banks of the European Union, including the European Central Bank. The CEBS is comprised of 25 member countries and 46 member organisations, observers from EEA* countries, the European Commission and the Banking Supervision Committee of ESCB (European System of Central Banks). Chairman - José María Roldán Secretary General - Andrea Enria * Iceland, Liechtenstein, Norway and soon Romania and Bulgaria.

7. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 7 I – CEBS: role and tasks The institutional tasks of CEBS To advise the European Commission on banking policy issues, in particular for the preparation of draft measures for the implementation of European legislation; To foster the consistent implementation of the Directives and to the convergence of supervisory practices; To promote supervisory co-operation and exchange of supervisory information.

8. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 8 II – The objectives of conglomerates’ supervision 1.To take better into account the increasing complexity of financial groups 2.To implement internationally agreed principles 3.To address risks not captured in traditional sectoral supervision

9. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 9 II – The objectives of conglomerates’ supervision 1- To take better into account the increasing complexity of financial groups Some groups provide financial services pertaining to the 3 financial sectors: bank, insurance, investment services; The magnitude of possible problems is particularly important, when such groups are cross-border EU or international groups; The risks of such cross-sector groups are not adequately captured in traditional sectoral supervision; Concerns about cross-sectoral risk transfers, and possible regulatory arbitrage have increased recently.

10. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 10 II – The objectives of conglomerates’ supervision 2 - To implement internationally agreed principles Supervision of financial conglomerates (Joint Forum, February 1999); Risk concentration principles (Joint Forum, December 1999); Intra-group transactions and exposures principles (Joint Forum, December 1999); Trends in risk integration and aggregation (Joint Forum, August 2003); Credit risk transfers (Joint Forum, March 2005).

11. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 11 II – The objectives of conglomerates’ supervision 3 - To address risks not captured in traditional sectoral supervision Ensure that financial conglomerates have sufficient capital basis, without double gearing of own funds and unreasonable capital leverage; Address intragroup transactions and possible excessive concentration of risks; Ensure adequate internal control as well risk measurement and management across the whole group; Designate a single « lead coordinator to monitor the supervision of the whole group ».

12. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 12 III – The European framework 1.Definition of an EU financial conglomerate 2.Designation of competent supervisors 3.Content of supplementary supervision 4.Means of supplementary supervision

13. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 13 III – The European framework It is a group, With at least one regulated entity within the Group, Which activity is mainly financial, With significant involvement in the banking/investment services sector and the insurance sector. 1. Definition of an EU financial conglomerate

14. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 14 III – The European framework Meaning a parent-subsidiary relationship (including participations) or An horizontal structure. 1. Definition of an EU financial conglomerate It is a « Group » A financial conglomerate may be a sub-group of another financial conglomerate; In such cases, they are in principle both subject to supplementary supervision; but possibility to waive supplementary supervision at sub-group level. … Or a « Sub-Group »

15. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 15 III – The European framework A bank (« credit institution »), or a securities firm/broker dealer (« investment firm »), or an insurance company, With its head office in the EU. 1.Definition of an EU financial conglomerate … With « at least one regulated entity » within the Group

16. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 16 III – The European framework Total balance sheet of the financial sector entities > 40% of total consolidated balance sheet of the whole group. 1.Definition of a financial conglomerate … The Group’s activities must be mainly financial

17. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 17 III – The European Framework The weight of the less important financial sector must not be less than 10%. This is assessed by comparing the total of the balance sheet and the capital adequacy requirements of each financial sector against those of the whole group. 1.Definition of a financial conglomerate … And cross-sector financial activities must be significant a) The micro-economic parameter

18. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 18 III – The European Framework The total of the balance sheet of the smallest financial sector > EUR 6 Billions; Waiver by relevant competent authorities if: - micro-economic parameter ≤ 10%, and - if not necessary or inappropriate or misleading with respect to the supervisory objectives. 1.Definition of a financial conglomerate … Cross-sector financial activities must be significant b) The macro-economic parameter

19. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 19 III – The European Framework Current solo supervisors keep exclusive responsibility for solo supervision; Current sectoral group supervisors keep their responsibilities for sectoral supervision at both solo and consolidated levels; Appointment of a unique lead coordinator for conglomerate supervision. 2. Designation of competent supervisors

20. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 20 III – The European Framework The Lead coordinator is appointed according to precise criteria determined by the Directive. In practice, most of the time, it is the supervisor in charge of the main financial sector; Nevertheless, the Directive’s criteria may be waived by the team of the « relevant supervisors », when needed; The coordinator is assisted by the team of other «relevant supervisors». 2. Designation of competent supervisors

21. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 21 III – the European Framework Information gathering and dissemination, on an on-going basis and in crisis situations; Assessment of financial soundness and compliance with financial conglomerate regulation; Compulsory coordination arrangements; … But he has no enforcement powers with respect to regulated entities located outside his jurisdiction. 2. Designation of competent supervisors The missions and powers of the lead coordinator consist in :

22. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 22 III – The European Framework a) Capital adequacy, b) Risk concentration, c) Intra group transactions, d) Internal control and risk management requirements. 3. Content of supplementary Supervision

23. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 23 III – The European Framework a)Capital adequacy 3. Content of supplementary Supervision The basic principle is that: The overall capital at conglomerate level must be sufficient to meet the total capital requirements of all entities within the group after elimination of intragroup elements.

24. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 24 III – The European Framework a)Capital adequacy The four methods developed by the Joint Forum in 1999 can be used: 3. Content of supplementary Supervision accounting consolidation method, deduction aggregation method, book value/requirement deduction method, combination of 2, or all, of methods above. The choice of the method is validated by the lead coodinator.

25. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 25 III – The European Framework b)Risk concentration 3. Content of supplementary Supervision There is a group-wide measure of concentration risks; It comprises all risks, namely credit, counterparty, investment, underwriting, market risk, etc. It is a qualitive supervision, but discretion for quantitative limits, The coordinator role consists in: – setting limits, according to the risk profile of the group, – measuring contagion risk/conflicts of interests/arbitrage, etc. – determining risk categories requiring reporting.

26. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 26 III – The European Framework c) Intra Group transactions 3. Content of supplementary Supervision Concept of « important Intra Group Transactions - IGTs» (> 5% of minimum capital requirements); Periodic notification of the important IGTs to the coordinator; Qualitive supervision of the IGTs, but country discretion for quantitative limits; Coordinator role, similar to his role in risk concentration monitoring.

27. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 27 III – The European Framework d)Internal control and risk management requirements 3. Content of supplementary Supervision Sound management processes: (adoption and periodic assessment by the top management of the Group’s strategies, policies and risk policy); Capital adequacy policy, appropriate to match the conglomerate’s risk profile and strategy; Internal risk measurement and management processes commensurate with the conglomerate’s risks; Sound internal control mechanisms and accounting principles.

28. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 28 III – The European Framework Access to information, Cooperation and exchange of information, - Areas of information exchanges are mainly: group’s structures, strategy, acquisitions, restructuring, CAD, IGT’s, large exposures, profitability, shareholders, management, internal control systems, materially adverse developments, regulatory measures, etc. -Essential information must be shared; relevant information may be shared. Verification of information, Enforcement. 4. Means of supplementary Supervision EU Financial conglomerates

29. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 29 III – The European Framework Entities established outside the EU 4. Means of supplementary Supervision notion of equivalent supervision, and cooperation agreements

30. Application of the Supervisory Review Process CEBS CP03 | May 2004 5 th Annual International Seminar on Policy Challenges for the Financial Sector | 2 June 2005 30 III – The European Framework What needs to be determined? Whether « appropriate and equivalent » supervisory is in place; When and by whom? The request is made at the initiative of the parent or the regulated entity or the coordinator; Who determines the possible equivalence? The coordinating supervisor decides with the advice of other relevant supervisors, and taking into account the general guidance issued by the Financial Conglomerates Committee in July 2004 regarding the equivalence of supervision in Switzerland and the USA; What if no equivalence? In this case, the Directive is applied by analogy to the EU parts of group; and appropriate methods are used to capture and measure at least « the sub-group’s risks » (e.g. require a sub-holding company). …. 4. Means of supplementary Supervision Groups with a Third Country Parent

31. Contact details: Chairman José María Roldán Email: josemaria.roldan@c-ebs.org Tel. : +44 20 7382 1770 Vice Chair Danièle Nouy Email: daniele.nouy@banque-france.fr Tel.: +33 1 4292 7501 Secretary General Andrea Enria Email: andrea.enria@c-ebs.org Tel. : +44 20 7382 1750