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Issues in Supervision of International Financial Conglomerates

Issues in Supervision of International Financial Conglomerates . Jan Brockmeijer Director Financial Stability Division De Nederlandsche Bank June 2, 2005. Outline. Special challenges in supervising conglomerates Contagion Complexity Consistency How we deal with this in the Netherlands

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Issues in Supervision of International Financial Conglomerates

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  1. Issues in Supervision of International Financial Conglomerates Jan Brockmeijer Director Financial Stability Division De Nederlandsche Bank June 2, 2005

  2. Outline • Special challenges in supervising conglomerates • Contagion • Complexity • Consistency • How we deal with this in the Netherlands • Integrated financial stability analysis • Integrated regulatory policy • Integrated teams of examiners at the group level

  3. 1. Challenges in supervising conglomerates

  4. 1.1 Diversification • Are conglomerates different from separate entities? • Legal firewalls suggest separation • Diversification implies less risk • But evidence on diversification is mixed: • Oliver Wyman report: 5-10% of capital reserves • OECD study: ex post revenue benefits limited at best • Diversification in stress periods may be limited

  5. 1.2 Contagion • Legal firewalls are permeable • Drexel Burnham Lambert Group: market did not distinguish between solvent and insolvent parts • Reputation risk

  6. 1.3 Complexity • Markets may think the group is ‘Too-big-to-fail’ or ‘Too-complex-to-fail’, causing moral hazard • Conglomerates in particular are subject to differing supervisory and legal regimes

  7. 1.4 Consistency or regulatory differences • “Double gearing” • Risk shifting to minimise capital requirements • Risks may, however, end up in areas that are better placed to bear them • If not, shifting risk from a bank to an insurer may be a macro-micro trade-off

  8. 2. How we deal with this in the Netherlands

  9. 2.1 Integrated financial stability • Comprehensive financial stability analysis • Interlinkages between banking, insurance, via conglomerates especially important • Examples of analyses: • Cross-sectoral impact of low interest rates and flat yield curve • Hedge fund exposures • Credit risk transfer

  10. 2.2 Integrated regulatory policy department • Exchange of knowledge and expertise • Common principles: risk based, three pillar approach

  11. 2.3 Integrated teams of examiners • Regular meetings with top management at group level on strategy, risk management, internal audit etc. • Cross-sectoral risk analysis tool FIRM which aggregates risks at group level • Group wide specific investigations: e.g. customer due diligence and internal audit • Pragmatic and close co-operation with foreign supervisors

  12. 3 Conclusion • Why are conglomerates special? • Contagion, Complexity, Consistency • What do we do about this in the Netherlands? • Integrated prudential supervision • Allows for greater consistency at three levels • Macro-prudential • Micro-prudential regulation • Micro-prudential supervision

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