Financial Conglomerates : New Rules for New Players?
The last couple of years, financial conglomerates have been established all over Europe. This horizontal diversification has not only attracted a great deal of attention in the banking and insurance sector but has also alarmed the supervisory authorities and the European Commission. Although the benefits of financial conglomerates are straightforward, it is clear that quite a number of potential risks can not be ignored. Since the phenomenon of "financial conglomeration" is rather new, the regulators do not possess a great deal of objective, scientific reference bases on which to construct the necessary regulations. Moreover the complexities and specific char- acteristics of the financial conglomerates do not permit a simple extrapolation of the rules for industrial conglomerates. Even the extrapolation of banking regula- tions to insurance groups and vice versa poses a lot of difficult questions. These observations lie at the origin of the research carried out at the Erasmus Finance and Insurance Centre (EPIC at the Erasmus University in Rotterdam), in collaboration with the Impulse Centre for Financial Services and Insurance (ALEA at the Vlerick School of Management of the University of Ghent). To confront the research results with the expertise of the business world and the supervisory authorities a workshop was organised in Rotterdam (1994). This publication is partly based on these research results and the workshop discussions. Three main blocs can be distinguished: the definition of financial conglomerates; the potential risks and the regulatory aspects; the strategic issues.
- Paperback | 192 pages
- 154.94 x 234.95 x 11.68mm | 362.87g
- 15 Nov 1995
- Dordrecht, Netherlands
- Softcover reprint of the original 1st ed. 1995
- 4 Illustrations, black and white; 192 p. 4 illus.
Table of contents
1. Defining financial conglomerates Combining economic and legal approaches.- 1.1. The essential elements that constitute a financial conglomerate.- 1.2. Defining a group of enterprises.- 1.2.1. Participation versus investment.- 1.2.2. Direct versus indirect participations.- 1.2.3. Ownership versus control.- 1.2.4. Economic versus legal integration.- 1.3. Defining financial institutions and financial activities.- 1.4. What distinguishes a financial conglomerate from a financial institution?.- 1.5. Complementarity between the activities and institutions involved.- 1.6. A financial conglomerate is not really a conglomerate in the economic sense of the word.- Appendix 1.A. Relevant definitions.- A.1. Defining a group.- A.2. Defining a daughter company or subsidiary.- A.3. Defining a participation.- A.4. Defining an associated or related enterprise.- A.5. Defining a financial conglomerate.- 2. Defining financial conglomerates; Discussion.- 2.1. Discussion by dr.A.J.Vermaat.- 2.1.1. One or more definitions ?.- 2.1.2. General theory of conglomerates.- 2.1.3. The term "financial conglomerate" in the context of supervision.- 2.1.4. An attempt to a simple typology.- 2.2. Discussion by Drs.J.H. Holsboer.- 2.2.1. Definition.- 2.2.2. Level playing field.- 2.2.3. Participation versus investment and the `droit de suite'.- 2.3. Discussion by dr. K.W. Knauth.- 2.3.2. What are the essential elements that constitute a financial conglomerate?.- 2.3.2. Defining a group of enterprises.- 2.4. Discussion by P.Pearson.- 2.4.1. Seeking a legal definition of a financial conglomerate.- 2.4.2. The relevant relationship between the undertakings ("group").- 2.4.3. The relevant activities and undertakings ("supervised companies providing financial services").- 2.4.4. The specific composition of the "group" (activities consist "largely, though not necessarily wholly of financial services of at least two different sectors").- 2.5. The case Norway by S. Simonsen.- 2.5.1. Background.- 2.5.2. Definition of a financial group.- 2.5.3. Organisation.- 2.5.4. Concurrent positions in boards.- 2.5.5. Transactions between companies (enterprises) in a financial group.- Appendix 2.A.- A.1. Financial institutions.- A.1.1. Ownership structure, etc.- A.1.2. General rules for business.- A.2. Financial groups.- A.2.1. Licence.- A.2.2. Organisational set-up.- A.2.3. Transactions and consolidation.- 3. Application of the most relevant definitions to the relational database.- 3.1. The collection of the data.- 3.2. The results.- 3.2.1. Defining the type and number of financial conglomerates.- 3.2.2. Economic impact of the financial conglomerates: some estimations.- 4. Financial conglomerates; Risks?.- 4.1. What are the potential risks in relation to financial conglomerates ?.- 4.1.1. The risks of instability and insolvency.- 4.1.2. The risk of non-transparency.- 4.1.3. The risk of infringing the free competition and the rights of the consumer.- 4.2. The supervision of financial conglomerates.- 5. Solvency regulations for financial conglomerates.- 5.1. Calculation of the required level of solvency for credit institutions and for insurance companies.- 5.1.1. Credit Institutions.- 5.1.2. Insurance Companies.- 5.2. Calculation of the solvency fund for credit institutions and insurance companies.- 5.2.1. Credit institutions.- 5.2.2. Insurance companies.- 5.3. Other elements that must guarantee the stability and confidence in the financial and insurance sector.- 5.3.1. Credit institutions.- 5.3.2. Insurance companies.- 5.4. Philosophy behind the solvency requirements for credit institutions and insurance companies.- 5.4.1. General observations.- 5.4.2. Philosophy behind the solvency regulations.- Appendix 5.A. Credit institutions.- A.1. What is the minimum level of solvency?.- A.1.1. Minimum level of solvency from I -1 -1993 until 1-1-1994.- A.1.2. Kind of risk.- A.1.3. Kind of risk only for OBS activities.- A.1.4. Weighted Assets.- A.1.5. Weighted Off-Balance-Sheet elements.- A.1.6. Minimum level of solvency from I-1-1994 until I-7-95 (including large risk).- A.2. Components of solvency.- A.3. Risk weighting factors.- Appendix 5.B. Insurance companies.- B.1. What is the minimum level of solvency.- B.1.1. Non-life insurance.- B.1.2. Minimum guarantee fund.- B.1.3. Solvency level based on premiums (Xt-I).- B.1.4. Solvency level based on average claims (Zt-I).- B.1.5. Life insurance.- B.1.6. Minimum guarantee fund.- B.1.7. Solvency level based on mathematical reserves and/or capital under risk.- B.2. Components of solvency.- B.2.1. Non-life insurance.- B.2.2. Life insurance.- B.3. List of symbols.- Appendix 5.C. Comparison of own funds.- 6. Research into the possibility of a global approach for the calculation of the solvency requirements of financial conglomerates.- 6.1. Some theoretical remarks.- 6.1.1. Do financial conglomerates lead to a decreasing or to an increasing entrepreneurial risk?.- 6.1.2. Does the solvency requirements of insurance companies need an upgrading to take also the "asset" risks into account ?.- 6.2. Simulations of the combined solvency.- 6.2.1. The calculation of the required solvency level for insurers on the basis of the banking rules.- 6.2.2. The calculation of the solvency fund for insurers on the basis of the banking rules.- 6.2.3. Analysis of the simulation results.- 6.3. Analysis of the need for an actualisation of the minimum solvency requirements.- Appendix 6.A.Theoretical problems in the application of the banking rules to insurance companies.- A.1. Definition of the solvency needed: the weighting factors.- Appendix 6.B. Simulation exercises.- B.1. Calculation of the solvency required according to the banking directives.- B.2. Combining solvency requirements according to insurance and banking rules.- Appendix 6.C. Correction: minimum solvency levels.- C.1. Correction on the European level.- C.2. Corrections for the Dutch market.- 7. Financial conglomerates, solvency and risks.- 7.1. Discussion by S. Simonsen.- 7.1.1. Solidity requirements.- 7.1.2. Consolidation.- 7.1.3. Supervision.- 7.2. Discussion by O. LOining.- 7.3. Risk-based capital in the United States, discussion by J. Roos.- 7.3.1. Introduction.- 7.3.2. Risk-based capital ratio.- 7.3.3. The ACL RBC of life insurers.- 7.3.4. The ACL RBC of property/casualty insurers.- 7.4. Discussion by drs.J.H. Holsboer.- 7.4.1. Consolidated versus solo-plus supervision.- 7.4.2. Development of supervisory rules in relation to `incidents'.- 7.4.3. Applying the BIS-ratio to insurance companies.- 7.4.4. Revaluation reserves of insurance companies as Tier 2 capital.- 7.4.5. Risk based capital solvency regulations.- 7.4.6. Role of rating agencies.- 7.5. Discussion by dr. K.W. Knauth.- 7.5.1. Solvency regulations for financial conglomerates.- 7.5.2. The risk of contagion.- 7.5.3. Double gearing.- 7.5.4. Research into the possibility of a global approach for the calculation of the solvency requirements of financial conglomerates.- 7.6. Discussion by R Pearson.- 7.6.1. Solvency Regulations for financial conglomerates.- 7.6.2. Minimum guarantee funds.- Appendix 7.A.Thresholds and minimum guarantee funds.- 8. Why financial conglomerates? Strategic Issues.- 8.1. What is the reasoning behind the formation of a financial conglomerate ?.- 8.2. Financial conglomerates: new wave strategic thinking?.- 8.3. Strategy at the limits of the possible: the management recipe of the nineties.- 8.4. Strategy at the limits of the possible goes further than internal creativity.- 8.5. The formation of financial conglomerates can be a strategy at the limits of the possible.- 8.5.1. Internal creativity at the limits of the possible.- 8.5.2. External (and internal) creativity at the limits of the possible.- 8.6. Conclusions.- 9. Summary and Conclusions.- 9.1. Part 1 - Definitions.- 9.1.1. What are the essential elements that constitute a financial conglomerate ?.- 9.1.2. Defining a group of enterprises.- 9.1.3. Defining different kinds of financial institutions.- 9.1.4. Applying the definitions in practice.- 9.2. Part II - Regulating financial conglomerates.- 9.2.1. Risks in relation to financial conglomerates.- 9.2.2. Supervision of financial conglomerates.- 9.2.3. Solvency regulations for financial conglomerates.- 9.2.4. The possibility of a global approach for the calculation of the solvency requirements of financial conglomerates.- 9.2.5. Discussion on risks and solvency.- 9.3. Part III - Strategic issues.- 9.3.1. Strategic issues.- 9.3.2. Basis statements to be tested in further research.