The regulation and supervision of domestic financial conglomerates

Financial conglomerates are groups of financial institutions related by ownership or control. Specific regulatory and supervisory issues arise when financial services -- such as commercial and retail banking, securities underwriting and trading, investment management, and insurance underwriting -- are provided by a financial conglomerate structure. The author provides a handbook for authorities responsible for financial conglomerate regulation and supervision, identifying key issues, spelling out regulatory and supervisory alternatives, and describing both preferred solutions and alternatives. He makes reference to the regulatory framework adopted in the European Economic Community. Among the main tools available to the authorities are prudential regulations, accounting consolidation, and consolidated supervision. Prudential regulation for financial conglomerates preferably would be applied on a uniform and fully consolidated basis. Alternatively, existing regulations applicable to different financial sectors can be modified, in particular to mitigate the potential that intragroup transactions overstate capital or earnings. Accounting consolidation of the financial entities in a group is a prerequisite for consolidated prudential regulation and improves the transparency of the group's financial position. The authorities should use consolidated supervision to ensure that the risks from all group entities are identified and assessed.