Financial Conglomerates,

What are the Inherent Risks?

2006 CIAB ConferencePort-of-Spain, Trinidad & Tobago

November 16, 2006

Thordur Olafsson, CARTAC

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Content of the Presentation

Definitions Main Systemic Risks Risk Management LCFIs – Nordea Group Supervision of the Financial Sector in the Nordic

Countries Supervisory Cooperation – MoUs their coverage and

responsibilities of regulators Other relevant issues for consideration Latin- and Central America regulatory arrangements The Caribbean Conclusion

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Definition of Financial Conglomerate

Financial Institution which is engaged in at least two of the following activities: banking, insurance and securities.

Domestic = cross-sectoral International/Regional= cross-

sectoral and cross-border

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Definition of Financial Conglomerate

A Large Complex Financial Institution (LCFI) is a cross-border financial institution, which is also cross-sectoral, engaged in at least two of the following activities: banking, insurance, and securities transactions with the potential to threaten regional or global financial stability owing to their size in more than one jurisdiction.

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Main Systemic Risks Concentration and cross-sectoral

credit~market~liquidity~and technical (insurance) risks arising from interbank and other funding

Securities, OTC derivatives, and other market activities

Credit~market~and insurance risk-sharing between LCFIs

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Main Systemic Risks

Large settlement and payment systems exposures

Enforceability of contracts (legal issues)

Poor transparency Market distortion and transaction

arbitrage

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Main Systemic Risks Differences in prudential regulations,

monetary policy, market distortions, and arbitrage encouraged by differences in home and host country taxation regimes

The heavy emphasis on cross-border financial activity raises issues for regulators responsible for supervision these

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Risk Management BCP 7 – Risk management process:

Supervisors must be satisfied that banks and banking groups have in place a comprehensive risk management process (including Board and senior management oversight) to identify, evaluate, monitor and control or mitigate all material risks and to assess their overall capital adequacy in relation to their risk profile. These processes should be commensurate with the size and complexity of the institution.

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Risk Management CP 7 - Additional criteria

1. The supervisor requires larger and more complex banks to have a dedicated unit(s) responsible for risk evaluation, monitoring, and control or mitigation for material risk areas. The supervisor confirms that this unit (these units) is (are) subject to periodic review by the internal audit function.

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LCFI – Nordea Group Leading financial services group in the

Nordic and Baltic Sea region Retail banking, corporate and

institutional banking, and asset management & life

Significant position in Nordic banking markets

Significant share of assets in Nordic insurance market

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LCFI – Nordea Group

Largest customer base of any financial group in the region

Leading asset manager in the Nordic financial market

Most comprehensive distribution network in the region

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Supervision of the Financial Sector in the Nordic

Countries

Supervisory authorities in the Nordic countries have a long-standing cooperation which has lasted for more than 80 years.

Considered to be in good order Financial sector regulatory authorities are

accountable to parliaments and governments

Highly developed bankruptcy and consumer protection

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Supervision of the Financial Sector in the Nordic

Countries

Efficient court system Very low corruption Accounting standards are compatible

with IFRS (IAS) standards Corporate governance highly

developed Single independent and autonomous

authority

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Supervisory Cooperation - MoUs

First general MoU 1989 – revised few times

Separate MoU on Nordea Group since 2000 and revised few times

ECB and EU national supervisory authorities signed MoU in March 2003

In June 2003 a MoU between the Nordic central banks on “ Management of a financial crises in banks with cross-border establishments.”

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MoU Coverage Confidentiality and definitions

related to each supervisory authority

Establishment of branches in any of the member countries

Cooperation within the Nordic supervisory

Cooperation on conducting on-site examinations region

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Mou Coverage

Cooperation related to consolidated supervision and cross-border financial services

Cooperation related to establishing of affiliated companies

Dealing with crises Technical issues (meetings etc.)

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Responsibilities of Regulatory Bodies

Draw up joint (annual) supervision plan Consolidated risk assessment of the group

Appropriate exchange of information on a continuous basis and especially on Imminent crises Preparation of contingency plan Maintain key contacts Regular exchange of supervisory staff

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Responsibilities of Central Banks

ECB – National EU Authorities Nordic Central Banks.

To assess the emergence of potential crises

To ensure appropriate flow of information

Coordinate policy actions Create a crises management group

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Other Relevant Issues for Consideration

Deposit insurance schemes Lender of last resort (LOR)

arrangements and emergency loans

Crises management Regulators ~ central banks

~governments (Ministry of Finance)

Financial stability monitoring

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Latin- and Central America Regulatory Arrangements

Mainly vested with different sectoral agencies

Mostly conducted by governmental agencies, but is some cases central banks

Low level of cooperation among regulatory agencies cross-border and across sectors

Relevance and usefulness of MoU in place questionable Generally not considered a priority in the

operation of regulatory agencies

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The Caribbean

Map out which are the financial conglomerates Within a jurisdiction In multiple jurisdictions International Regional

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The Caribbean What are the main risks for the

region if a LCFI fails? What is the level of supervisory

cooperation? MoUs ? Is there a contingency planning?

LOR arrangements? MoUs between respective Central Banks?

Crises management ?

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Conclusion Growing trend in sector integration and

cross-border establishments call for special supervisory attention

Need for close cooperation between sectoral supervisory agencies (central banks and ministries of finance)

Conduct of market players counts Come up with an appropriate model to

handle eventual regional financial crises Nordic model is instructive

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Conclusion

Thank you