1(a) Do financial conglomerates exist in your country? (i.e. are there any financial conglomerates whose main operational company is incorporated in your country?)

Financial conglomerates exist in most countries. Japan is something of an exception; it only recently (from 1.4.93) became legally possible for a Japanese bank to be the majority shareholder of a securities company and for a Japanese securities company to be a majority shareholder of a bank. Hitherto, however, Japanese banks have owned securities subsidiaries abroad and Japanese securities companies have owned banks abroad.

In general, financial conglomerates engage in a variety of activities both domestically and internationally. For example, US broker­dealers, either directly or through their subsidiaries and affiliates, engage in financial activities such as brokerage, trading, investment banking, merchant banking, asset management, insurance, futures and other derivative products. In addition, broker-dealer affiliates engage in commercial activities such as travel arrangements and travel­related publication services, information processing, real estate brokerage and commercial property management, retail activities, and producing and selling industrial equipment, consumer appliances and duplicating equipment.

In Switzerland, some conglomerates also carry out leasing, factoring, foreign exchange and precious metal trading, but in most cases the universal banking activity tends to be predominant. Some large universal banks hold majority or minority participations in industry, engineering, travel, hotels and other non­financial activities. In the United Kingdom, the majority of financial conglomerates are predominantly banking or insurance based. The same can be said of Luxembourg (where only two conglomerates exist), Italy, Germany, The Netherlands, Belgium and France. In Switzerland, Italy, Germany, Luxembourg and The Netherlands, securities business is considered to be something of a "natural" banking activity which can be conducted within the legal entity of the bank or by a separate subsidiary of a financial conglomerate.

In Canada, several large life insurance companies own subsidiaries that are banks or near­banks, while Canadian banks have acquired control of several domestic securities firms and a few have established or acquired insurance companies.

1(b) If so, has their relative importance grown during the last five years (measured in absolute numbers or in percentage market share)?

Except in Japan and Luxembourg, the importance of financial conglomerates has grown during the last five years, although growth in the United States has been slower than it was in the early 1980s. In Sweden, too, growth has been slow as it only became possible for banks and insurance companies to own shares in each other in mid­1991. In Japan, the relative importance of financial conglomerates is expected to grow as a result of the recent legislative reform.

In the United Kingdom, "Big Bang" (the ending of certain restrictive practices on the Stock Exchange) provided the impetus for financial diversification ­ in particular the emergence of conglomerates based on the acquisition by banks or existing banking groups of securities subsidiaries. The process of financial conglomeration has continued post "Big Bang".

In The Netherlands, financial conglomerates developed rapidly following the liberalisation of the so­called structural policy, which took place on January 1^st, 1990. Until that time, participations by banks in insurance companies and by insurance companies in banks were not allowed (except for participations for investment purposes of less than 15%).

Italian law has a principle separating banking and commerce. However, since 1990, credit institutions have been allowed to take equity participations in insurance companies, while the latter have in turn been able to take controlling interests in banks.

In The Netherlands, the market share of banks incorporated in financial conglomerates (balance sheet total) is about 70%, while the market share of insurers incorporated in financial conglomerates (in premium income) is about 65%. The market share of the three largest Swiss financial conglomerates was roughly 50% at end­1994.

In Canada, financial conglomerates have grown in importance over the last five years and will continue to do so in response to the 1992 revisions to financial institution legislation in Canada which allows financial institutions themselves to set up conglomerates. Previously, financial conglomerates were owned largely by upstream holding companies.

2(a) Are there legal or prudential restrictions on ownership linkages between financial companies in different sectors?

2(b) If so, please describe briefly what these restrictions are.

In a majority of countries, there are no legal restrictions on ownership linkages between financial companies in different financial sectors, although the United States and Japan are notable exceptions to the norm. Specific prudential restrictions exist widely and these vary from country to country.

In the United States, legal restrictions on the mixing of commercial banking with full-scale securities and insurance business prevent a financial conglomerate from providing all such services. Under Federal and New York state law, insurance companies cannot directly or indirectly own commercial banks (insurance laws vary from state to state); moreover, the Glass­Steagall Act generally restricts the ability of banks to engage directly in securities activities or to affiliate with securities firms.24 Where the restricted securities activities cannot be carried on domestically by a bank, they may be permitted in a foreign branch or affiliate of the bank. In the US, banks are generally limited to acting as principal and agent for government securities and certain public debt securities, and to acting as agent for customer transactions in corporate securities. However, through interpretations of the Glass­Steagall Act, the US federal banking regulators have permitted banks to engage in certain securities activities in the United States, such as private placements, investment advisory services and discount brokerage, and have allowed bank affiliates to engage in corporate debt and equity underwriting and trading, subject to certain restrictions. US law also prohibits banks from affiliating with commercial firms and from underwriting insurance either directly or through a domestic affiliate.

The Anti­Monopoly Law in Japan prohibits establishment of a holding company whose main business is to control the business activities of other domestic companies through the holding of ownership. The law also prohibits a bank or securities company from holding more than 5% of a domestic company, and an insurance company from holding more than 10% of such a company, unless they receive prior permission from the Fair Trade Commission. Permission is strictly limited, for example, to cases of a bank becoming majority shareholder in a securities company or vice­versa.

In Italy, securities investment firms may not acquire controlling interests in credit institutions, in the parent company of credit groups or in insurance companies. However, the larger credit institutions may be authorised by the Bank of Italy to acquire controlling interests in insurance companies subject to restrictions related to the own funds of the credit institution. The prior authorisation of ISVAP is also required for the purchase of controlling stakes in insurance companies.

In the European Community, the First European Insurance Directives limit insurance undertakings to insurance business. In Switzerland, too, the Insurance Supervision Law requires insurance business to be legally separated from other activities for prudential and technical reasons; but banks may own insurance companies and, subject to the authorisation of the Federal Office for Private Insurance, insurance companies can own banks. Swiss banks' participations in non­consolidated entities ­ mainly non­financial companies ­ is indirectly restricted by stringent capital requirements. A capital ratio of 40% of the participation's net value is required, equivalent to 500% of the standard credit­risk weighting of 8% for unsecured claims against the private sector. Furthermore, banks have to deduct participations in insurance companies from the regulatory capital.

In The Netherlands, banking supervisory legislation requires a declaration of non-objection from the Minister of Finance (or from the Nederlandsche Bank on behalf of the Minister) for any participation by a bank of 10% or more in the share capital of another institution; and for any participation involving more than 5% of a bank's share capital. According to insurance supervisory legislation, similar declarations are required for any participation of more than 5% by an insurer (or by the holding company of an insurer) in a bank; and for participations of more than 5% by a bank in an insurance company.

In the United Kingdom and in Luxembourg, the acquisition of qualifying shareholdings is also subject to certain "fit and proper" controls. Moreover, in the United Kingdom, the Bank of England and the Department of Trade and Industry Insurance Division consult one another informally about proposed ownership linkages between banks and insurance companies. Certain UK regulators also assess the prudential consequences of proposed acquisitions in respect of matters such as the ability of the acquirer's management to effect proper direction and control of any new subsidiary and the impact of the acquisition on the overall capital position of the group. In addition, mergers and acquisitions can be referred to the Monopolies and Mergers Commission (or, in certain cases, its EC equivalent) primarily, but not exclusively, on competition grounds.

In Luxembourg, the law requires the group structure to be transparent so that it is possible to identify the competent supervisory authority and to carry out effective supervision. The group structure must also facilitate consolidated supervision of the group where applicable, although this condition does not apply to insurance companies. The Luxembourg Monetary Institute and the Commissariat aux Assurances may oppose ownership linkages between credit institutions, insurance companies and investment firms on the grounds that these legal requirements have not been met. In any event, the taking of a participation in a credit institution, investment firm or insurance company is subject to the prior approval of the Luxembourg Monetary Institute and the Commissariat aux Assurances.

In Belgium, a law has recently come into force authorising credit institutions to acquire shareholdings in insurance companies without any quantitative limitations; they are also authorised by law to acquire shareholdings in broking companies. Similarly, legal requirements concerning the own funds of insurance companies include no restrictions on the acquisition of shareholdings. However, company shares held by insurance companies as securities to cover their technical reserves must not exceed, in total, 25% and, per caption, 5% of those reserves. In accordance with the third European Insurance Directive, new rules are being prepared under which the 5% limit per caption will remain but the 25% limit on the total will no longer apply. However, a new limit of 10% of technical reserves will be imposed on the total value of the securities which cannot be traded on a regulated market. Similar restrictions on the amount insurance companies can invest apply in France and in Luxembourg. Broking companies in Belgium, on the other hand, are forbidden from acquiring shareholdings in companies other than broking companies without the prior consent of the Banking and Finance Commission (BFC). This has only arisen once, when permission was granted for a broking company to acquire 100% of the capital of a credit institution.

In Germany, the Federal Insurance Supervisory Office (FISO) can prohibit participations in non­insurance companies. Where an insurance company holds a financial interest in another enterprise not subject to supervision, which, because of the nature of its business or because of the size of the participation, could endanger the insurance company, FISO is empowered to prohibit continuation of the interest or to impose specific conditions.

In Canada, there is a requirement that no shareholder in a major domestic bank should have more than a 10% interest with a view to ensuring that such banks are widely held. Financial institution legislation which came into force in June 1992 removed previous restrictions on ownership linkages between financial companies in different sectors. Restrictions still apply, however, on activities which Canadian financial institutions can engage in directly. (Companies generally restricted to core activities of banking, insurance, trust or securities.)

3 What structures of financial conglomerates can be observed?

(i) "groups" in which companies participate in each other to a substantial degree

The most common structure of a financial conglomerate in Belgium is that of direct shareholdings between controlled enterprises operating in different financial sectors. Examples of this type of conglomerate also exist in Germany, France, Italy, Sweden and the United Kingdom.

(ii) "groups" with a licensed holding company above the (other) operating companies

The larger US financial conglomerates generally operate within a holding company structure. The owner may be a regulated bank holding company, an unregulated holding company, an insurance company, or a commercial firm.

In the majority of financial conglomerates in Germany, the main operational company is not a holding company, but is a licensed operating company (usually a bank). In Canada, too, the top company in the "tree" is often a bank or life insurance firm. In The Netherlands, a large licensed bank owns a large insurance company; and one holding company, which has a banking license, owns a large operating bank with a small insurance subsidiary. Banking subsidiaries of insurance companies in The Netherlands are nearly always owned by the holding company of the insurer.

Groups with a licensed holding company above the other operating companies can also be found in Italy (though only among credit groups), Sweden, Belgium and the United Kingdom.

In Switzerland, most financial conglomerates still have the traditional European group structure with the original parent bank or insurance company at the head. There are no "groups" with a licensed holding company above the other operating companies as there is no licensing requirement for holding companies. The same holds true for the two financial conglomerates in Luxembourg, where the parent companies are among the large players in the banking sector.

(iii) "groups" with a non­licensed holding company above the operating companies

The two largest financial conglomerates in The Netherlands are structured in this way and there are notable examples in Switzerland where non­licensed holding companies feature in the structure above the other operating companies. Conglomerates with this type of structure exist in the United Kingdom, Canada, the United States, Sweden and Belgium; and also in Italy and Germany, where they are more common in insurance based groups.

(iv) "groups" in which companies are highly integrated

There are examples of highly integrated groups in Switzerland. A high degree of integration can also be observed in banking groups in Italy and in a few cases in Belgium. In The Netherlands, it is not possible to integrate banking and insurance activities in a single legal entity. However, large conglomerates there are nevertheless integrating their banking and insurance activities with a view to achieving more synergy, and a few small banking subsidiaries are integrated to a large extent in larger insurance companies.

(v) other structures; if so, please give a brief description

In Germany, there are a number of mixed conglomerates, where a bank has major participations in other financial conglomerates as well as in industrial companies. The explanation for this lies in the fact that, historically, banks, as major creditors, have taken participations in industrial companies which have got themselves into economic difficulties.

Overall, most financial conglomerates tend to establish separate companies to specialise in specific financial activities or to set themselves up in different countries. Frequently, group structures reflect differences in regulatory requirements between countries (i.e. regulatory arbitrage). The structure of groups in the United Kingdom also seems to be driven by factors such as taxation, facilitation of dividend payments and management incentives. Often, day­to­day management there is undertaken without reference to the legal structures and is instead based on sectoral analysis reflecting the various types of commercial activity undertaken by the group.

4(a) Do mixed conglomerates (i.e. economic groups of companies encompassing financial and non­financial companies) exist in your country?

Mixed conglomerates exist to a limited extent in most countries. In Belgium and in Canada, however, they are said to play a major role in the economic life of the country.

In Switzerland, the most obvious example is CS Holding with its main activities in the financial sector, but substantial participations in the non­financial sector (Electrowatt: energy, engineering, industry; and Fides: trust business, management consultancy etc).

The non­financial activities of UK­based financial conglomerates tend to be a minor part of their overall business and they are often service based (e.g. leisure companies or estate agencies, many of which carry on investment business as appointed representatives of life offices in selling mortgage related endowment policies). Few, if any, UK­based financial conglomerates are involved in manufacturing. Some UK-based non-financial conglomerates have diversified into financial services.

In the United States, a non-financial firm can own a broker­dealer; and mixed conglomerates can also exist in the insurance industry, where the head of the conglomerate is often a public non-financial operating company. However, federal banking laws generally prohibit commercial firms from owning a US commercial bank or bank holding company, although they may be able to acquire a foreign bank or savings association. For their part, banks and bank holding companies cannot own or acquire commercial companies that are not engaged in activities which are "closely related" or "incidental" to banking.

In The Netherlands, a few insurance companies are part of mainly non­financial conglomerates; in Japan, there are a few financial companies which are owned by non­financial companies.

In Italy, when a bank is involved, the non-financial component of a mixed conglomerate must be no more than 15% of the balance sheet assets of the entire conglomerate. It is quite common for industrial groups in Italy to contain sub­conglomerates of financial and insurance companies.

Mixed conglomerates in France also encompass financial and industrial companies. Insurance companies there have very little in the way of shareholdings in non­financial companies, but examples can be found of banking activity being undertaken alongside car manufacturing or the operation of retail department stores within a mixed conglomerate.

4(b) If so, has their relative importance grown during the last five years?

The relative importance of mixed conglomerates has not grown during the past five years. On the contrary, most banking groups in Switzerland seem to be concentrating their activities in the financial sector because their participations in companies with non­financial activities attract a very high capital adequacy requirement (see question 2b above). Participations in industrial or commercial companies are held by banks in both Switzerland and Germany either on a long term basis due to historical links, or temporarily to restructure bad loans and / or rescue important firms in the public interest. New strategic investments in non­financial firms are rare; there has in fact been some disinvestment by mixed conglomerates in the financial sector.

5(a) Are financial companies ­ operating either as independent firms or as part of a conglomerate structure ­ allowed to sell each other's products?

Practices vary considerably in the twelve countries.

In The Netherlands and in Sweden, there are no limitations on the sale of each other's products by financial companies operating either as independent firms or as part of a conglomerate.

At the other end of the spectrum, in Japan, financial companies in different financial sectors are not allowed to sell each other's products, although securities companies can sell bank debentures and both banks and securities firms are allowed to sell certain financial instruments (e.g. government bonds).

In the United States, the types of securities and insurance products that banks may sell are restricted and the federal banking laws prohibit banks from tying credit extensions to other services. There are also various restrictions governing relationships between banks and their affiliates that are engaged in certain types of securities activities. However, dually­licensed employees of both an insurance company and a broker­dealer can sell both insurance and securities products.

In the United Kingdom, financial companies ­ operating either as independent firms or as part of a conglomerate structure ­ are allowed to sell each other's products. However, in the retail market, a distinction is made between firms acting as "tied agents" of the product provider(s) and firms acting as independent intermediaries (independent financial advisers ­ IFAs). As a tied agent, a financial firm can only sell the products of the provider(s) to which it is tied (which can be a group member). For life insurance, a tied agent can only be tied to a single company or group; for non­life, the agent can have up to six ties. Independent intermediaries must offer advice by considering a range of products from different providers across the market. In the distribution of life insurance, the major financial groups have tended to shift from IFA status to tied agents status.

In Canada, insurance agents may be licensed to sell the products of more than one company; they may also obtain a license as a mutual fund distributor. However, while a bank may own an insurance company, the bank may not act as an insurance agent, market insurance products through its branches or provide space in any of its Canadian branches to insurers or their agents. In addition, there are rules governing the bank's ability to promote insurance products; these largely address competitive concerns rather than prudential concerns.

Licensed banks in Switzerland can sell as many financial products as they wish, provided they have adequate organisation and expertise. Insurance companies there are allowed to sell certificates of investment funds, but cannot carry out deposit­taking.

In Italy, banks may sell securities products and the sale of standardised insurance policies may also be effected directly by a bank or through an agent or broker. Securities investment firms may sell all types of financial instruments (including insurance policies), with the exception of typical banking products.

In Belgium, legal and regulatory restrictions limit the possibilities for broking companies to act as agents of banks and the marketing of insurance products through broking companies is also quite rare. On the other hand, there are no legal restrictions on agreements between insurance companies and banks for the reciprocal marketing of each other's products, and numerous such agreements currently exist or are being developed.

In Luxembourg, banks and investment firms are not allowed to do insurance business on their own account but can do so through a subsidiary. Regulatory approval is required in order to set up or take a participation in an insurance company. Insurance companies themselves are not allowed to engage in banking activities on their own account, but can take a participation in a bank or investment firm provided that the legal authorisation requirements are met. There too, a number of agreements have been reached in recent years allowing insurance companies to distribute their products through the banking network. Securities business is conducted mainly through banks which, with the prior approval of the Luxembourg Monetary Institute, may take equity stakes in investment firms. On the other hand, investment firms themselves are not allowed to engage in banking activities (except investment), but may take a participation in a bank provided that the legal authorisation requirements are met.

In France, only firms with a banking license are allowed to sell banking products. However, banks may sell non-banking products such as insurance as long as such operations remain of limited importance in relation to the institution's normal business (i.e. less than 10% of net banking income) and they do not hinder, restrict or distort competition on the market concerned. In the case of insurance / bank conglomerates, it is quite common for employees of insurance companies to sell policies in the offices of the bank to which their company is affiliated.

In Germany, too, insurance companies are not allowed to sell banking products. Nevertheless, in the last five years, the importance of cross­selling has increased considerably there. However, this is not limited to financial conglomerates because there are a number of cooperations between banks and insurance companies which are neither based on cross­ownership nor on joint group membership.

5(b) If so, to what extent does this occur?

In The Netherlands, almost all banks act as intermediaries for insurance companies, while there are insurance intermediaries or insurance companies which sell savings products of the banks of the financial conglomerate of which they are part.

In Sweden, in practice, only life insurance products are sold through the banks and it is quite unusual for insurance companies to offer banking services.

In Luxembourg, the distribution of insurance products through banking networks is still limited. Insurance companies do not sell the products of banks and investment firms.

In the United States, where a financial conglomerate contains both an insurance and a securities group, it is quite common for dually­licensed employees of both the insurance company and the broker­dealer to sell insurance and securities products.

In Belgium, some banks already sell a range of insurance products (life and non­life), mainly to retail customers; while some insurance company agents sell investment and credit instruments offered by the banks to which their insurance companies are affiliated through cooperation agreements.

In France and in Germany, the importance of the cross-selling of banking and insurance products is also growing, while, in the United Kingdom, many banking­dominated conglomerates now own life offices and recommend their products. Cross­selling activity is also on the increase in Switzerland although it is not yet important there.

In Japan, a sizeable portion of bank debentures is sold through securities companies.

6(a) Do you have in your country financial conglomerates with (regulated) parts in other G­10 countries?

Most countries have financial conglomerates with regulated parts in other G­10 countries.

In The Netherlands and France, most conglomerates operate internationally, often on a substantial scale.

In Switzerland, there are about a dozen international financial conglomerates with a domestically incorporated parent, but there are also around 150 foreign dominated banks operating in Switzerland through locally incorporated subsidiaries of foreign banking groups or foreign securities firms. The big Swiss banking groups operate in all major financial centres of the world; they carry out most universal banking activities, but generally concentrate on the wholesale side of the business. Depending upon local legislation, activities are carried out through branches or through specialised subsidiaries; securities and derivatives business tends to be conducted through subsidiaries. In recent years, the main internal growth of these groups has taken place outside Switzerland. Swiss­based insurance groups, offering insurance and other financial services through subsidiaries or branches, have also been established in several G­10 countries.

In the United Kingdom, there are an estimated 60 UK­based financial conglomerates with regulated parts in other G­10 countries. The main international operations of financial conglomerates represented in the United Kingdom are in the world's major financial centres in the United States, Japan and Western Europe, although the insurance dominated conglomerates are more widely spread. In addition, a large number of financial conglomerates based in other G­10 countries have operations in the United Kingdom.

US banks, broker­dealers and insurance companies do business in other G­10 countries through the establishment of branch offices, through their subsidiaries and affiliates or by the establishment of joint ventures.

Exceptions to the norm are Belgium and Luxembourg. The presence of Belgian financial conglomerates is limited, except in Luxembourg; while the Grand Duchy's own two financial conglomerates are not represented in other G­10 countries.

6(b) Do you have in your country financial conglomerates with substantial intra­group exposures? What kind of exposures are they (e.g. trading, guarantees, etc.)?

Many financial conglomerates in the United Kingdom generate substantial intra­group exposures. These include, but are not limited to:­

- trading exposures (both between group companies located in the United Kingdom and between UK and overseas group companies, reflecting global trading);

- exposures arising through the central management of short­term liquidity in many banking dominated groups and in some financial conglomerates where banking is not the predominant activity;

- provision of longer term finance;

- equity investments in subsidiaries and associated group companies;

- exposures arising from the provision of services (e.g. cost of overheads or of group pension arrangements);

- guarantees given to or received from other group companies.

In the United States, intra­group exposure within a financial conglomerate can result from activities such as the extension of credit, equity investments, trading exposures, financing and guarantees. US laws impose capital and collateral restrictions on banks' transactions with their affiliates. Moreover, the banking regulators regularly monitor and control intra­group exposures. In the case of broker­dealers, the SEC's net capital rule limits intra­group exposure. The broker­dealer holding company risk assessment programme enables the SEC to monitor the risks posed to broker-dealers by other entities within a financial conglomerate. As far as US insurance companies are concerned, intra­group exposures, off­balance sheet transactions and guarantees have to be disclosed in an annual statement that is filed with state insurance departments. Intra­group exposures have become something of a concern within the US insurance industry, mainly because of the risk of contagion.

In Canada, rules applicable to transactions with related parties have been effective in minimising intra­group exposures. Loans are generally prohibited and sales of assets are subject to regulatory review to establish that they are carried out at market rates. Parent­subsidiary relationships are an exception; here it is common for there to be guarantees or support agreements.

In Switzerland, intra­group exposures of licensed banks are limited by large exposure limits in the same way as exposures to third parties. However, Swiss banking subsidiaries of foreign banks are authorised to exceed those limits vis­à­vis other banks and adequately supervised securities firms of the same conglomerate provided the excess exposure is covered by pledged deposits with the Swiss subsidiary. Most intra­group exposures in the banking sector are loans or financial derivatives contracts, rather than guarantees. In the insurance sector, substantial exposures between group members may occur when reciprocal reinsurance is involved.

In Belgium, intra­group exposures are limited to 25% of the own funds of the credit institution involved (but this does not apply to the risks incurred by credit institutions on their subsidiaries or on a parent institution which is an OECD­incorporated credit institution, subject to consolidated supervision). Intra­group exposures which are not concluded at arm's length have to be deducted from the credit institution's own funds. There are no specific regulations on intra­group exposures of insurance companies, other than the general restriction on securities that cover technical reserves, and the general principles of security, profitability, liquidity and diversification, which must also be complied with.

In Luxembourg, too, banks' intra­group exposures are limited (currently to 30% of own funds). This limit will be reduced to 20% with effect from January 1^st, 1999. The situation with regard to intra­group exposures of insurance companies is the same as in Belgium.

In The Netherlands, there are occasional subordinated loans between banks and insurers; while, in Sweden, intra­group exposures exist in the form of loans and security guarantees.

In France, banks lending more than 5% of own funds to shareholders who own more than 10% of the group's capital must notify the Commission Bancaire, while the constant supervision of insurance companies enables the supervisory authority to examine existing links and the risks they may cause.

In Italy, substantial intra­group exposures do not exist between firms which are part of credit groups and other parts of conglomerates as they are strictly limited by the prudential regulations stipulated in the EC Directive on large exposures. In the case of financial conglomerates that cannot be described as credit groups, when insurance companies are involved, substantial intra­group exposures can sometimes be found in the form of loans or guarantees from the insurance company to other members of the group.

In Germany, the main intra­group exposures of banks are loans to non­financial parts of the group. Exposure between banks and insurance companies arises from trading activities, while the insurance companies themselves also have loans outstanding to other parts of their group.