26. The deregulation of domestic financial markets over the past decade together with the globalisation of financial markets has led to new ways and means of doing business in the highly competitive, integrated world economy of the 1980s and 1990s. One notable development has been the emergence of the financial conglomerate, often with a significantly large balance sheet (and off balance sheet positions), providing a wide range of financial services in a variety of geographic locations.

27. Driving the structure of the financial conglomerate has been the effort to create an organisation which takes advantage of economies of scale and the synergies which exist between different financial sectors, an organisation with the ability to network a package of financial products and thus meet the requirements of a broader range of customers. By its sheer breadth, a financial conglomerate also offers a certain measure of diversification in terms of revenues and risk. The goal embodied in the emergence of financial conglomerates has been to improve the efficiency and effectiveness of a financial group by creating separate business areas for a variety of financial activities where each business can develop independently and yet where the opportunities for synergy constitute a long-term competitive benefit.

28. Many of the financial activities undertaken by financial conglomerates are subject to regulation, whether by bank, securities or insurance regulators. Often, even within a single jurisdiction, more than one regulator is involved. Moreover, because of the diverse locations in which these conglomerates operate, regulators in different countries are faced with the difficulty of having contact with and responsibility for only a part of any given conglomerate. Further complications arise where entities within a financial conglomerate undertake financial activities for which, in some countries, a licence may or may not be required, but which are not subject to any capital regulation. For example, financial activities such as leasing, reinsurance, consumer credit, bridge financing, custody operations and certain financial derivatives may be conducted outside regulated entities in many countries.

29. In view of the fact that their structures are frequently complex and their activities so wide­ranging geographically, financial conglomerates pose difficulties for regulators. If, for example, one of these conglomerates were to encounter financial problems, a large number of its customers (be they depositors, insurance policy holders, investors or other creditors) could be adversely affected on an international scale. There would also be implications for deposit and customer protection arrangements.

30. Thus, the question of how to grapple from a supervisory point of view with the growing trend in most countries towards financial conglomerates is increasingly important to bank, insurance and securities regulators and is likely to remain so for the foreseeable future. At the same time, it is clear that both within any single country and among countries there are considerable differences between insurance supervisors, bank regulators, and securities authorities in terms of their regulatory objectives, the scope of their powers, and the instruments at their disposal. These differences stem in part from the nature of the businesses they supervise, and in part from differing traditions, histories, accounting practices and legal frameworks. While these differences cannot be underestimated, there is nonetheless a common need for cooperation among supervisors if only because of the greater potential for risks inherent in financial conglomerates. In short, supervisors of all sectors across countries share a common objective as to the financial position and solvency of the institutions they oversee because the way in which these institutions interact can have implications for the financial system as a whole.

31. Over the past several years, a number of supervisory and regulatory groups within the international financial community have sought to explore the ways in which some of their concerns relating to the supervision of financial conglomerates could be addressed. Each of these groups has published a report looking at the subject from their own particular perspective. The groups include the Basle Committee on Banking Supervision, the Working Group of the Conference of Insurance Supervisors of the European Economic Community, the Technical Committee of the International Organisation of Securities Commissions (IOSCO), the Banking Advisory Committee of the Commission of the European Communities and the Insurance Committee of the Commission of the European Communities.

32. This report attempts to look at the subject of financial conglomerates from a joint perspective. It brings together the efforts of a Tripartite Group of bank, securities and insurance regulators. This group was set up at the initiative of the Basle Committee at the beginning of 1993 to consider ways of improving the supervision of financial conglomerates. The Tripartite Group is an informal one with representatives (from each of the G­10 countries, from Luxembourg and from the EC Commission) having been invited to participate on an individual basis; broadly speaking, banking, securities and insurance are equally represented among the group's twenty­six members (see Appendix I). This report seeks to synthesise the views of the Tripartite Group with regard to the body of work that has already been published by representatives of the individual sectors; to distinguish the points of agreement; and, in so doing, to identify possible solutions to some of the problems involved in the supervision of financial conglomerates.

33. With a view to clarifying the position regarding the supervision of financial conglomerates, a specially designed questionnaire was completed by members of the Tripartite Group. Answers were provided on a country basis, involving the bank, securities and insurance supervisors in all countries represented on the group. In some cases, this meant that consultation was necessary with supervisors not directly represented. An analysis of responses to the questionnaire is attached to this report (Appendix II).