65. Although these approaches are well tested from a prudential perspective in the individual sectors, they differ considerably and, from a bank supervisor's perspective, there is arguably a very strong case for the application of large exposure rules on a group­wide basis in order to prevent regulatory arbitrage taking place among banking, securities and insurance undertakings within the same group. The following questions were considered by the Tripartite Group:

- How serious a problem is this seen as being?

- Are solutions readily available within the framework of options for assessing capital adequacy?

- Is it possible for individual entities within a financial conglomerate to meet the requirements of their respective regulators with regard to large exposures, but for the overall level of exposure to an individual counterparty (or group of connected counterparties) to be a matter of concern for regulators? If so, how is the "level of concern" (the limit?) to be determined?

- To what extent are common rules needed in relation to financial conglomerates?

66. As evidenced by the more stringent rules applying to large exposures as such in the banking sector as opposed to the insurance sector, large exposures are of more concern to bank regulators than to insurance supervisors and they are a particular problem for groups involving both banks and insurance companies. As indicated above, in many cases insurance regulators' asset diversification rules are not linked to the quantum of capital, so it is in theory possible for insurance companies to have exposures exceeding their capital to a single counterparty. It is therefore conceivable that the overall exposure to a single counterparty of a group involving a bank parent and an insurance subsidiary could exceed that deemed to be prudent by the parent's regulator (even though the bank parent and the insurance subsidiary each comply with their respective solo limits / rules). Where the bank'' share of the insurance subsidiary implies a high degree of responsibility, it is suggested that the parent's regulator could not ignore such a concentration of exposure.

67. Take the simple case of a bank parent with a capital of 100, a large exposure to a third party of 25 (i.e. at the solo limit), a 75% participation in an insurance company with an overall capital of 50 and an exposure to the same counterparty of 100. Pro­rata consolidation / aggregation yields an exposure at group level of 100% of group capital, but if the bank's responsibility is considered to be higher than that reflected by its share, the counterparty exposure is larger than the group's capital. If, however, the insurance company is the parent and the bank is the subsidiary, application of the insurance regulator's diversification rules at group level would not reveal an overexposure because the bank's exposure is not part of the assets backing the technical provisions. Nevertheless, the group's overall exposure to that counterparty is the same as in the first example. The difference in the regulatory treatment is sometimes explained by the different nature of banks' and insurance companies' assets, and by the ability of insurers substantially to match assets to liabilities both as regards investment risk and timing risk. However, it is arguable that losses from the worst cases of counterparty failure can only be contained by limiting counterparty exposure to the institutions own funds.

68. The above example tends to douse one suggestion which was considered by the Tripartite Group, viz. that the large exposure rules of a parent's regulator should be applied to the group as a whole. Some members wondered whether there was any scope for applying normal insurance rules to insurance assets (or only to those assets covering technical provisions), and banking / securities rules to all other assets (i.e. the free assets). However, it would be difficult to justify one set of rules for insurance companies which were part of a conglomerate and another set for those which were not, and application of a banking risk control mechanism across the whole insurance industry would be something of a quantum leap. Moreover, although such a change would undoubtedly bring the rules in the two industries closer together, it may not be sufficient to allay the concerns of bank supervisors because technical provisions account for such a large proportion of the balance sheet, particularly in life assurance companies.

69. Another idea to emerge from the Tripartite Group's discussions was the possibility of extending the insurance industry's diversification requirements so that they applied to all assets (including free assets). This would have the merit of ensuring that large exposure rules applied to all insurance sector assets, albeit different rules from those applying in the banking sector. This is essentially a matter which insurance supervisors might wish to pursue at international level.

70. It was concluded that, although the wide difference between the rules pertaining in the banking and insurance industries provided ample scope for regulatory arbitrage, the heterogeneity of the rules was indicative of how difficult it is likely to be to reach agreement on any harmonised rules.

71. The Tripartite Group, however, agreed that a combination of large exposures to the same counterparty in different parts of a conglomerate can be dangerous to the group as a whole. Notwithstanding the discrepancies between different regulatory requirements, the Group therefore sees a need for a group-wide perspective as well as the application of individual large exposure rules to regulated entities. One practical way of proceeding might be to develop a system whereby the parent or lead regulator is furnished with sufficient information to enable him to assess major group­wide exposures to individual counterparties; this would provide valuable information on gross large exposures. For example, all gross exposures to a counterparty or group of connected counterparties which amount to 10% or more of an individual entity's own funds (which would be in line with the requirements of the EU Large Exposures Directive for credit institutions) could be reported by that entity's regulator to the parent or lead regulator; alternatively, a parent (bank) regulator could require large exposure information to be collected on a consolidated or "look through" basis for the parent company and all its subsidiaries taken together. Whether such exposures were a matter of concern would depend on their actual size and distribution, and on the extent to which reductions in the value of assets would be offset by reductions in the value of liabilities. Importantly, it may also be dependent upon whether the parent or lead regulator is from the banking, securities or insurance sector although it would seem reasonable to assume (and the Tripartite Group strongly advocates) that there should be a close liaison between the parent or lead supervisor and other group supervisors. With the benefit of some research, it might be possible to identify suitable large exposure "trigger points" of concern from an individual supervisory perspective. "Trigger points", it is felt, could be of particular importance in groups where the parent is, say, an insurance company with a banking subsidiary. When these "trigger points" are reached, the supervisors involved could discuss the nature of any perceived problems and agree upon an appropriate course of action on a case­by­case basis.

72. It is acknowledged, however, that identification of appropriate "trigger points" across the range of supervisory disciplines and different types of conglomerate is a task that should not be underestimated. Moreover, a system which is dependent upon reporting has the significant drawback of imposing an additional burden on regulated entities. This burden could be reduced by using a higher "trigger point" for large exposure reporting in respect of financial conglomerates as a whole, but, at the end of the day, reports can only provide a snapshot of large exposures on a given date. Since exposures are likely to vary considerably over time, it is felt that supervisors also need to encourage financial conglomerates to put in place an internal system for tracking group exposures and limiting excessive exposures to a single counterparty. Supervisors adopting an on-site approach to supervision could use the examination process for this purpose.