3 What can supervisory authorities do:

(i) to prevent "double gearing":  dual or multiple use of the same capital in several members of a financial conglomerate, or where the parent company finances its capital subscription to a supervised subsidiary by issuing debt;

One method of preventing double gearing is to deduct the book value of participations in subsidiaries from the parents' liable funds (capital deduction). In the United States, double counting of capital is prevented by deducting from bank holding companies' total capital any investments in banking and finance subsidiaries whose financial statements are not consolidated for accounting or bank reporting capital purposes. In addition, on a case by case basis, investments in certain other subsidiaries are deducted from bank holding companies' consolidated total capital if the resources in those subsidiaries are not generally available to support additional leverage or to absorb losses elsewhere in the organisation. For example, capital invested in broker­dealer subsidiaries is deducted for the purposes of assessing group­wide capital adequacy (i.e. securities subsidiaries are required to comply on a stand­alone basis with capital regulations administered by the SEC). The SEC's net capital rule requires registered broker dealers to maintain sufficient liquid assets to enable firms that fall below the minimum capital requirement to liquidate in an orderly fashion without a formal proceeding. The net capital rule does not apply to non-registered affiliates of broker­dealers (including the parents), but the effects of any double leverage are minimised because the net capital rule requires, among other things, that (i) a broker­dealer that makes an unsecured loan to, or an investment in, its holding company parent, affiliates, or subsidiaries to deduct the full amount of the loan or investment when computing net capital; (ii) a broker­dealer to notify the SEC of large capital withdrawals made to benefit affiliates, subsidiaries and other persons related to the broker­dealer, and the SEC has the authority to halt certain capital withdrawals on a temporary basis in certain situations; and (iii) a broker­dealer to consolidate, in its net capital computation, the assets and liabilities of any subsidiary or affiliate that the broker­dealer guarantees, endorses, or assumes liabilities. In the US insurance industry, new risk based capital requirements have been introduced to address the issue of double gearing. When calculating an insurer's capital, the capital charge for its insurance subsidiaries is equal to the risk­based capital of those subsidiaries. The capital charge for all other operating subsidiaries of life insurers is 30% of the equity value of the subsidiary, and for non­life insurers 22.5% of the equity value of the subsidiary. In the United States, market forces limit the amount of double leverage in a financial conglomerate. In determining ratings on debt securities, one of the factors rating agencies consider is the amount of double leverage, if any, that exists in the conglomerate. Higher more favourable ratings result in, among other things, greater access to financing and a lower cost of capital than that available to lower rated issuers.

In Canada, the supervisory authorities have relied on a two­part approach to prevent double gearing. The capital test applicable to financial institutions requires consolidation of any subsidiary carrying on similar financial activities and "shaving" or elimination of the amount invested in an unlike financial subsidiary from the parent's capital. However, it is recognised that the consequences of either approach are not necessarily the most appropriate. In the supervision of property / casualty insurers, the required capital (including statutory margins) for the subsidiary has been deducted from the parent company's capital, enabling the parent to benefit from any excess investment in the subsidiary. Similarly, it is possible to review the regulations applicable to the subsidiary to confirm whether this excess capital is available to the parent. Under this approach, each institution is tested by its supervisory authority on a stand-alone basis. An advantage of this is that it helps resolve conflicts that arise due to different accounting and capital regimes that may be applicable to corporations of a different nature or to those domiciled in different jurisdictions.

Although in principle effective, the deduction of participations in subsidiaries may not be an accurate reflection of the true risk taken on in the subsidiaries. Another method is to deduct the solvency margins of subsidiaries from the parents' own funds, but this penalises parent companies whose subsidiaries have endowed their own funds out of profits. In these cases, the book value of the parent's participation is lower than the subsidiaries' solvency margin. In the long run, this method reduces the incentive for parent institutions to strengthen the capital bases of their subsidiaries from retained earnings.

Several variants of these deduction methods try to avoid this disadvantage. One such variant is used by the FISO in Germany; this involves aggregating the capital requirements of all regulated entities in a group specified by the respective supervisors in order to obtain the capital requirement at group level. Since intra­group exposures do not cancel out in the aggregation process, the deduction of solvency margins tends to be harsher than prudential consolidation. On the other hand, its application is limited to cases where the aggregating supervisor can be sure that the capital requirements specified by the subsidiaries' supervisors are adequate; this may not be the case for financial conglomerates with entities in "regulatory havens".

This disadvantage can be avoided with prudential consolidation, which is the method used in Germany for the consolidation of banking groups. This involves the aggregation at group level of assets and liabilities vis­à­vis external creditors and debtors (i.e. intra­group exposures cancel out). The application of capital requirements to the consolidated balance sheet prevents double gearing. Furthermore, since capital charges are applied to risk positions actually taken on in the group's entities, this method neither understates nor overstates the risks. This concept could be transposed to conglomerates with entities in different financial sectors. Assets and liabilities would have to be added as described and grouped according to the risk they represent. For each category of risk, the respective capital charges would apply. The resulting capital requirements would have to be met by the group's liable funds with a distinction made between different types of capital.

The supervisory authorities in Belgium also regard prudential consolidation as a means of preventing double gearing by credit institutions. Shareholdings in affiliated enterprises and in enterprises linked by a participating interest (where such enterprises are credit institutions or financial institutions which grant credit or conclude other transactions which are taken into account in the calculation of weighted risk) must be deducted from the own funds of a credit institution; so too must subordinated claims and other securities equivalent to own funds relating to the same affiliated or linked enterprises. Moreover, shareholdings in insurance companies, which are not included in the consolidation, must also be deducted from the own funds of credit institutions. On the other hand, there are no specific rules to prevent double gearing by insurance companies through their holdings in credit institutions or in other insurance companies. As far as broking companies are concerned, their fixed assets, including their shareholdings, will be deducted from own funds for the purposes of verifying minimum solvency ratios with which they will need to comply once the European Directive on the adequacy of investment firms' own funds is transposed into Belgium law.

In France, the supervisory authorities also rely on prudential consolidation to minimise opportunities for excessive gearing. However, their approach incorporates qualitative elements beyond strict calculation, which are particularly important if technical difficulties are experienced in consolidating certain entities of a group.

In Italy, double gearing is prevented by deducting unconsolidated equity participations in credit and financial institutions from the individual or consolidated own funds of the credit institution. At present, no such regulations are envisaged as regards insurance companies. There is no system for preventing double gearing in the Italian insurance industry.

In Japan, if the parent company is a bank, its capital adequacy ratio is calculated on a consolidated basis. If, on the other hand, the parent company is a securities company, subsidiary holdings are deducted in the calculation of the security company's capital adequacy ratio. There are no financial conglomerates with an insurance company as the parent company.

In Sweden, if a bank holds 50% or more of the capital or the voting rights in a financial institution (excluding insurance companies), that institution is consolidated for the purposes of supervision. Holdings of between 5% and 50% are deducted from the own funds of the bank in the solvency calculation.

In Luxembourg, the most efficient method for preventing double gearing is thought to be supervision on a consolidated basis. Where this is not possible due, for example, to legal impediments, deduction methods could be envisaged. The European Community Own Funds Directive requires banks to deduct from their own funds participations and other elements of own funds held in other credit institutions or financial institutions. Although the deduction of participations and other elements of own funds held in insurance companies or other non­financial institutions is not mandatory, the Second Banking Coordination Banking Directive does introduce limits on the taking of participations in insurance companies not subject to EEC legislation; and similar provisions are included in the Capital Adequacy Directive for investment firms. There are no specific rules to prevent double gearing by insurance companies through their holdings of participations and other elements of own funds in other insurance companies, credit institutions or financial institutions.

In the United Kingdom, the supervisory authorities generally apply the deduction of equity and other forms of regulatory capital downstreamed into subsidiaries and other group companies from the aggregate capital of a group. It is acknowledged that the practicalities of ensuring that capital is counted only once are not straightforward, and supervisors might take the following steps to detect (or deter institutions from attempting) double gearing:­

Clearly define the concept of a group;

Ensure audit trail enables sources of capital to be traced; scrutinise quality of capital base;

Gain understanding of funding strategies;

Encourage adoption of common financial year end for all group companies.

In the United Kingdom insurance sector, a variation of the deduction method is used. A parent insurer may only take into account, for its own regulatory requirements, the relevant share of the net assets of its subsidiary, after deducting all the subsidiary's liabilities and its solvency margin. The parent's holding is thus valued on the basis of "look through" to the underlying assets and liabilities of the subsidiary.

In The Netherlands, the supervisors' Protocol includes a solvency test for financial conglomerates. Under this rule, a holding company should have an amount of capital, reserves and subordinated loans which is at least equal to the funds required by the Nederlandsche Bank and the solvency margins imposed by the Verzekeringskamer on banks and insurance companies respectively. The supervisory authorities reserve the right to take other subsidiary companies into account.

In Switzerland, the Banking Law indirectly prevents double gearing by applying stringent capital requirements on banks' participations in non­consolidated entities (non­financial companies or minority participations in the financial sector); a capital ratio of 40% of the participation's net value is required (equivalent to 500% of the standard risk weighting). Consolidated capital requirements based on the full consolidation method are used in the case of majority or other controlling participations in the financial sector. In addition, consolidated participations of this nature have to be deducted from the parent bank's capital on a solo basis. Likewise, subordinated claims on subsidiaries have to be deducted from the parent bank's capital. The present insurance supervision law in Switzerland does not address the problem of double­gearing, but more information will be available to supervisors upon the planned introduction of certain annual accounts requirements.

(ii) to prevent "supervisory arbitrage":  the shifting of activities within a group for undesirable supervisory reasons only (e.g. to reduce capital or solvency margin requirements);

Supervisory arbitrage occurs if there are differences in the supervisory treatment of risks, transactions positions etc. The Luxembourg and German supervisors subscribe to the view that the only effective means of avoiding arbitrage is to eliminate the incentives ­ i.e. reduce or eliminate differences in supervisory treatment, and remove obstacles to the exchange of information between supervisory authorities. The strict observation of the principle "same business ­ same risk ­ same rules" would help to achieve this objective. This implies that a certain risk would be subject to the same capital requirement regardless of the type of institution in which it occurs. Participations in regulated entities could also be made subject to the prior approval of the competent supervisory authorities.

The supervisory authorities in Canada also believe that harmonisation of the rules applicable to different types of institution would be the most effective means of preventing supervisory arbitrage. However, given that most jurisdictions apply rules by type of institution rather than nature of business, this is acknowledged as difficult. For example, deferred annuities offered by life insurance companies are very similar to deposits offered by banks and are often advertised as deposit instruments to consumers.

The banking and securities supervisory authorities in the United Kingdom believe there are several measures that can be implemented in order to militate against the shifting of activities from one group company to another in order to benefit from a more lax regulatory regime:­

Regulation by product type rather than category of institution (thus, for example, a securities house which starts to take deposits is likely to need a deposit-taking license and in effect for that purpose become a bank, and be regulated by a banking supervisor);

Restrictions on the types of business which individual regulators are empowered to cover (so that in practice it may not be possible to persuade a regulator with a less onerous supervisory regime to cover business which would typically be dealt with by a different regulator who operates a more rigorous regime);

Liaison between regulators as regards "borderline" activities (such as index linked "deposits") and awareness of a need for common standards.

In the UK insurance sector, the scope for such arbitrage is limited. The European Community Directives require insurance undertakings to limit their activities to insurance business and activities carried on in connection with that business. At the margins, some insurance activities are similar to banking business, but there is no evidence yet that significant distortions have arisen.

In The Netherlands, the Nederlandsche Bank and the Verzekeringskamer have agreed to inform each other about major transactions which may cause supervisory arbitrage between their respective regimes. In order to counteract transactions that might endanger the solvency of a bank, the Nederlandsche Bank may give a bank directions on the course of action to be pursued. The Verzekeringskamer has identical powers in respect of insurers. Furthermore, according to the Insurance Business Supervision Act, the Verzekeringskamer can restrict the right of disposal of an insurer in respect of its financial assets.

In France and in Sweden, prudential consolidation is seen as reducing the risk of supervisory arbitrage within a group since it provides regulators with a comprehensive assessment of the risks borne by the whole group as an economic entity. In Sweden, the way in which a new institution is organised is always examined and the institution is required to the advise the Authority of any changes. In Belgium, prudential legislation requires credit institutions to consolidate insurance companies in which they hold a participation so that compliance with large exposure rules and with the rules on the holding of equities in non­financial companies can be checked. In Italy, too, consolidation eliminates supervisory arbitrage among credit groups and there is no evidence of activities being shifted to avoid supervisory restrictions in the case of financial conglomerates. However, there is no consolidated supervision in the insurance sector there.

In Switzerland, in 1983 and 1988 Crédit Suisse changed from the classical parent bank structure to two holding structures in the hope of avoiding consolidation of the US investment banking sub­group, CS First Boston, and the heavy capital charge on its non­financial participations. However, Crédit Suisse was asked to apply consolidated capital requirements not only to its subsidiaries in the financial sector but also to the superordinate holding company and the financial entities controlled by the holding company. The Swiss Federal Supreme Court subsequently ruled that a bank cannot evade consolidated capital requirements through a holding structure and that the imposition of additional capital requirements in the case of Crédit Suisse was correct. In the insurance sector, companies are obliged to provide consolidated annual accounts and detailed information on their participations.

In the United States, supervisory arbitrage generally is not an issue with banks and bank holding companies as the bank regulators supervise financial conglomerates on a consolidated basis. In addition, US laws impose capital and collateral restrictions on a bank's transactions with its affiliates and generally prohibit a bank from purchasing low quality assets from an affiliate. In the case of broker­dealers, the SEC's risk assessment programme enables it to monitor the risks posed by affiliates. As for the insurance sector, holding company laws vary from state to state, but they generally contain reporting requirements and restrictions on transactions between an insurer and its affiliates.

In Japan, there is no room for supervisory arbitrage. The scope of business is legally defined in each of the financial sectors and overlapping is limited.

The United Kingdom authorities also discuss a second form of supervisory arbitrage; this involves the shifting of activities to offshore centres in order to benefit perhaps from a more liberal regulatory system. A number of suggestions are made with a view to removing any incentive to do this:­

Keep regulation to the minimum needed to achieve legitimate policy objectives;

Prohibit branches of overseas banks unless satisfied with quality of consolidated home supervision;

Insist that registered and head offices of a group are in the same country and that that country is regarded as the home country for supervisory purposes;

Endeavour to enforce the principle of consolidated supervision;

Address problems that inhibit consolidated supervision (e.g. secrecy laws in some centres);

Promote initiatives to harmonise capital and other regulatory standards.

(iii) to redress non­transparent corporate structures;

The German supervisors believe that the most effective way to redress non­transparent corporate structures is to empower regulators to refuse or withdraw a license if the criterion of transparency is not met. The United Kingdom and Luxembourg supervisors also support this approach. Any definition of transparent and non­transparent structures would, on the one hand, have to be flexible enough to grant some discretion to the supervisor and, on the other hand, be precise enough not only to constitute a reliable basis for decisions to be made by corporates, but also to be enforceable in the courts. Luxembourg suggest that transparency is achieved when financial conglomerates are organised in such a way as to allow effective supervision of the group; to identify the authorities in charge of the supervision of the group to which the applicant bank, investment firm or regulated financial institution belongs; and to allow consolidated supervision of the group of which the bank, investment firm or other regulated financial institution is part. Since the beginning of 1993, the FBSO in Germany and the Minister of Finance in Luxembourg have had the power to refuse or withdraw a license if efficient supervision is not possible because of the shareholding structure of a bank. Similar legislation is in place in Luxembourg for investment firms and for insurance companies. From July 1994, corresponding rules will be in force for the supervision of insurance companies in Germany.

In Italy, the establishment and any subsequent restructuring of credit groups are evaluated by the Bank of Italy, which may refuse the authorisation if the structure of a group is such as to impede effective supervision. However, ISVAP does not have analogous powers in respect of insurance companies.

Under recent legislation and the revised Protocol, it is possible for the supervisors in The Netherlands to prevent non-transparent corporate structures by turning down requests for a declaration of non­objection if the structure has changed and has become non­transparent. It is also possible to withdraw such a declaration or to turn down requests for authorisation of banks or insurance companies which are part of non­transparent financial conglomerates.

In Belgium the supervisory authorities may object to group structures which are insufficiently transparent. The conclusion of protocols on banking autonomy between the Banking and Finance Commission and most Belgian credit institutions provide further possibilities for intervention in this respect. In Sweden, too, the Financial Supervisory Authority can require an institution to be restructured and ultimately has powers to withdraw authorisation if not satisfied.

In Canada, legislation has been considered, but none has been forthcoming. Cooperation and coordination between supervisory agencies has however been effective. When processing applications for new incorporations of financial institutions, the regulator routinely reviews the proposed structure and may require changes to the structure or undertakings regarding access to information as the circumstances require.

In France, the authorisation process for banks requires the Comité des Établissements de Crédit to verify the appropriateness of an enterprise's legal form and structure to the activity of a credit institution; and the applicant institution's capacity to achieve its development objectives in a manner that is compatible with the smooth running of the banking system and offers sufficient security to its customers. The Conseil des Bourses de Valeurs ensures that the legal and financial structure of a securities firm is consistent with its activities and the Commission de Contrôle des Assurances examines the structure of insurance companies.

In Japan, the establishment of holding companies for the purpose of controlling the business of other domestic companies is prohibited. In addition, the Ministry of Finance has adopted a policy of allowing the establishment of subsidiaries only when a clear business necessity for a multiple layer structure exists.

In Switzerland, the supervisory system is based on consolidation and the Federal Banking Commission is not therefore concerned with the transparency of corporate structures. If auditing and oversight were to become unduly burdensome or the corporate structure were to present an unacceptable risk for depositors, the Commission has the power to intervene and insist on changes.

In the United States, supervisors believe that, in general, they have adequate information on activities within corporate structures.

(iv) to influence at the holding company level the quality of the management?

In Germany, the granting of a banking license is conditional on banks' having at least two managers who fulfil the "fit and proper" criterion of the FBSO, which is empowered to demand their dismissal for prudential reasons. Moreover, since the beginning of 1993, the FBSO has the power to withdraw a license if the owner of a bank or the holder of a material participation does not meet the requirements for the sound management of a credit institution. Since July 1994, the FISO can suspend a shareholder's voting rights when the influence of the owner is likely to operate against the prudent and sound management of the insurance undertaking.

In Switzerland, under the present Banking Law, the fit and proper licensing requirement for bank managers and board members can be extended to persons with a more informal influence on a bank's activity. It would therefore be possible to ban unfit holding company managers from exercising any material influence on a bank. The additional licensing requirement (introduced in 1994), that large shareholders with qualified participations must ensure that their influence has no negative impact on the bank's activities, also provides for the elimination of a holding company with an unqualified management from its shareholder position in a bank. In the insurance sector, however, the supervisors' ability to influence the quality of management is restricted to the insurance companies that are subject to supervision; holding companies are not supervised.

In the United Kingdom, the sanctions which regulators may take against a group's authorised subsidiaries enables them to influence the quality of management at holding company level. In addition, banking and insurance supervisors have the power to vet a potential controller and to object to that person becoming a controller. The implementation of the Investment Services Directive will provide securities regulators with similar powers.

In Belgium, direct influence on the quality of management at holding company level is made possible by supervision of the shareholding structure. The Luxembourg supervisors also believe that making the suitability of shareholders a prerequisite for the exercise of banking or insurance activities, and for the granting of authorisation to operate as an investment firm or other financial institution, can be an effective means of assuring management quality at holding company level. If the supervisory authorities notice that the shareholders or the managers of the parent holding company are acting to the detriment of the prudent and sound management of the credit institution, investment firm, insurance company or the regulated financial institution, they must take whatever supervisory measures are considered necessary. This might involve suspension of the voting rights attached to the shares in question or, if drastic action is called for, the withdrawal of the operating license of the regulated entity.

In The Netherlands, supervisory legislation and the Protocol between the Nederlandsche Bank and the Verzekeringskamer were revised in 1994 to make it possible to screen the fit and properness and, where applicable, the expertise of the managers of a holding company.

In the United States, bank and bank holding company regulators already have broad authority with respect to management. In the case of broker­dealers, persons who can directly or indirectly influence policies or management must meet certain standards. The SEC or an SRO can preclude people who fail to meet these standards. Holding company laws applicable to the insurance sector vary from state to state but, in New York, the management of any holding company wanting to acquire an insurance company must be subjected to an investigation before the company is allowed to proceed with the acquisition.

In France, the authorisation process for banks requires the Comité des Établissements de Crédit to verify the suitability and competence of the investors, the management and, where applicable, their guarantors (i.e. "fit and proper test"). The quality of shareholders and competence of management are also assessed by the insurance and securities supervisors.

In Canada, regulators have no direct authority over upstream holding companies. However, "fit and proper" tests can be applied in respect of managers and directors of the regulated institution.

In Italy, people performing the functions of administration, management or internal control in holding companies of credit groups are subject to the same competence and integrity requirements that Directive 77/780 imposes on people exercising these functions in credit institutions. Similar provisions apply to people exercising the same functions in insurance companies.

In Sweden, application of a fit and proper test to the owners of an institution is seen as the best way of influencing the level of management quality.

4(a) Do you supplement your solo supervision of licensed operating companies with group­based information and / or methods?

Most countries do indeed supplement their solo supervision of licensed operating companies with group-based information and / or methods. In general, supervisors of banks and securities companies tend to take more of a consolidated view than their counterparts in the insurance sector.

4(b) If so, to what extent is supervision based on a "consolidated" view or "consolidation" techniques? Please clarify such methods.

In the United Kingdom, the Bank of England (the Bank) supervises all UK incorporated banks (authorised institutions) on a solo basis. In addition, the Bank supervises the capital adequacy and risk concentrations of all authorised institutions on a consolidated basis in accordance with the EC Second Consolidated Supervision Directive (2CSD). In addition to consolidation downwards to subsidiaries of an authorised institution, 2CSD requires the Bank to extend its consolidation and application of capital requirements upwards to non­bank parents of banking groups (within the EC) and across to a banking company's fellow subsidiaries. The Bank also undertakes a qualitative assessment of the risks which other group companies pose for a bank. It regards consolidated supervision as a complement to, rather than a substitute for, the solo supervision of an authorised institution. The Bank's consolidation for capital adequacy purposes does not include group companies carrying on insurance business. In accordance with 2CSD, the Bank's treatment of a group's non­bank investment subsidiaries authorised under the Financial Services Act (FSA) for consolidated capital adequacy purposes is to deduct from its aggregate capital the investment in the subsidiary and any capital deficiency in any of these regulated subsidiaries. This approach is known as "deduction plus"; under it, regulatory capital surpluses are ignored. The Building Societies Commission also supervises the capital adequacy of building societies on a consolidated basis, while the Department of Trade and Industry Insurance Division (DTI) supervises all UK authorised insurance companies on a solo basis but includes, like the Bank, the monitoring of intra­group exposures. In addition, the DTI operates a similar deductive approach to calculation of the solvency margin of the parent in an insurance dominated group. The Securities and Investments Board and the self regulatory organisations do not at present undertake formal consolidated supervision. However, implementation of the Capital Adequacy Directive will confer the role of consolidating supervisor on UK securities regulators in respect of certain non­bank groups. The new approach is not expected to replace solo supervision.

In France, the Commission bancaire supplements solo supervision of licensed companies with prudential and accounting consolidation. In the prudential field, compulsory consolidation applies to capital adequacy and large exposures regulations. In the case of accounting, the method of consolidation depends on the degree of control exercised by the head office on its subsidiary. Some entities may be excluded from consolidation on the grounds that effective control is not exercised or that the entities in question are immaterial.

In Switzerland, consolidation includes all entities of a financial conglomerate in the financial sector (excluding insurance) as well as real estate companies if the common parent has a controlling interest. Consolidation applies to capital adequacy and to large exposures. The purpose of consolidation is not merely to know the risks and the financial situation of the conglomerate as a single economic entity, but, if necessary, to take corrective action at the level of the regulated bank. Formally, any supervisory measures are directed exclusively at the regulated bank as the holding company and its unregulated subsidiaries are not subject to the Banking Law; in practice, however, such measures force the conglomerate as a whole to comply with banking supervisory standards if it wishes its bank(s) to retain a license. Assets and liabilities of non-financial companies of a financial conglomerate are not consolidated, but the consolidated capital adequacy statement of the group's participations in such companies carry a very high capital ratio. A more qualitative approach is adopted towards the supervision of group liquidity and towards the maintenance of fit and proper standards throughout a group. The new Federal Law on securities and exchanges provides for the consolidated supervision of securities groups in the same way as for banking groups, while the Federal Office for Private Insurance is also considering implementation of consolidated supervision although, at present, it has not identified a method for so doing.

In Sweden, the Supervisory Authority also supplements its solo supervision of licensed operating companies with group­based information. Risks are assessed in relation to the consolidated capital base (but excluding insurance companies).

In the United States, banks and their subsidiaries are subject to consolidated supervision by their applicable banking authority. They file financial reports on a consolidated basis and supervisory standards, including capital standards, are applied to the consolidated entity. The SEC has authority to obtain information regarding certain activities of broker­dealer affiliates, subsidiaries and holding companies. Bank holding companies are subject to consolidated regulation and examination by the Federal Reserve Board. In addition, bank holding companies are required to file consolidated financial data as well as information on individual non-bank subsidiaries. Broker­dealers are required to maintain and to file, among other things, an organisation chart of the holding company structure; consolidating and consolidated financial statements for the holding company; and a broad range of other financial information. In the insurance sector, the state insurance regulator concentrates on the licensee. However, information on the affiliates of the conglomerate is available for review.

In Canada, capital rules for banks and insurance companies are based on a consolidated approach. Accounting consolidation principles are now available since accounting rules for all types of financial institution are now prescribed under Canadian Generally Accepted Accounting Principles.

The Bank of Italy supervises credit institutions, securities investment firms, leasing and factoring companies and other financial companies on both a solo and a consolidated basis. Consolidated supervision conforms with European Community Directives. The factors considered include own funds, risk asset ratios, large exposures and equity participations. Subsidiaries owned jointly with other companies are subject to pro-rata consolidation of accounts. The supervision exercised by ISVAP involves monitoring the consolidated balance sheets of groups in which the parent company is an insurance company. Intra­group transactions and equity participations in and by insurance companies are also monitored.

In Belgium and Luxembourg, following implementation of 2CSD, consolidated supervision is applied to banking groups where the parent company is a credit institution or a financial holding company. All financial institutions are included in the scope of such consolidated supervision. Where the parent is a mixed company, making quantitative consolidation inappropriate, the supply of group­based information facilitates qualitative supervision on a consolidated basis. Insurance supervisors are awaiting the transposition into Belgian law of the EC Directive on the annual accounts and consolidated accounts.

In Germany, the FBSO supervises groups of banks on a consolidated basis. Consolidation includes domestic and foreign subsidiaries as well as leasing and factoring companies in which the parent bank has an interest of at least 40%, or over which it can exercise a controlling influence. The FISO supplements the solo supervision of licensed insurance companies with group­based information on all transactions with other licensed and non-licensed companies in the group. There is, however, no consolidated supervision of insurance groups.

In The Netherlands, solo supervision is supplemented by group­based information; this system is known as "solo­plus" supervision. In the case of a financial holding company without insurance subsidiaries (and not therefore subject to the Protocol between the Nederlandsche Bank and the Verzekeringskamer), the Nederlandsche Bank requires consolidated returns every quarter or every six months in order to make an assessment of the solvency position.

In Japan, banks are required to submit consolidated financial statements and the capital adequacy ratio is calculated on a consolidated basis.

5(a) Do regulators in your country, whether statutory or self­regulating organisations, have the power to share prudential information with other regulators domestically and internationally?

In France and in Luxembourg, supervisory authorities may share prudential information covered by professional secrecy requirements with each other. In addition, they can pass on information needed for prudential supervision purposes to supervisory authorities in other countries as long as there is reciprocity and provided that the information is covered by professional secrecy requirements in the other country(ies). In Belgium, Germany and Japan, the supervisory authorities can also share prudential information with other regulators provided the information is needed for prudential supervision, is used only for that purpose, and is treated with strict confidentiality. In general terms, supervisory authorities in the United Kingdom, Sweden, Canada and Italy also have the power to share prudential information with other regulators, domestically and internationally.

In The Netherlands, new legislation provides for the exchange of prudential information between supervisory authorities both domestically and internationally.

In EC countries, 2BCD has potentially narrowed the gateways available to banking supervisors by allowing disclosure of information to regulators in countries outside the EC only if the regulators are subject to restrictions on information disclosure equivalent to the professional secrecy provisions in 2BCD itself. Once the Third Insurance Directives are in force, EC insurance regulators' ability to share information will be affected in the same way.

In the United States, federal bank supervisory authorities and the SEC are permitted to disclose information to both domestic and foreign supervisory authorities upon receipt of appropriate assurances of confidentiality. However, there are no provisions under the federal securities laws either prohibiting or permitting the provision of information by SROs to foreign supervisors; nevertheless, some SROs have adopted rules permitting them to provide foreign SROs with information. In the insurance sector, the National Association of Insurance Supervisors has adopted a model act to facilitate the exchange of regulatory information between supervisory authorities where that information can be kept confidential.

In Switzerland, although there are no specific provisions which apply domestically, the exchange of prudential information among different federal and cantonal regulators is legally permitted and works in practice. The cooperation between governmental agencies and private self-regulatory organisations is legally more uncertain, but practical solutions have been found in most cases. An amendment to the Banking Law (1994) now provides an explicit legal basis for international cooperation and exchange of information between the Federal Banking Commission and foreign bank supervisors or regulators of other financial institutions. A similar provision is to be found in the new Federal Securities and Exchange Law. The exchange of non-public information is subject to three conditions:­  (i) the information may only be used for supervisory purposes; (ii) the recipient authority must be bound by professional or official secrecy; and (iii) the information may not be passed on to third parties without the prior approval of the Federal Banking Commission. In cases involving information related to individual customers, a more formal procedure applies, in which the customer concerned has a right to be heard and to appeal against any disclosure decision. The Federal Office for Private Insurance already has an explicit legal basis for information sharing with the supervisory authorities of the European Community for supervisory purposes.

5(b) What power do regulators in your country have to keep regulatory information received from another regulator confidential?

In all countries, any confidential information received from another supervisory authority is subject to statutory protection. However, in Italy, France and Luxembourg, professional secrecy cannot be used as a ground for non-disclosure in any criminal proceedings. Moreover, in Italy, information received from foreign supervisory authorities may be divulged to other Italian authorities unless the authority supplying the information forbids it. In the United States, the Freedom of Information Act exempts confidential information in the possession of the federal bank supervisory authorities from its disclosure requirements. However, if such information is subpoenaed by a court, by a federal or state governmental agency, by a legislative body, or by a grand jury, the US supervisory authorities may be required to disclose it. In such a case, to the extent possible, the foreign regulatory authority would be given the opportunity to assert any applicable privileges before the information is disclosed. The International Securities Enforcement Cooperation Act (ISECA) of 1990 provides an exemption from disclosure under the Freedom of Information Act for confidential information received by the SEC from foreign regulators. However, the ISECA also specifies that the SEC is not authorised to withhold information from Congress or from a court in an action commenced by the SEC or by the United States.

6 Do you have any policy objectives with respect to the structure of the financial sector (as a whole or any part of it)?

In the United Kingdom, the present policy objective with respect to the structure of the UK financial sector is to continue to promote an open financial sector, which is accessible to domestic and overseas based financial conglomerates providing they are fit and proper and their corporate structure is sufficiently transparent from a regulatory perspective.

In The Netherlands, a major policy objective of the authorities is to make it possible for Dutch financial institutions to compete in the liberalised European financial markets. With this in mind, the so­called "structural policy" was liberalised as of January 1^st, 1990 (see answer to question 1b in section A of this analysis), giving institutions the opportunity to strengthen their position internationally through the formation of financial conglomerates. The supervisory authorities believe it is their duty to pursue an adequate supervisory policy with regard to new risks posed by the phenomenon of financial conglomerates.

In Germany, regulation is based on the philosophy that there should be as much competition as possible, and only as much regulation as is necessary. For this reason, the roles of FBSO and FISO are limited to prudential aspects.

In Sweden, France and Belgium, the supervisory authorities have no policy objectives with respect to the structure of the financial sector. The same can be said of the situation in Luxembourg.

In Switzerland, too, there are no explicit policy objectives with respect to the structure of the financial sector. The 40% capital ratio (i.e. 500% risk­weighting) for banks' participations in the non­financial sector is mainly based on prudential grounds, but it also has the implied structural effect of discouraging the existence of truly mixed financial conglomerates. In the insurance sector, EC developments are the focus of attention, with Swiss insurance legislation being adapted to the third generation of EC insurance directives.

In Italy, a primary objective of insurance supervision is currently to produce a legal definition of insurance groups with a view to the development of group­based supervision.

In Japan, supervisory objectives include the following:­  to maintain and improve the soundness and stability of the financial system; to improve the efficiency of the financial markets and promote healthy competition; and to avoid conflict of interests.

In the United States, the regulatory authorities each have their own policy objectives with regard to ensuring the soundness and stability of their own part of the financial sector.

In Canada, supervisors seek to foster a safe yet competitive environment and to ensure that Canadian institutions can be competitive abroad.

7 Is there any concern about the concentration of power within the financial sector in your jurisdiction due to the emergence of financial conglomerates?

In Italy, France, the United Kingdom, the United States, Canada, Belgium, Luxembourg and The Netherlands, there are no concerns about concentration of power. However, as the three largest Dutch banks currently have a market share in The Netherlands of about 70%, the Nederlandsche Bank is of the opinion that mergers between them are not desirable at present. In Canada, legislation exists for the review of significant transactions which could reduce competition. In addition, financial institution legislation requires the Minister to take into account the size of companies involved when a transfer of ownership takes place. In the United Kingdom, competition authorities (the Office of Fair Trading, the Monopolies and Mergers Commission and the Department of Trade and Industry) have powers to prevent a merger or acquisition taking place or to impose conditions, except where the proposed merger falls under the remit of the European Commission. They have the lead responsibility for detecting any undue concentrations of power within the financial sector, whether or not due to the emergence of financial conglomerates.

In Switzerland, there is no particular concern about the concentration of power due to the emergence of financial conglomerates as such. Concentration is taking place amongst the banks themselves, with many small banks merging or being subsumed by larger banks. The main worry with regard to this restructuring is that it can take place without losses for depositors. The trio of financial conglomerates at the top end of the banking sector hold about half the market share in aggregate, but their individual powers are well­balanced and the balance would only be tipped by a further merger among them; this seems unlikely. Concentration has also been taking place in the insurance sector and the supervisory authority takes a positive view of this development as a number of small and medium­sized companies were not up to the requirements of a liberalised market.

In Germany, the power of financial conglomerates is not yet a political issue. However, for the supervisory authorities, the prudential ramifications of issues such as double gearing, regulatory arbitrage, transparency and contagion are of major importance.

In Japan, the Anti-Monopoly Law prohibits monopoly and aims to eliminate excessive concentration of power in both the financial and non­financial sectors. In addition, the Financial System Reform Act, effective from 1.4.93, stipulates arm's length rule by a parent over its subsidiaries in order to prevent the exercise of undue influence.

In Sweden, there are no immediate concerns, although it has been said that the convergence of banks, insurance companies and securities firms should not be allowed to have any damaging effects from a competitive viewpoint.