Financial Conglomerates

1. Defining financial conglomerates Combining economic and legal approaches.- 1.1. The essential elements that constitute a financial conglomerate.- 1.2. Defining a group of enterprises.- 1.2.1. Participation versus investment.- 1.2.2. Direct versus indirect participations.- 1.2.3. Ownership versus control.- 1.2.4. Economic versus legal integration.- 1.3. Defining financial institutions and financial activities.- 1.4. What distinguishes a financial conglomerate from a financial institution?.- 1.5. Complementarity between the activities and institutions involved.- 1.6. A financial conglomerate is not really a conglomerate in the economic sense of the word.- Appendix 1.A. Relevant definitions.- A.1. Defining a group.- A.2. Defining a daughter company or subsidiary.- A.3. Defining a participation.- A.4. Defining an associated or related enterprise.- A.5. Defining a financial conglomerate.- 2. Defining financial conglomerates; Discussion.- 2.1. Discussion by dr.A.J.Vermaat.- 2.1.1. One or more definitions ?.- 2.1.2. General theory of conglomerates.- 2.1.3. The term “financial conglomerate” in the context of supervision.- 2.1.4. An attempt to a simple typology.- 2.2. Discussion by Drs.J.H. Holsboer.- 2.2.1. Definition.- 2.2.2. Level playing field.- 2.2.3. Participation versus investment and the ‘droit de suite’.- 2.3. Discussion by dr. K.W. Knauth.- 2.3.2. What are the essential elements that constitute a financial conglomerate?.- 2.3.2. Defining a group of enterprises.- 2.4. Discussion by P.Pearson.- 2.4.1. Seeking a legal definition of a financial conglomerate.- 2.4.2. The relevant relationship between the undertakings (“group”).- 2.4.3. The relevant activities and undertakings (“supervised companies providing financial services”).- 2.4.4. The specific composition of the “group” (activities consist “largely, though not necessarily wholly of financial services of at least two different sectors”).- 2.5. The case Norway by S. Simonsen.- 2.5.1. Background.- 2.5.2. Definition of a financial group.- 2.5.3. Organisation.- 2.5.4. Concurrent positions in boards.- 2.5.5. Transactions between companies (enterprises) in a financial group.- Appendix 2.A.- A.1. Financial institutions.- A.1.1. Ownership structure, etc.- A.1.2. General rules for business.- A.2. Financial groups.- A.2.1. Licence.- A.2.2. Organisational set-up.- A.2.3. Transactions and consolidation.- 3. Application of the most relevant definitions to the relational database.- 3.1. The collection of the data.- 3.2. The results.- 3.2.1. Defining the type and number of financial conglomerates.- 3.2.2. Economic impact of the financial conglomerates: some estimations.- 4. Financial conglomerates; Risks?.- 4.1. What are the potential risks in relation to financial conglomerates ?.- 4.1.1. The risks of instability and insolvency.- 4.1.2. The risk of non-transparency.- 4.1.3. The risk of infringing the free competition and the rights of the consumer.- 4.2. The supervision of financial conglomerates.- 5. Solvency regulations for financial conglomerates.- 5.1. Calculation of the required level of solvency for credit institutions and for insurance companies.- 5.1.1. Credit Institutions.- 5.1.2. Insurance Companies.- 5.2. Calculation of the solvency fund for credit institutions and insurance companies.- 5.2.1. Credit institutions.- 5.2.2. Insurance companies.- 5.3. Other elements that must guarantee the stability and confidence in the financial and insurance sector.- 5.3.1. Credit institutions.- 5.3.2. Insurance companies.- 5.4. Philosophy behind the solvency requirements for credit institutions and insurance companies.- 5.4.1. General observations.- 5.4.2. Philosophy behind the solvency regulations.- Appendix 5.A. Credit institutions.- A.1. What is the minimum level of solvency?.- A.1.1. Minimum level of solvency from I -1 -1993 until 1-1-1994.- A.1.2. Kind of risk.- A.1.3. Kind of risk only for OBS activities.- A.1.4. Weighted Assets.- A.1.5. Weighted Off-Balance-Sheet elements.- A.1.6. Minimum level of solvency from I-1-1994 until I-7-95 (including large risk).- A.2. Components of solvency.- A.3. Risk weighting factors.- Appendix 5.B. Insurance companies.- B.1. What is the minimum level of solvency.- B.1.1. Non-life insurance.- B.1.2. Minimum guarantee fund.- B.1.3. Solvency level based on premiums (Xt-I).- B.1.4. Solvency level based on average claims (Zt-I).- B.1.5. Life insurance.- B.1.6. Minimum guarantee fund.- B.1.7. Solvency level based on mathematical reserves and/or capital under risk.- B.2. Components of solvency.- B.2.1. Non-life insurance.- B.2.2. Life insurance.- B.3. List of symbols.- Appendix 5.C. Comparison of own funds.- 6. Research into the possibility of a global approach for the calculation of the solvency requirements of financial conglomerates.- 6.1. Some theoretical remarks.- 6.1.1. Do financial conglomerates lead to a decreasing or to an increasing entrepreneurial risk?.- 6.1.2. Does the solvency requirements of insurance companies need an upgrading to take also the “asset” risks into account ?.- 6.2. Simulations of the combined solvency.- 6.2.1. The calculation of the required solvency level for insurers on the basis of the banking rules.- 6.2.2. The calculation of the solvency fund for insurers on the basis of the banking rules.- 6.2.3. Analysis of the simulation results.- 6.3. Analysis of the need for an actualisation of the minimum solvency requirements.- Appendix 6.A.Theoretical problems in the application of the banking rules to insurance companies.- A.1. Definition of the solvency needed: the weighting factors.- Appendix 6.B. Simulation exercises.- B.1. Calculation of the solvency required according to the banking directives.- B.2. Combining solvency requirements according to insurance and banking rules.- Appendix 6.C. Correction: minimum solvency levels.- C.1. Correction on the European level.- C.2. Corrections for the Dutch market.- 7. Financial conglomerates, solvency and risks.- 7.1. Discussion by S. Simonsen.- 7.1.1. Solidity requirements.- 7.1.2. Consolidation.- 7.1.3. Supervision.- 7.2. Discussion by Ø. LØining.- 7.3. Risk-based capital in the United States, discussion by J. Roos.- 7.3.1. Introduction.- 7.3.2. Risk-based capital ratio.- 7.3.3. The ACL RBC of life insurers.- 7.3.4. The ACL RBC of property/casualty insurers.- 7.4. Discussion by drs.J.H. Holsboer.- 7.4.1. Consolidated versus solo-plus supervision.- 7.4.2. Development of supervisory rules in relation to ‘incidents’.- 7.4.3. Applying the BIS-ratio to insurance companies.- 7.4.4. Revaluation reserves of insurance companies as Tier 2 capital.- 7.4.5. Risk based capital solvency regulations.- 7.4.6. Role of rating agencies.- 7.5. Discussion by dr. K.W. Knauth.- 7.5.1. Solvency regulations for financial conglomerates.- 7.5.2. The risk of contagion.- 7.5.3. Double gearing.- 7.5.4. Research into the possibility of a global approach for the calculation of the solvency requirements of financial conglomerates.- 7.6. Discussion by R Pearson.- 7.6.1. Solvency Regulations for financial conglomerates.- 7.6.2. Minimum guarantee funds.- Appendix 7.A.Thresholds and minimum guarantee funds.- 8. Why financial conglomerates? Strategic Issues.- 8.1. What is the reasoning behind the formation of a financial conglomerate ?.- 8.2. Financial conglomerates: new wave strategic thinking?.- 8.3. Strategy at the limits of the possible: the management recipe of the nineties.- 8.4. Strategy at the limits of the possible goes further than internal creativity.- 8.5. The formation of financial conglomerates can be a strategy at the limits of the possible.- 8.5.1. Internal creativity at the limits of the possible.- 8.5.2. External (and internal) creativity at the limits of the possible.- 8.6. Conclusions.- 9. Summary and Conclusions.- 9.1. Part 1 — Definitions.- 9.1.1. What are the essential elements that constitute a financial conglomerate ?.- 9.1.2. Defining a group of enterprises.- 9.1.3. Defining different kinds of financial institutions.- 9.1.4. Applying the definitions in practice.- 9.2. Part II — Regulating financial conglomerates.- 9.2.1. Risks in relation to financial conglomerates.- 9.2.2. Supervision of financial conglomerates.- 9.2.3. Solvency regulations for financial conglomerates.- 9.2.4. The possibility of a global approach for the calculation of the solvency requirements of financial conglomerates.- 9.2.5. Discussion on risks and solvency.- 9.3. Part III — Strategic issues.- 9.3.1. Strategic issues.- 9.3.2. Basis statements to be tested in further research.