Financial conglomerates are financial groups, which offer their services and products in multiple financial sectors (the banking, investment services and insurance sectors). The cross-sector significance of financial conglomerates is accounted for by means of special supervisory rules, the aims of which are covered briefly below.
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Based on the mutual interconnectedness, which can lead to cross-sector effects in the event of financial difficulties arising, the “Financial Conglomerates Directive” (2002/87/EC) was adopted in December 2002. Consequently supplementary supervision was introduced for credit institutions, insurance undertakings and investment firms belonging to a financial conglomerate, that conducted a considerable amount of cross-sectoral business exceeding specific thresholds.
Prior to the adoption of this European Directive cross-sectoral holdings in entities from other financial sectors had hitherto been recognised as suitable asset forms for covering of assumed risks. In the worst case scenario this could have led to an own funds shortfall for a financial undertaking. The consumption of own funds in a sector as coverage for risks that are realised would have simultaneously led to a loss in own funds in another sector. In the event that risks were simultaneously realised in the other sector, then its provision for counterbalancing capacity would already have been used up. The apparent security as a result of an own funds position that seems to be adequate under supervisory law would have proven to be deceptive, since one of the two entities concerned would have been insolvent.
The Directive prescribes, in order to avoid the double-gearing of own funds, that there should be an obligation to deduct capital for all cross-sector holdings in the financial sector. Such assets are no longer suitable for consideration for the provision for counterbalancing capacity. The evaluation of solvency within the conglomerate, the monitoring of concentration of risk and intra-group transactions should be permitted.
In 2011 Directive 2011/89/EU (FiCoD I) defined the regulations for the supplementary supervision of financial undertakings within a financial conglomerate – irrespective of the underlying legal constructions more effectively in addition to the sector-specific supervision. The coordination between the supervisory authorities was encouraged and increased coherence created between the sector-specific aims. Overall the supervision of financial conglomerates has been overhauls on the basis of the experiences from the financial crisis.
In transposing the Financial Conglomerates Directive (Directive 2002/87/EC) into national law, Austria decided to enact a separate legal act for the supervision of financial conglomerates to ensure better handling and clarity, the Financial Conglomerates Act (available in German only) (FKG – Finanzkonglomerategesetz) published in Federal Law Gazette I no. 70/2004.
Significant measures in the Financial Conglomerates Act:
European Commission – Financial Conglomerates