ESAs publish list of financial conglomerates for 2017
How do you become one? What does it entail in terms of additional capital and supervision? Is there anything that you can do?
The EBA cooperates regularly and closely with the other two European Supervisory Authorities (ESAs), EIOPA and ESMA, through the ESAs' Joint Committee. The aim of this cooperation is to ensure cross-sectoral consistency of work and to reach joint positions in the area of supervision of financial conglomerates, under the Financial Conglomerates Directive (FICOD, 2002/87/EC).
The Joint Committee of the European Supervisory Authorities (ESAs) – EBA, EIOPA and ESMA – published earlier this month, the 2017 list of identified financial conglomerates (FICO) (click here)
Hungary, Croatia, Slovenia, Poland, Romania, Latvia, Lithuania, Bulgaria and Czech Republic are all countries hosting FICOs in Central Europe.
EBA provides comprehensive criteria for the classification of FICO. A typical example of FICO is a bank with a sizeable insurance subsidiary or sister company.
FICO Directive requires a different calculation of capital adequacy and joint supervision to account for additional systemic risks such as double gearing of capital, risk concentration etc. FICO minimum capital requirements are most often the aggregation of the minimum capital requirements per entity plus additional capital buffers.
The supervision of financial conglomerates (FICO) on a group and solo basis is built on a set of principles that enhance the level of playing field in the financial market and reduce administrative burdens for firms. These, make the financial conglomerates different, in following segments:
1. Corporate Governance
- Financial conglomerate establishes a comprehensive and consistent governance framework including unregulated entities, without prejudice to the governance of individual entities in the group;
- Financial conglomerate has a transparent organizational and managerial structure
- Suitability of board members, senior managers and key persons in control functions;
- Board of the head of the financial conglomerate appropriately defines the strategy and risk appetite of the financial conglomerate
2. Capital adequacy and liquidity
- Capital management should take into account additional risks associated with unregulated activities;
- Financial conglomerate should maintain adequate capital on a group-wide basis to act as a buffer against the risks associated with the group’s activities;
- Capital adequacy should consider group-wide risks, including those undertaken by unregulated entities within a financial conglomerate;
- Capital adequacy assessment and measurement techniques consider the elimination of double or multiple gearing;
- Capital adequacy techniques address excessive leverage and situations where a parent issues debt and down-streams the proceeds in the form of equity to a subsidiary;
- Evaluate any limitations on intra-group transfers of capital and eliminate intra-group creation of own funds;
- Liquidity risk management should take into full account lending, investment, and other activities, and ensure that adequate liquidity is maintained at the head
3. Risk Management
- Independent, comprehensive and effective risk management framework should be in place;
- Processes and procedures to engender an appropriate group-wide risk management culture should be in place;
- Have processes and criteria in place to review decisions to outsource a function in order to ensure that such outsourcing does not imply delegation of responsibility for that function;
- Assessment and measurement techniques should evaluate any limitations on intra-group transfers of capital;
- Financial conglomerate should periodically carry out group-wide stress tests and scenario analyses for its major sources of risk;
How can Deloitte help
Our team can help you:
- Establish a regulatory radar for the FICO in order to better monitor how the supervisory process developments of one entity can affect the other entity or the FICO
- Optimize your risk management framework and prepare the FICO on a group or solo basis under the supervisory framework by the ESAs, through a gap analysis exercise, a mock onsite inspection and individual/team trainings
- Establish an interactive capital adequacy model between the FICO entities that develops a joint capital agenda for the FICO
- Establish a FICO risk management framework to eliminate FICO related risk factors that translate into additional capital buffers for the organization
- Incorporate updated cost of capital in the pricing of the product offering and commercial strategy of all entities included in the FICO