The Prudential Supervision of Financial Conglomerates in the European Union

Abstract

Around the world, the formation of financial conglomerates is gaining importance. In the United States, the provisional agreement between Congress and President Clinton’s administration to break down the barriers between banking, insurance, and securities firms by repealing the Glass-Steagall Act is no less than revolutionary. Meanwhile, in the European Union (EU), where the establishment of financial groups working in all three sectors has long been permitted, the Financial Services Action Plan (COM 1999),1 as endorsed by European Heads of State at the Köln Council, identifies the further development of prudential rules for financial conglomerates as a top priority for EU financial services legislation in the coming years. The focus of EU prudential legislation is on individual financial services undertakings, that is, on the bank, insurance company, or securities undertaking and not on the position and operation of the conglomerate as a whole. From this angle, the potential danger is one of a growing mismatch between the prudential approach, which looks at the individual legal undertakings separately, and the business approach, which manages and controls the conglomerate as a whole in different product and geographic areas. For this reason, the basic EU prudential framework has been supplemented to address the conglomerate dimension. This paper presents an overview of financial services prudential legislation in the EU. It explains the role of the European Commission and gives a summary of the basic prudential framework for financial services, focusing on the single passport concept and the principle of mutual recognition. It examines the recent history of financial concentration and conglomeration in Europe and discusses general prudential issues arising from financial conglomerates. The paper also examines existing EU prudential legislation on financial conglomerates and how this might be developed in the future. Finally, some conclusions are drawn. It is hoped that this brief overview of how the European Union has tackled and is tackling the difficult issue of financial conglomerate supervision might be of interest to North American readers at a time when the United States is changing its prudential legislation to permit the development of financial conglomerates.