A comparative analysis of the US and EU retail banking markets - Wsbi

However, in order to protect the interests of insured
parties from the risks associated with other business
activities, combining insurance with banking, securities
or any other commercial business in the same legal
entity is prohibited by law according to the
specialisation principle 115 .
3.3.2.2 Definition
The term ‘financial conglomerate’ is legally defined
for the EU in the Directive 2002/87/EC, which
introduced a legal framework for supplementary
supervision of financial conglomerates on a groupwide
basis. According to Article 2 n°14 of that
Directive, the following formal requirements have
to be met for a group to qualify as a financial
conglomerate 116 :
- The presence in the group of at least one
regulated entity in the EU. A “regulated entity” is
a credit institution, insurance undertaking or
investment firm as defined under the respective
EU directives for those sectors.
- If the group is headed by a regulated entity, it
must be the parent of, hold a participation in or
be linked through a horizontal group with an
entity in the financial sector.
- If the group is not headed by a regulated entity, its
activities should occur mainly in the financial sector.
A quantitative threshold, based in principle on
balance sheet data, is used to define what “mainly
occur in the financial sector” means. The ratio of
the balance sheet total of the financial sector
entities in the group to the balance sheet total of
the whole group has to be greater than 40% 117 .
- The group should have at least one insurance or
reinsurance undertaking and at least one entity
from a different financial sector. It is not required
that there is a regulated entity in each financial
sector covered by the group.
- The group must have significant cross-sectoral
activities. For this assessment, two sectors are
considered: (i) the insurance sector and (ii) the
banking/investment services sectors taken together,
and both have to be significant. Again, quantitative
criteria are used to define what “significant” means.
There is a relative criterion and an absolute criterion.
The relative criterion refers to the importance of
the sector in the group’s total assets and solvency
requirements, which has to be on average more
than 10%.
The absolute criterion is that when the smallest
sector, measured according to the abovementioned
relative criterion, has a balance sheet
total of more than 6 billion Euros, the crosssectoral
activities are also presumed to be
significant. But if the group does not meet at the
same time the minimum threshold of the relative
criterion, the competent authorities may decide not
to treat the group as a financial conglomerate 118 .
3.3.3 Comparison
Although it is apparent that a significant number of the
companies that are registered as a financial holding
company in the US would also satisfy the definition of a
financial conglomerate as stipulated in the EC Directive,
there are two important aspects where the definition of a
financial conglomerate and the one of a financial holding
company are clearly not equivalent.
According to the EU framework, it is at least theoretically
possible (although less likely in practice) to have a group
without a credit institution that qualifies as a financial
conglomerate. The presence of an insurance or reinsurance
undertaking in the group is the essential element for such
qualification. In general, it also seems that there can be a
much larger non-financial component in an EU financial
conglomerate than in a US one.
Another difference is that the US regulation poses more
organisational restrictions. At the level of shareholders of
the financial holding company, non-financial commercial
companies continue to be barred from owning banks.
Financial holding companies that were previously not bank
holding companies are nevertheless permitted to retain limited
commercial activities at the level of the parent company,
but only under strict restrictions. Another example is the
prohibition against banks engaging directly or indirectly in
insurance underwriting or merchant banking, or directly in
securities business. Such restrictions have the advantage of
providing additional safeguards against possible spill-over
effects on depository institutions in the event of financial
difficulties. But they also imply costs for the group and may
only provide protection that is more apparent than real.
In the EU framework, there are no special requirements
regarding the shareholders of the financial conglomerate
apart from the indirect requirements through the specific
sectoral rules. In addition, banks can own insurance
companies and directly or indirectly build up substantial
activities in securities business and merchant banking.
115 See Article 6(1)(b) of the Life Assurance Directive (2002/83/EC) and Article 8(1)(b) of the Non-Life Insurance Directive (92/49/EEC).
116 Definition taken from ECB Occasional Paper Series Nr.20, August 2004.
117 See Article 3 Nr.1 of the Directive.
118 See Article 3 Nr.2 and 3 of the Directive.
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