Over the last thirty-or-so years, financial deregulation and innovations in information technology have lent wings to the process of change in European financial markets. Deregulation and progress in IT have ushered in new growth opportunities for financial institutions and so have improved their possibilities for participation in international mergers and acquisitions. The emergence and increasing popularity of financial conglomerates and financial multinationals is a good indicator of the ongoing consolidation process in the financial industry. Technological progress and financial deregulation have also spurred financial innovation and facilitated the emergence of financial products that are increasingly complex and difficult to classify among the traditional categories of banking, securities and insurance. Because of the financial market developments that have already taken place, authorities in different branches of the financial services industry and in different countries have been forced to cooperate more closely than before in matters of financial market supervision. The issue of creating a supranational supervisory agency has emerged in the related European public debate, and in many countries people have started to question the wisdom underlying the currently dominant structure of separate, sector-specific supervisors and to require a thorough re-evaluation of its soundness, including its sustainability given the currently visible trends in financial markets. In Finland the government recently decided to combine financial and insurance supervision under a new agency that will function in association with the Bank of Finland.
Financial conglomeration and the emergence of multinationals in the financial services industry pose challenges to existing supervisory structures. Financial conglomerates, in particular, have raised the pressure to integrate sector-specific supervisors in the financial services industry into larger entities. The introduction of new financial products that are closely tied to the emergence of financial conglomerates and which tend to blur the boundaries between 'pure' banking, securities and insurance products – the traditional bases for classifying financial products – has brought similar pressures to reorganize financial supervision. Moreover, financial conglomeration does not respect national borders, and the emergence of financial multinationals is placing further strains on present supervisory structures. It is partly for this reason that the related economic and financial literature sees financial conglomeration and multinationals as closely related phenomena, which is also understandable because the economic motives underlying their creation are much the same. The desire to exploit economies of scale and scope, as well as better opportunities for diversification in risk management (insofar as the returns on various business lines are not highly correlated), have facilitated the emergence of financial conglomerates. Similarly, it has been argued that the formation of multinationals is driven by the desire of financial institutions to capture scale economies and to benefit from better risk diversification. The efficiency improvement in risk management here originates from both the increased number of securities available for diversification and the reduction in geographical concentration of financial activities. It is noteworthy that the corporate structures chosen by financial conglomerates and multinationals are considered important factors in the relevant economic and financial research, as well as in the related political debate dealing with the problems of financial supervision.
In her forthcoming BoF discussion paper, 'Integration of supervision in the financial services industry', H. Holopainen analyses those factors that explain the growing pressure to reorganize existing supervisory structures in the financial services industry. The fact that the economic and financial reference literature, ie the research that directly serves her analysis, is still fairly scanty renders her analytical survey especially praiseworthy. Of course, we do have a good helping of economic research on regulation and supervision of individual sectors of the financial services industry. Before examining the pros and cons of integrating sectoral supervisors into a common supervisory entity, Holopainen discusses various issues closely related to financial supervision – such as the dimensions of official financial supervision, the efficiency implications of powers granted to official supervisors, and the relationship between official supervision and private supervision or market discipline. Moreover, Holopainen's analysis nicely spotlights the three layers that characterize the legal framework of prudential supervision in the EU: individual regulated entities are supervised on a stand-alone basis; regulated entities forming a group that is active in the same sector of the financial industry are subject to consolidated supervision; and heterogeneous financial groups active in several sectors of the financial industry are subject to supplementary supervision. In the case of financial conglomerates, all three layers of supervision may be actively involved, as noted by Holopainen. Against this general background of prudential supervision, Holopainen reviews the various corporate structures of financial conglomerates, through which the production of financial services is organized. In this context, she makes elegant use of the study 'Regulating financial conglomerates' by Freixas, Loranth and Morrison (soon to be published in the Journal of Financial Intermediation) to show how the holding company structure can give rise to regulatory arbitrage and capital requirements can be used to exploit differences in market discipline via regulatory arbitrage. A host of arguments in favour of an integrated supervisory structure have been presented in the earlier literature, and these arguments are nicely detailed by Holopainen. But such a system of integrated supervision has its own problems, which pose further challenges. These challenges arise mainly from the fact that a single authority in an integrated supervisory structure has monopoly status in terms of supervision. Towards the end of her paper, Holopainen calls for careful consideration and planning to ensure the effective functioning of integrated supervision, because with a single supervisory authority the greatest risks and challenges derive from this single entity assuming or being assigned too many tasks. The policy-oriented analysis of alternative supervisory structures for the financial services industry presented in Holopainen's paper is a welcome contribution to the existing, but still scanty, literature in this area. The economic analysis of regulatory and supervisory structures is still seeking its proper focus – a fact that should encourage further research effort in the area. |