Capital adequacy regulation and financial conglomerates

Abstract

A topical concern in public policy debate is that the current capital adequacy regulation designed for stand-alone financial institutions exhibits several weaknesses due to the emergence of large financial institutions combining several activities under common control. This paper will address these concerns in the framework for capital regulation of financial institutions proposed in the economic literature. It will first describe the potential reasons that led to the emergence of financial conglomerates. Secondly, it will consider the theoretical background for the regulation of financial institutions, especially insurance and banking companies. Finally, it will use this framework to examine the limitations of the current regulatory framework in controlling the risks in financial conglomerates. The conclusions of the paper give little support for the view that regulatory approach should be modified toward harmonisation.