Concerns remain that double-counting of assets is a disaster waiting to happen.
The rise of the bancassurer, while not new, has yet to be dealt with properly by regulators. Are they waiting for a crisis before they put their house in order? The concern is that assets are being double-counted and that the same capital is underpinning both banking and insurance risk.
The Netherlands and Belgium, home to the Fortis, ING and KBC banking/insurance groups, appear to have the best model for dealing with the problem. Insurance and banking regulators there were for a long time separate organisations that worked closely together.
The upshot is that consolidated financial reporting by bancassurers is also accompanied by clear separate business segment financial reporting of both balance sheet and income statement.
At a time when transparency is the focus of attention, this model for reporting should be the norm for such groups. The worry is that the merger of the Belgian insurance and banking regulators in January 2004, to be followed by consolidation of their Dutch counterparts in January 2005, may dilute this reporting model.
In the US, the provisions of the Gramm-Leach-Bliley Act are already producing anomalies. Take US insurer Metlife, which acquired Grand Bank NA in 2001 and elected to become a bank holding company under the regulatory scope of the Federal Reserve Bank. It then transitioned to a financial holding company, again, under Federal Reserve regulations.
Metlife anomaly
In a Fed list of the top bank holding companies or banks that are federally regulated without being within a holding company setup, Metlife appears in a high position although its actual banking activities form a very small part of the whole: Metlife Bank had Tier 1 capital of $80m and total assets of $469.1m at the end of 2002 compared with Metlife Inc’s Tier 1 capital of $14,806.2m and assets of $277,385.7m.
The Charles Schwab Corporation is another example, this time of a securities dealer/broker that acquired a bank holding company (US Trust Corporation, New York, in 2000) and followed the same path. In this case, banking assets formed 17% of the total under the latest set of results.
Remarkably, the UK’s Financial Services & Markets Act 2000, which pulled together all financial services regulation under one umbrella and is considered a state-of-the-art regulation model, failed even to define a ‘bank’. There is also no requirement under either the US or UK regulatory regimes to publish separate banking and insurance financial statements, making it near-impossible to separate banking and insurance activities – try sorting this out for Citigroup, for example.
The prospects for improvement are not good. The International Financial Reporting Standards, due to be adopted in the EU from 2005, are also deficient in some areas of insurance accounting and reporting.
With all the regulation that has been passed in recent months in reaction to corporate scandals and the threat of money laundering, the failure to address this issue is a major oversight.
