purposes<sup>48</sup> . However, there remain important legal gaps covering the definition of a financial conglomerate (i.e. presumption of subordination or ‘dominant influence’) and the scope and conduct of consolidated supervision (e.g. development of a comprehensive and consistent risk assessment methodology) that do not allow supervisors to fully ‘capture’ an economic group. For example, in cases where shareholdings are below 50 percent but there is presumption of subordination, commonality of purpose and management must be proved for a company to be deemed to belong to an economic group. A narrow interpretation of this rule has historically allowed the two main economic groups to argue successfully that certain companies do not form part of them, impeding the supervisor from ‘capturing’ the entire group<sup>49</sup> . This exposes the financial system to vulnerabilities stemming from the presence of financial conglomerates that are not adequately addressed by financial regulation and supervision<sup>50</sup> .

**International experience shows that supervisors must be empowered with a set of legal presumptions in order to be able to effectively determine a financial conglomerate’s perimeter.** Experience has shown that commercial legal frameworks for economic groups tend to be insufficient to address financial conglomerates given their complexity and importance. In particular, the emphasis of financial supervisors is not solely on knowledge of the ultimate conglomerate controller(s), but also on the relationships and inter-dependence between group companies in order to understand group-level sources and levels of risk and solvency. As such, some countries have adopted specific regulations for the determination of financial conglomerates that supersede Commercial Code rules (for example, Chile<sup>51</sup> and Spain). Moreover, financial supervisors have been progressively entitled to presume links between companies in terms of control and influence, giving them the power to define the perimeter of the financial group and thereby shift the burden of proof.

**Recommendation B: Introduce legislation that would inhibit authorization for complex and/or non-transparent financial group structures which cannot be supervised properly.** This recommendation would introduce a regulation that permits the supervisory authorities to reject or withdraw the license of those financial institutions that form part of a financial group that is impossible to supervise effectively because of having a complex and/or non-transparent corporate structure based on specific criteria that would need to be determined.

> 48 These requirements do not include consolidated minimum capital adequacy requirements for the entire group, which currently apply at the level of individual credit institutions and the bank holding company. 49 For example, Grupo Aval currently consolidates its financial sector activities under 3 different financial groups for supervisory purposes (i.e. Banco de Bogota, Banco Popular and Banco de Occidente).

> 50 A typology of vulnerabilities created by the presence of financial conglomerates in a financial system can be found in Joint Forum publications and in Stephanou C. (March 2005). These include excessive leverage or multiple gearing, inconsistent regulatory treatment and incomplete coverage, financial and psychological contagion, and distorted competition.

> 51 Article 84 of the General Banking Act in Chile states: “ _Corresponderá a la Superintendencia determinar, mediante normas generales, las personas naturales o jurídicas que deban considerarse vinculadas a la propiedad o gestión del banco... El hecho de que sea deudora de un banco una sociedad constituida en el extranjero, entre cuyos socios o accionistas figuren otras sociedades o cuyas acciones sean al portador, hará presumir que se encuentra vinculada para los efectos de este número_ ”.

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