is either compliant or largely compliant with all the core principles except those dealing with consolidated supervision. the proposed amendments in the bco would also enable pakistan to ensure compliance with this principle. major risks arising from complex structures and supervisory challenges while the increasing integration and the drive towards financial conglomeration has opened up possibilities of greater efficiency through increased economies of scale and scope, at the same time it has also generated novel risks and has consequently raised a number of supervisory concerns. a few of these risks and concerns are as follows : • one of the foremost risks is contagion risk which can manifest itself in psychological as well as financial forms. financial distress in one entity could impair the reputation of the other entities and the market participants may be reluctant to engage in business with them. the reputational problem can often lead to financial distress in the entire group, as the parent or the other group associates may have to help out the distressed entity in order to safeguard the group from reputational risk. such other group entity could be a subsidiary of the bank, with the potential of downstream risk, or parent of the bank or affiliate under the control of parent i. e. upstream risk. • a bank or dfi, together with other group entities under its control, could take exposures on a single borrower, borrowing group, or sector that are beyond prudential limits. generally, on individual basis, there are per party exposure limits. however, various entities in a group may end up with an unusually large exposure on a collective basis. moreover, since the entities within a group may be subject to different regulations, this may lead to regulatory arbitrage allowing banks to take advantage of the less stringent regulatory regime applicable on some of its subsidiaries. there might be specific intra - group linkages that could nullify the impact of conventional risk mitigation techniques at the group level by simply shifting the risk from one of the group entities to another. • another problem is the overstatement of capital or double gearing whereby the capital of one entity is used to satisfy the requirements of more than one affiliate entities. this phenomenon is typical where investments are made by the parent body in its subsidiaries. double gearing results in the overstatement of capital and can also lead to regulatory arbitrage. • another aspect which is often difficult to detect is of intra group transactions, which might not be on arms - length basis. this increases the likelihood of fraud or siphoning - off of funds. • liquid

result in improved operational efficiency and effectiveness due to lower costs, reduced prices, and improved innovation in products and services. however, at the same time the emergence of such groups has also added complex linkages and relationships among economic agents. consequently, they have also necessitated a paradigm shift in the supervisory approaches all across the globe to assess, manage, and mitigate risks stemming from such arrangements. like other countries, these developments have steadily gained momentum in the pakistani financial sector. the existing regulatory framework in pakistan under sbp gradually became more open, flexible and allowed the banks to set up subsidiaries to operate non - bank financial businesses. the prevalent structure under which non - bank financial services are being offered is mostly through the parent – subsidiary form of structure wherein banks are parent of their non - banking subsidiaries, or in some cases banks have non - banking finance companies ( nfbcs ) as associates. some elements of universal banking also exist, for example banks are allowed to undertake investment banking, and leasing businesses on their own balance sheet as well. while the central bank showed flexibility in allowing these developments, the underlying legal architecture was not changed in line with the market needs and developments. as such, the current legislation and regulatory tools are not adequate to effectively address the potential risks to the safety and soundness of the financial sector. the safety and soundness of the banking sector, being at the core of all activities of the financial sector, is critical for the general public, for the financial sector itself and for the economy as a whole. the governing law of the banking sector viz. the banking companies ordinance ( bco ) was introduced in 1962 and occasional changes were made in it in response to the challenges of different phases of development. the significant challenges posed by universal banking, large financial groups and holding company structures now warrant a matching legal framework to avoid any major disruptions in the economy and in the process of financial intermediation. recognizing these challenges, sbp has sought in principle approval from the requisite forums for amendments in the bco to enable it to supervise banks, groups and financial holding companies in line with international trends. besides forestalling various risks, these amendments would enable significant benefits in the form of operational efficiency, lower costs, reduced prices and innovation in products and services. moreover, one of the core principles for effective banking supervision ( cp - 24 ) issued by the basel committee on banking supervision requires that a banking supervisor should be able to supervise the banking groups on a consolidated basis. presently, pakistan