- banking activities are exposed not just to credit and market risks which are the primary risks of their business, and which the banks should assess and manage as part of their core competence. these banks will also be taking on the business risks of their non - financial activities. if their non - financial activities run into trouble, the banks may feel compelled to support them beyond normal commercial considerations, to protect their own reputation. in so doing the banks may undermine their own soundness ; yet if they did not extend the rescue, the problems of the affiliates may trigger a loss of confidence in the bank itself because of the close association. secondly, with banking and non - banking activities inter - meshed within a conglomerate, there will be a strong tendency to stretch any safety net intended for the banking system also to cover non - bank operations in the group. if failure of an associated non - bank threatens the bank and systemic stability, the regulator or government may be forced to rescue both. we have seen this happen in the recent asian crisis. an implicit safety net for the banking system may be a necessary evil ; but extending it to non - banks compounds the problem of moral hazard. it also tilts the playing field against non - bank competitors who are not associated with banks. thirdly, separation minimises the risk of non arms - length transactions between banks and their nonbank affiliates. when a bank lends to a related entity at more favourable terms than market, or invests in an affiliate in order to control it even though the investment does not perform, minority shareholders of the bank are disadvantaged, and so are depositors. some economists have argued that in less - developed financial markets, it is in fact a rational and practical strategy for a group of companies sharing common ownership or cross - shareholdings to lend to and invest in one another. information about companies is often less than complete, and company accounts and business plans are hard to interpret. family networks or guanxi are then efficient ways to establish a basis of trust for doing business, and to avoid the high costs of obtaining reliable knowledge about the other party ’ s activities and finances. but the non - transparency of this approach can lead to serious difficulties and abuses. cross - shareholdings diminish the influence of minority shareholders, dilute market pressure on the companies in the group, and weaken the internal discipline to appraise rigorously the risk of each investment. the ongoing reforms in many asian countries are as much about tightening corporate governance

company which owns a substantial share of a bank, directly or indirectly, as an fhc. such an fhc will be subject to mas regulation and will not be allowed to own non - financial activities. cross - shareholding the financial entities will not be allowed to own, directly or indirectly, the shares of non - financial firms affiliated to the same principal shareholder. within the financial arm, shareholdings should only be in one direction. we will not allow two companies in the financial arm to have mutual shareholdings in each other. for example, if a bank takes a stake in an insurance company or securities firm, then the insurance company or securities firm would not be allowed to hold a stake in the bank. the companies act already prohibits subsidiaries of banks from owning shares in the bank. we will extend this principle to all entities below the bank or fhc, whether or not they are subsidiaries of the bank or fhc. ideally, we should also disallow the non - financial entities from owning shares in the financial entities. however, we do not start from a clean slate. requiring the banks to divest themselves of the nonfinancial activities will already be a major structural change. therefore, in the present exercise mas will allow the principal shareholders to continue owning indirect stakes in the banking groups through the non - financial entities that they control. mas will review this arrangement later. management to avoid conflicts of interest, the management of the financial entities should be separate from the management of its non - financial affiliates. there should be no sharing of executive directors and management staff, such as the chief financial officer and chief operating officer. on the board of directors of a regulated financial entity, a majority of the directors should not be holding directorships on the boards of the non - financial affiliates as well. name - sharing mixed conglomerates usually leverage on common brand building. many of the non - financial affiliates of local banks share the name of their parent banks. financial and non - financial entities alike have built up goodwill in the brand name over the years. but reputational and contagion risks can result from sharing of names and corporate badges between the bank and its non - bank affiliates. where an unregulated entity sharing a name fails or falls into disrepute, the public may attribute its problems to the bank, causing a bank run. mas will therefore disallow the sharing of names and logos between the financial and non - financial entities. we are considering amending the