Emergence of financial conglomerates is a natural corollary to financial sector development. Increasing financial market integration and blurring of the traditional distinction between banking, investment and insurance sectors have resulted in banking getting intricately linked with para-banking activities such as insurance, mutual funds, asset management, securities broking, etc. While the benefits of financial conglomeration such as economies of scale, economies of scope, better efficiency and profitability are beyond doubt, the focus of the regulations has been on containing any likely contagion effect or reputational risk arising out of the other financial activities to the banking company.

The core issue, safety of the banking system and depositors’ money, is something that cannot be compromised as failure on the part of one bank but may have a cascading effect on the entire financial system and thereby be a threat to the overall financial stability. The recent global financial crisis has shown that opacity of organisational and compensation structures in big conglomerates pose significant risks to the financial system and the financial stability with systemic implications.

However, as a matter of principle, regulations should not stifle innovation and efficiency and hence, there is a need to strike a balance.

Understanding the financial conglomerate structure
Perceptions differ as to what exactly constitutes a financial conglomerate. To a large extent, these perceptions are dependent upon custom and practice in different countries, but they are also influenced by legislations governing not only the ownership of banks but also the activities in which banks could be involved.

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