The risk effects of the evolution of financial conglomerates.

Supplementary supervision of the risk of financial conglomerates has been regulated since 2005 by a new directive in the European Union. In many countries, financial conglomerates have evolved in recent decades with ownership links displaying the ever stronger cooperation of banks and insurance companies. The effects of the evolution of such financial conglomerates have not been fully explored. Despite the empirical relevance of this question, indicated also by the passage of the new EU directive, the theory of the risk effects accompanying the evolution of financial conglomerates is remarkably undeveloped. The article offers a new theoretical framework that separates the transaction, motivation and portfolio effects of the establishment of financial conglomerates and analyses the consequences of these effects on the institution-level stability of banks and insurance companies.