International Financial Conglomerates: Benefits and Risks – a Bank Supervisor’s Perspective

1. International Financial Conglomerates:Benefits and Risks – a Bank Supervisor’s Perspective Sarah Dahlgren Federal Reserve Bank of New York June 1, 2005

2. Agenda • Regulatory Structure • Growth of Financial Conglomerates • Bank Supervision within a Central Bank • Current Challenges/Issues

3. U.S. Financial System Regulatory Structure • Dual banking supervision • Federal supervisory agencies (FRS, OCC, FDIC) • State supervisors • Securities regulators • SEC • Insurance regulators • State insurance regulators

4. Coordination of BHC/FHC Supervision • Federal Reserve • Sole federal regulator of bank holding companies and financial holding companies • Over 1,600 BHCs and 450 FHCs • Umbrella Supervisor • Responsible for consolidated entity • Coordination with other bank supervisors • Coordination with functional regulators • For foreign entities – coordinate with home country supervisor

5. Growth of Financial Conglomerates • Size/Concentration • Complexity and Breadth of Activities • Geographic Reach

6. Size of Firms • Absolute size of firms • Top ten – from less than 25% in the late 1990s • U.S. trillion dollar firms – Citigroup, JPMC, BofA • Citigroup grew from just over $700 billion in 1999 to $1.3 billion in 2003 • Diversity • Challenges for Supervisors • Resources • Where to focus • Supervisory Response • Risk Focused Supervision Techniques

7. Size: Supervisory Response • Risk Focused Supervision Techniques • Shift away from “current” assessments to focus on processes • Shift more focus on business line evaluations and risk management • Allows us to use scarce resources more effectively • Changes to our examination processes • “full-scope” vs. targeted examinations • leverage audit/internal control functions • focus on key risks/vulnerabilities

8. Complexity of Activities • Complexity of Activities • Pace of innovation • Growth of derivatives • Technology • Challenges for Supervisors • Depth of knowledge • Timeliness of information • Supervisory Response • Specialized Teams • On-site supervisory teams

9. Complexity: Supervisory Response • Specialized Teams • Organize staff resources by specialization • Institution types: LCBOs, FBOs, Regional/Community • Risks: Credit, Market, Operational, Legal/Compliance • Horizontal perspective – benchmarking • On-site Teams • Continuous supervisory process • Monitoring is critical • Access to MIS and key personnel • Timeliness of information flows • Enhanced knowledge of institution

10. Geographic Reach • Number of jurisdictions • Distance from head office • Complexity of regulatory environment • Challenges for Supervisors • Where the business activity is conducted vs. where it is risk managed • Knowledge of activities and management • Supervisory Response • Enhanced coordination with host country supervisors • Enhanced coordination with home country supervisors • Enhanced information sharing

11. Geography: Supervisory Response • Increased scrutiny on overseas activities • Internal controls and governance of institution • On-site examinations and visits • Enhanced coordination with host country supervisors • Regular contacts with supervisors • Coordinated supervisory reviews • Supervisory Working Groups • Enhanced coordination with home country supervisors • Information sharing agreements • Regular contacts

12. Bank Supervision within the Central Bank • Growth in size and complexity • Faster transmission of problems • Systemic risk • Hands-on knowledge of institutions • Current understanding of risk management practices • Faster recognition of emerging trends or practices • Coordination in crisis management

13. Current Issues and Challenges • New Basel Accord • Complexity of home/host coordination • Post-9/11 Issues • AML/BSA – terrorist financing • Business resilience • Other Issues • Reputational, legal and compliance risks • Growth in structured credit markets • Risk management and controls keeping pace