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

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

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

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

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

Size of Firms Absolute size of firms Challenges for Supervisors 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

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

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

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

Geographic Reach Number of jurisdictions Challenges for Supervisors 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

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

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

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