1. 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

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 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

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
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 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

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