International Financial Conglomerates: Benefits and Risks

1
International Financial ConglomeratesBenefits
and Risks a Bank Supervisors 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

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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