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  • Volume 87 Number 2 February 2001

    Federal Reserve

    BULLETIN

    Board of Governors of the Federal Reserve System, Washington, D.C.

    Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

  • Table of Contents

    47 SUPERVISION OF LARGE COMPLEX BANKING ORGANIZATIONS

    The long-term trends of consolidation and inno-vation in the U.S. banking system have intensified over the past decade. A small number of banking organizations now hold a larger portion of the banking system's assets, and, at the same time, their activities have become more complex. As a result, the Federal Reserve has altered its approach to the supervision of the largest, most complex banking organizations (LCBOs). This new approach focuses on the most important risks facing U.S. banking organizations and the ways in which these risks are managed. This article dis-cusses the Federal Reserve's risk-focused super-vision program as applied to LCBOs.

    58 INDUSTRIAL PRODUCTION AND CAPACITY UTILIZATION FOR DECEMBER 2000

    Industrial production fell 0.6 percent in Decem-ber, to 147.3 percent of its 1992 average, after two months of smaller losses. The rate of capac-ity utilization for total industry fell to 80.6 per-cent in December, a level IV2 percentage points below its 1967-99 average

    61 ANNOUNCEMENTS

    Federal Open Market Committee directive.

    Statement on the nomination of Paul O'Neill as Secretary of the Treasury.

    Statement on the resignation of Arthur Levitt as SEC chairman.

    Appointment of new members, president, and vice president of the Thrift Institutions Advisory Council.

    Adoption of an interagency rule on the disclosure and reporting of CRA-related agreements.

    Ruling that the "finder role" is a permissible activity for financial holding companies.

    Interim rule on the definition of financial activi-ties under the Bank Holding Company Act.

    Final rule on procedures to qualify as a financial holding company and on permissible activities.

    Increase in the exemption threshold for deposi-tory institutions reporting under HMDA.

    Proposed revisions to Regulation C.

    Proposed amendments to Regulation Z regarding the Home Ownership and Equity Protection Act of 1994.

    Proposed amendment to Regulation Y.

    Proposed revisions to calculation methods for priced services.

    Proposal to allow financial holding companies to offer real estate services.

    Publication of the December 2000 update to the Bank Holding Company Supervision Manual.

    Enforcement actions and termination of previous actions.

    Changes in Board staff.

    68 MINUTES OF THE MEETING OF THE FEDERAL OPEN MARKET COMMITTEE HELD ON NOVEMBER 15, 2000

    At this meeting, the Committee voted to maintain the existing stance of monetary policy, keeping its target for the federal funds rate at 6V2 per-cent. The Committee members also agreed that the risks continued to be weighted mainly toward conditions that might generate heightened infla-tion pressures in the foreseeable future.

    75 LEGAL DEVELOPMENTS

    Various bank holding company, bank service cor-poration, and bank merger orders; and pending cases.

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  • A1 FINANCIAL AND BUSINESS STATISTICS

    These tables reflect data available as of December 27, 2000.

    A3 GUIDE TO TABULAR PRESENTATION

    A4 Domestic Financial Statistics A42 Domestic Nonfinancial Statistics A50 International Statistics

    A63 GUIDE TO STATISTICAL RELEASES AND SPECIAL TABLES

    A78 INDEX TO STATISTICAL TABLES

    A80 BOARD OF GOVERNORS AND STAFF

    A82 FEDERAL OPEN MARKET COMMITTEE AND STAFF; ADVISORY COUNCILS

    A84 FEDERAL RESERVE BOARD PUBLICATIONS

    A86 MAPS OF THE FEDERAL RESERVE SYSTEM

    A88 FEDERAL RESERVE BANKS, BRANCHES, AND OFFICES

    Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

  • PUBLICATIONS COMMITTEE Lynn S. Fox, Chair Jennifer J. Johnson Karen H. Johnson Donald L. Kohn Stephen R. Malphrus J. Virgil Mattingly, Jr. Dolores S. Smith Richard Spillenkothen Richard C. Stevens David J. Stockton

    The Federal Reserve Bulletin is issued monthly under the direction of the staff publications committee. This committee is responsible for opinions expressed except in official statements and signed articles. It is assisted by the Economic Editing Section headed by S. Ellen Dykes, the Graphics Center under the direction of Christine S. Griffith, and Publications Services supervised by Linda C. Kyles.

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  • Supervision of Large Complex Banking Organizations

    Lisa M. DeFerrari and David E. Palmer, of the Board's Division of Banking Supervision and Regu-lation, prepared this article.

    Over the past decade, the long-term trends of consoli-dation and innovation in the U.S. banking system have intensified. Today a large proportion of assets held by U.S. banking organizations is concentrated in a small number of companies, and U.S. banking organizations have integrated into their product mix activities that extend well beyond traditional deposit-taking and lending. As a result of these develop-ments, there is a small number of banking organiza-tions that are larger and engage in a wider array of financial activities than at any time in recent history.

    Banking supervisors have responded to these changes by adapting their approaches to supervision so that they continue to be aligned with the way finan-cial organizations structure and manage their business activities. These newer approachescollectively referred to as risk-focused supervisionare designed to focus the greatest amount of supervisory attention on the business areas that represent the greatest risk to a banking organization's overall condition.

    The Federal Reserve began to implement a struc-tured, more formal program of risk-focused super-vision in the early 1990s, and that program continues to evolve as the banking system itself continues to change. Since the mid-1990s, the Federal Reserve has devoted particular attention to developing and implementing a program for the supervision of the largest, most complex banking organizations, or LCBOs. Given the speed with which the risk profiles of these institutions can change, the LCBO super-vision program incorporates both a more continuous supervision process than in the past and a greater emphasis on the evaluation of banking organizations' internal systems and controls for managing risk.

    DEVELOPMENT OF THE PROGRAM FOR LCBOS

    Trends in the Banking Industry

    Since 1989, the U.S. banking industry has undergone both consolidation in assets and expansion in the

    range of financial activities conducted, an extension of long-term trends. From 1989 to 1999, the number of independent banking organizations in the United States fell from 9,500 to 6,800.! Over the same period, total assets held by these banking organiza-tions rose nearly 50 percent in real terms (chart 1). A related trend is that the banking system's assets have become even more concentrated than before in the largest banking organizations. Specifically, the share of total assets held by the fifty largest U.S. banking organizations rose from 55 percent in 1989 to 74 per-cent in 1999; the share held by the ten largest grew from 26 percent to 49 percent (chart 2).

    Expansion in the range of financial activities of U.S. banking organizations is reflected in an increase both in the notional amount of derivatives contracts and in the size of nonbank subsidiaries. A small number of institutions are responsible for the largest portion of derivatives activity of U.S. banking organi-

    1. Included are all bank holding companies and all independent banks (with no holding company). Notably, most of the consolidation in the banking system has occurred as the result of mergers and acquisitions, but bank failures at the beginning of the period also played a role. For more detail, see Stephen A. Rhoades, Bank Mergers and Banking Structure in the United States, 1980-98, Staff Studies 174 (Board of Governors of the Federal Reserve System, August 2000).

    1. Number and total assets of U.S. banking organizations, 1989-99

    Number Assets (billions of dollars)

    8,000 Number' 8,000

    6,000 ^ 6,000

    4,000 Tolalassets in real term^ *

    2,000

    I I 1 1

    2,000

    . i i i i i i l 1989 1991 1993 1995 1997 1999

    1. Includes all bank holding companies and independent banks with no holding company.

    2. Adjusted by the GDP deflator (base year = 1996).

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  • 48 Federal Reserve Bulletin February 2001

    2. Share of total banking assets held by the fifty largest U.S. banking organizations, selected years, 1989-99

    zations, with the ten largest institutions accounting for nearly 95 percent of the total notional amount. Growth in the assets of nonbank subsidiaries of U.S. banking organizations over the past decade reflects in large part a significant expansion in the securities activities of the largest organizations. Total assets of nonbank subsidiaries held by the largest fifty banking organizations now represent nearly a quarter of their total consolidated assets, and the largest ten compa-nies account for the greatest proportion of these non-bank assets.2

    Many factors account for the increase in asset concentration at the largest U.S. banking organiza-tions as well as the broadening of the range of their financial activities during the 1990s. These factors include increased competitio