Modern financial services firms use a variety of holding company structures to manage risk inherent in their businesses. The United States regulatory system that consists of primary bank supervisors, functional supervisors, and consolidated supervisors oversees these firms in part to ensure that they do not take on excessive risk that could undermine the safety and soundness of the financial system. Primary bank supervisors oversee banks according to their charters, and functional supervisors— primarily, SEC, self-regulatory organizations (SRO), and state insurance regulators—oversee entities engaged in the securities and insurance industries as appropriate. Consolidated supervisors oversee holding companies that contain subsidiaries that have primary bank or functional supervisors. They are chartered, registered, or licensed as banks, securities firms, commodity trading firms, and insurers. International bodies have provided some guidance for consolidated supervision. Many modern financial firms are organized as holding companies that may have a variety of subsidiaries. In recent years, the financial services industry has become more global, consolidated within traditional sectors, formed conglomerates across sectors, and converged in terms of institutional roles and products. The holding company structure, which allows firms to expand geographically, move into other permissible product markets, and obtain greater financial flexibility and tax benefits, has facilitated these changes. Financial services holding companies now range in size and complexity from small enterprises that own only a single bank and are being used for financial flexibility and tax purposes to large diversified businesses with hundreds of subsidiaries—including banks, broker-dealers, insurers, and commercial entities—that have centralized business functions that may be housed in the holding company. In addition, modern financial corporate structures often consist of several tiers of holding companies. To varying degrees, all financial institutions are exposed to a variety of risks that create the potential for financial loss associated with failure of a borrower or counterparty to perform on an obligation—credit risk; broad movements in financial prices—interest rates or stock prices— failure to meet obligations because of inability to liquidate assets or obtain funding—liquidity risk; inadequate information systems, operational problems, and breaches in internal controls—operational risk; negative publicity regarding an institution’s business practices and subsequent decline in customers, costly litigation, or revenue reductions— reputation risk; breaches of law or regulation that may result in heavy penalties or other risks that an insurance underwriter takes in exchange for premiums— insurance risk; and events not covered above, such as credit rating downgrades or factors beyond the control of the firm, such as major shocks in the firm’s markets—business/event risk. In addition, the industry as a whole is exposed to systemic risk, the risk that a disruption could cause widespread difficulties in the financial system as a whole. As firms have diversified, some holding companies have adopted enterprisewide risk management practices where they manage and control risks across the entire holding company rather than within subsidiaries. These firms have global risk managers who manage credit, market, liquidity, and other risks across the enterprise rather than within individual subsidiaries, such as securities, banking, or insurance businesses or subsidiaries in foreign countries. In addition, these firms generally provide services such as information technology on a firmwide basis and have firmwide compliance and internal audit functions. We have previously reported that most financial services firms are subject to federal oversight designed to limit the risks these firms take on because (1) consumers/investors do not have adequate information to impose market discipline on the institutions and (2) systemic linkages may make the financial system as a whole prone to instability. In the United States, this oversight is provided by primary bank and functional supervisors as well as by consolidated supervisors. As table 1 illustrates, in the United States a variety of federal bank supervisors oversee banks that are subsidiaries of holding companies. State bank supervisors also participate in the oversight of banks with state charters. Similarly, securities supervisors that include SEC and SROs, such as the New York Stock Exchange and NASD, oversee broker-dealer subsidiaries and state insurance supervisors oversee insurance companies and products. While each of the agencies has multiple goals, all are involved in assessing the financial solvency of the institutions they regulate. All of the primary bank supervisors use the same framework to examine banks for safety and soundness and compliance with applicable laws and regulations. Among other things, they examine whether the bank has adequate capital on the basis of its size, composition of its assets and liabilities, and its credit and market risk profile; the bank has an appropriate asset quality based on the credit risk of loans in its portfolio; the bank’s earnings trend measures up to that of its peers; the competence and integrity of the bank’s management and board of directors to manage the risks of the bank’s activities and their record of complying with banking regulations and other laws; the bank has adequate liquidity based on its deposit volatility, credit conditions, loan commitments and other contingent claims on the bank’s assets and its perceived ability to raise funds on short notice at acceptable market rates; and the bank adequately identifies and manages its exposures to changes in interest rates and, as applicable, foreign exchange rates, commodity and equity prices. Primary bank examiners rate banks in each of the areas; these ratings are usually referred to as CAMELS ratings (capital adequacy, asset quality, management ability, earnings, liquidity, and, where appropriate, sensitivity to market risk). SROs oversee certain aspects of broker-dealer activity. SEC concurrently oversees these SROs and independently examines broker-dealers. SEC considers its enforcement authority crucial for its protection of investors. Under this authority, it brings actions against broker-dealers and other securities firms and professionals for infractions such as insider trading and providing false or misleading information about securities or the companies that issue them. However, to protect investors, SEC also requires broker-dealers to maintain a level of capital that should allow the broker-dealer to satisfy the claims of its customers, other broker-dealers, and creditors in the event of potential losses from proprietary trading or operational events. SEC and the SROs examine broker-dealers to determine if they are maintaining required capital and evaluate broker- dealers’ internal controls. The central purpose of insurance regulation is to protect consumers by monitoring the solvency of insurers and their business practices. Insurance companies are supervised on a state-by-state basis, although states often follow general standards promulgated by the National Association of Insurance Commissioners (NAIC), a private voluntary association for insurance regulators. For example, insurance supervisors generally require insurance firms to prepare their quarterly and annual financial statements in a format unique to insurance known as statutory accounting principles that are maintained by NAIC. Insurance supervisors impose capital requirements on insurance companies to try to limit insurance company failures and ensure their long-run viability. In addition, all state insurance supervisors monitor insurers’ business practices and terms of insurance contracts in their states. In the United States, three agencies provide consolidated supervision—the Federal Reserve oversees bank holding companies, OTS oversees thrift holding companies, and SEC oversees certain CSEs on a consolidated basis. As table 2 shows, the number and type of institutions these agencies oversee varies. As the table shows, SEC, under its CSE program, oversees only large complex firms. These include Bear Stearns & Co., Goldman Sachs & Co., Lehman Brothers Inc., Merrill Lynch & Co. Inc., and Morgan Stanley & Co., while the Federal Reserve and OTS oversee firms that vary significantly in size and complexity. Among larger firms, the Federal Reserve oversees Bank of America Corporation, Citigroup, and JPMorgan Chase, and OTS oversees American International Group Inc., General Electric Company, General Motors Corporation, Merrill Lynch & Co. Inc., and Washington Mutual Inc. Most of the large bank holding companies that the Federal Reserve oversees are primarily in the business of banking but to a lesser extent engage in securities or other nonbank activities as well. Many of the large firms OTS oversees are engaged in commercial businesses, as well as securities and insurance. The Federal Reserve and OTS also oversee the vast majority of U.S. financial institutions that have remained relatively small and are not complex. The Federal Reserve and OTS base their consolidated supervision programs on their long-standing authority to supervise holding companies, while SEC has only recently become a consolidated supervisor. The Federal Reserve’s authority is set forth primarily in the Bank Holding Company Act of 1956, which contains the supervisory framework for holding companies that control commercial banks. OTS’s consolidated supervisory authority is set forth in the Home Owners Loan Act of 1933, as amended, which provides for the supervision of holding companies that control institutions with thrift charters (other than bank holding companies). SEC bases its authority on section 15(c)(3) of the Securities Exchange Act of 1934. Specifically, in 2004, SEC adopted the Alternative Net Capital Rule for CSEs based on its authority under that provision, which authorizes SEC to adopt rules and regulations regarding the financial responsibilities of broker-dealers that it finds necessary or appropriate in the public interest or for the protection of investors. Under the CSE rules, qualified broker-dealers can elect to be supervised by SEC on a consolidated basis. If the holding company of the broker-dealer also is a bank holding company, SEC defers to the Federal Reserve’s supervision of the holding company. At the same time that it issued the CSE rules, SEC promulgated final rules for the consolidated supervision of supervised investment bank holding companies (SIBHC) pursuant to a provision in the Gramm-Leach-Bliley Act (GLBA). The GLBA provision established a supervisory framework for SIBHCs—qualified investment bank holding companies that do not control an insured depository institution—similar to the approach prescribed in the act for the supervision of bank and thrift holding companies. As of this date, no firm has elected to be regulated under the SIBHC scheme.