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¡¡¡¡In view of the steady increase of international banking activities, the appropriate regulation and supervision of multinational banks become more and more relevant. Financial regulators have long been aware of the problems surrounding the supervision of multinational banks, and considerable efforts have been invested in developing a sound regulatory framework. Most countries have adopted the BIS guidelines for international banking supervision, so that basic supervisory responsibilities are divided between the relevant home-and host country authorities. Together with the ¡°Core Principle¡¯s for Effective Banking Supervision¡± that were established following the BCCI crisis, they are now followed by many countries. Moreover, bilateral Memoranda of Understanding specify how information exchange between these authorities is organized. ¡¡

¡¡¡¡In recent years, a number of emerging market countries, particularly in Asia , have become important participants in the international financial markets. The exposure of investors and banks in industrial countries to merging market countries has increased substantially, as portfolio investment flows and bank lending to the emerging markets have grown and the latter¡¯s financial sectors have expanded, relative to the financial sectors of industrial countries. Even developing countries are not yet major players in the financial markets would benefit from being included in multilateral arrangements¡ªa sound financial system can make an important contribution to economic performance. G-10 has responded to the momentous changes in financial markets in the 1980s and 1990s by strengthening supervision and regulation of the international banking system through several multilateral arrangements. These arrangements have generally been successful in reducing risks to the system and averting potential problems. ¡¡

¡¡¡¡In the past few decades, as one financial crisis falls, another rises, spurring the evolvement of banking business areas and the development of banking supervision frame in domestic, regional and international level. The Asian crises, Russian crisis, Turkey crisis, Argentine crisis and Brazil crisis along with their spread to the world are typical examples. Even though U.S. and Japanese supervisory agencies adopted different measures to maintain soundness and safety of their banking and financial system as well as single bank, the systemic turbulences and crises were still inevitable. It can be well illuminated by the crises of savings and loan institutions in U.S. occurred during late 1980s and early 1990s and 1998 Asian financial crises. ¡¡

¡¡¡¡With the incessant changes of external environment, the modes of the international commercial banking supervision went though four phases from Administrative order approach to Standard approach, Internal model-based approach and then Pre-commitment approach . Because of the increasing complexity of financial instruments and the speed of movement in financial markets, intrusive supervision has become less meaningful. Thus the U.S. federal banking agencies have adopted a risk-focused approach to banking supervision that emphasizes the adequacy of banks' internal risk management systems. Together with the traditional approaches of loan review and transaction monitoring, market-based supervision will best ensure the continued viability of the banking sector. ¡¡

¡¡¡¡III. BANKING SUPERVISION IN U.S¡¡

¡¡¡¡A fundamental goal of modern United States banking law is to prevent another Great Depression, with massive runs on banks, and heavy costs to society. Bank regulation in the United States is highly fragmented compared to other G-10 countries where most countries have only one bank regulator. In the U.S., a bank's primary regulator could be the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, or any one of 50 state regulatory bodies, depending on the charter of the bank. And within the Federal Reserve Board, there are 12 districts with 12 different regulatory staffing groups.¡¡

¡¡¡¡It is also one of the most highly regulated banking environments in the world, however, many of the regulations are not safety and soundness related, but are instead focused on privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and promoting lending to lower-income segments. Even individual cities enact their own financial regulation laws.¡¡

¡¡¡¡Significant Legislation¡¡

¡¡¡¡Over the years, legislation has changed what banks can or cannot do. For example, the Gramm-Leach-Bliley Act of 1999 abolished the core provisions of the Banking Act of 1933, also known as the Glass-Steagall Act, which restricted banks from selling insurance and securities. As the impact of the law takes hold, consumers will be able to purchase a variety of services, such as car insurance or a checking account, and trade stocks, all at one place. The Federal Reserve has been given responsibility for regulating these multiple-service providers. Legislation also regulates both the international activities of U.S. banks in foreign locations and the activities of foreign banks in U.S locations. For example, the International Banking Act of 1978 provided equal powers for foreign banks operating in the United States to promote equal competition between them and U.S. banks. In addition, the International Lending Supervision Act of 1983 requires the Federal Reserve and other U.S. banking agencies to consult with bank regulators in other countries to adopt consistent supervisory policies to facilitate international banking. The Federal Reserve is responsible for regulating branches of foreign banks operating in the United States.¡¡

¡¡¡¡The dual banking supervision system ¡¡

¡¡¡¡The National Bank Act of 1863 created a system of banks throughout the United States that were chartered by the federal government. In 1865, an amendment to the act placed a tax on state bank notes, bringing all banks in the United States under federal supervision. However, a number of banks were exempt from the tax and continued under their state charters until the Federal Reserve Act of 1913 . This was known as the "dual banking system." ¡¡

¡¡¡¡The Federal Reserve System, also the Federal Reserve, informally The Fed, is the central banking system of the United States. The Federal Reserve System is a quasi-governmental banking system composed of (1) a presidentially-appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) twelve regional Federal Reserve Banks located in major cities throughout the nation; and (4) numerous private member banks , which own varying amounts of stock in the regional Federal Reserve Banks . ¡¡

¡¡¡¡The Federal Reserve Act of 1913 established the present day Federal Reserve System and brought all banks in the United States under the authority of the federal government, creating the twelve regional Federal Reserve Banks which are supervised by the Federal Reserve Board. Notwithstanding the Glass-Steagall Act of 1932 and the Banking Acts of 1933 and 1935, which were attempting to reform various banking abuses, the Federal Reserve System has remained more or less unchanged through to the present day. The Glass-Steagall Act was repealed in 1999, whereas the Banking Act of 1933 simply strengthened the supervisory powers of federal authorities and created the Federal Deposit Insurance Corporation.¡¡

¡¡¡¡The Federal Reserve System supervises and regulates a wide range of financial institutions and activities. The Fed works in conjunction with other federal and state authorities to ensure that financial institutions safely manage their operations and provide fair and equitable services to consumers. Bank examiners also gather information on trends in the financial industry, which helps the Federal Reserve System meet its other responsibilities, including determining monetary policy.¡¡

¡¡¡¡Roger Ferguson Jr, a Governor of the Federal Reserve Board, once clearly made the case for the Federal Reserve maintaining a significant role in banking supervision. He argued that , ¡¡

¡¡¡¡¡® In the last analysis, there simply is no substitute for understanding the links among supervision, regulation market behavior, risk taking, prudential standards, and- let us not lose sight-macro stability. The intelligence and know-how that come from our examination and regulatory responsibilities play an important, at times, critical-role in our monetary policy making. No less relevant, our economic stabilization responsibilities contribute to our supervisory policies. Observers and supervisors from single-purpose agencies often lose sight of how too rigorous or too lenient a supervisory stance-or a change in stance-can have serious and significant macro-economic implications, the consideration of which is likely to modify the supervisory policy. In short, I think the Fed¡¯s monetary policy is better because of its supervisory responsibilities, and its supervision and regulation are better because of its stabilization responsibilities.¡¯¡¡

¡¡¡¡Since 1863, commercial banks in the United States have been able to choose to organize as national banks with a charter issued by the Office of the Comptroller of the Currency (OCC) or as state banks with a charter issued by a state government. The choice of charter determines which agency will supervise the bank: the primary supervisor of nationally chartered banks is the OCC, whereas state-chartered banks are supervised jointly by their state chartering authority and either the Federal Deposit Insurance Corporation (FDIC) or the Federal Reserve System (Federal Reserve). In their supervisory capacity, the FDIC and the Federal Reserve generally alternate examinations with the states.¡¡

¡¡¡¡Several federal and state agencies regulate banks along with the Federal Reserve. The Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC), the Office of Thrift Supervision (OTS) and state banking authorities also regulate financial institutions. The OCC charters, regulates and supervises nationally chartered banks. The FDIC, the Federal Reserve and state banking authorities regulate state-chartered banks. Bank holding companies and financial services holding companies, which own or have controlling interest in one or more banks, are also regulated by the Federal Reserve. The OTS examines federal and many state-chartered thrift institutions, which include savings banks and savings and loan associations. ¡¡

¡¡¡¡Umbrella supervision mode¡¡

¡¡¡¡1. Federal Reserve as Umbrella supervisor¡¡

¡¡¡¡Gramm-Leach-Bliley , namely GLB, offers exciting opportunities for banking organizations to expand their lines of business and their range of customer services. It permits certain bank holding companies to affiliate with securities firms and insurance companies. Expanded permissible activities for these holding companies include securities underwriting and dealing, insurance agency activities and insurance underwriting, acting as a futures commission merchant, and merchant banking. The Federal Reserve Board and the Secretary of the Treasury have the authority to determine whether other activities are financial in nature or incidental to financial activities and hence permissible for these holding companies to engage in. To take advantage of the new powers, a bank holding company must become a financial holding company (FHC) , which requires that each of its subsidiary banks is well-capitalized and well-managed and that all of its insured subsidiary banks maintain a Consumer Reinvestment Act (CRA) rating of at least satisfactory.¡¡

¡¡¡¡The rationale for umbrella supervision is that most large and sophisticated financial services companies take an umbrella or consolidated approach to managing their risk. As a practical matter, the Federal Reserve expects all FHCs to evolve toward comprehensive, consolidated risk management in order to measure and assess the range of their exposures and the way those exposures interrelate. ¡¡

¡¡¡¡Umbrella supervision seeks to balance the objective of protecting the depository subsidiaries of increasingly complex organizations engaged in a greater number of interrelated activities and incurring different risk with the objective of not imposing an unduly duplicative or onerous burden on the nonbank entities that are part of the organization. The legislation clearly intends that functional regulators, primary bank and thrift supervisors, and the umbrella supervisor will respect each other's responsibilities and will acknowledge and make use of each other's expertise.¡¡

¡¡¡¡Moreover, umbrella supervision requires strengthened relationships between primary bank and thrift supervisors and the umbrella supervisor and enhanced relationships with functional regulators and foreign nonbank supervisors. Finally, the Federal Reserve needs to place greater reliance on recent initiatives that promote a more risk-focused supervision process and market discipline. ¡¡

¡¡¡¡The activities of the Federal Reserve as the umbrella supervisor fall into three broad categories: information gathering and assessment, ongoing supervision, and promotion of sound practices and improved disclosure. The Federal Reserve will interact closely with, and obtain information from, the primary bank and thrift supervisors and the functional regulators as well as from FHC senior management and boards of directors. ¡¡

¡¡¡¡Examiners may conduct targeted transaction testing, to verify that risk-management systems are adequately and appropriately measuring and managing areas of risk for the organization and to confirm that laws and regulations within the jurisdiction of the Federal Reserve are being followed. There will also be periodic discussions with FHC senior management and boards of directors and with personnel responsible for centralized management and control functions such as heads of business lines, risk management, internal audit and internal control. ¡¡

¡¡¡¡2. Mutual coordination of different supervisors¡¡

¡¡¡¡ The Federal Reserve Board, FDIC, Department of Justice, SEC , CFTC , OTS, NCUA and FT , even FBI regulate and supervise commercial banks from their respective responsibilities, among which The Fed and FDIC are the main supervisory institutions. ¡¡

¡¡¡¡All the national banks are members of Federal Reserve System, whereas state banks have the options to be the member or not and those who choose to join are called state member banks. The Fed is responsible directly and basically for all the member banks. Meanwhile, the Fed acts as the supervisor for bank holding companies and financial holding companies, granting business charters. Up to now, more than 1,500 financial holding banks have been set up in US. Because of the vastness of objects to be supervised, in actual practice, the Fed focuses its supervision mainly on big commercial banks and institutions, for instance, Citigroup has routine meeting with the Federal Reserve examiners every other week. However, the supervision on small banks is mostly from the perspective of liquidation and capital circulation and on-site test of their detailed activities. ¡¡