The Fed’s New Model of Supervision for “Large Complex Banking Organizations”: Coordinated Risk-Based Supervision of Financial Multinationals for International Financial Stability

Abstract

Large internationally active financial institutions, in particular multinational banks, have the capacity to create profound disturbances in the globalized financial markets in the event of failure. For that reason, these entities are supervised and examined in a manner that is completely different than the ordinary business corporation. This piece describes the new methodology that has been developed by the United States' central bank, the Board of Governors of the Federal Reserve System or "the Fed" for short, since 1995, for examining what the Fed calls "large complex banking organizations" or LBCOs and indicates how the system in fact carries out the form of supervision recommended by a paper by Michael Taylor, "Twin Peaks: A Regulatory Scheme for the New Century" published in 1995 for London's Centre for the Study of Financial Innovation. The piece concludes that the Fed is trying to deal with the problem of the gap between regulatory expertise and the largest entities' capacity to innovate in the financial markets.