N.Y. Fed's Top Regulator: Calm Amid Storm

The Federal Reserve Bank of New York has sure taken its lumps lately.

First, it came under fire for not heading off the trading debacle at Daiwa Bank. Then it was sued by activists over community reinvestment concerns.

But Chester Feldberg, the New York Fed's top bank regulator, appears unshaken. Though willing to consider the claims of critics, he approaches his job with all the resolve suggested by the bank's granite architecture in Manhattan's financial district.

"I don't think there is anything the New York Fed or the exam force should feel embarrassed about," he said in a recent interview.

Since assuming his post five years ago, Mr. Feldberg has sought to transform the 642-member exam force into a thoroughly modern organization that is keenly attuned to the evolution of banking.

"You've got a good chunk of financial innovation happening in the marketplace and being implemented rather quickly here," said Mr. Feldberg, the New York Fed's executive vice president for bank examinations. "We at the New York Fed are closer to the action, so we have to be very focused on the issues."

That has meant empowering small teams of examiners to solve problems on their own, a management strategy now in vogue at many of the country's largest corporations.

Rather than having 50 to 100 examiners report to a single boss, in 1991 Mr. Feldberg divided his staff into teams of 15 to 20. Each team was given a list of banks to examine that year. Everything else was left up to the team.

"It turned out to be a major lifesaver," he said.

The teams devote most of their resources to reviewing risk-management practices, rather than examining loan quality. Poor risk management, he said, can lead "at minimum to serious financial problems and at the maximum, the failure of the bank."

The innovations won't stop with his team approach. Mr. Feldberg leads a Fed committee reviewing ways to make examinations less burdensome to banks and regulators.

"We already have 650 examiners, and you can't grow forever," he said. "That means we've got to get more efficient." Topping the committee's agenda: computerizing exams and performing exams off-site.

Mr. Feldberg said modern management techniques keep his examination forces nimble, and for now, that means staying just "a half step" behind the industry so as not to stifle innovation.

"That's where I want to be," he said. "Do we always get it exactly right? Hell no."

The Daiwa incident may be one instance in which the New York Fed got it wrong.

Critics have asked why examiners relied on the bank's assurances that Toshihide Iguchi, the bond trader who has pleaded guilty to losing $1.1 billion in unauthorized trades, was not monitoring his own work. They note that Daiwa confessed in 1993 to deceiving the New York Fed purposely about the location of its securities trading business.

Mr. Feldberg said his office is still evaluating the Daiwa incident. It is too early to discuss what supervision policies, if any, might be changed, he added. The incident also is still under investigation by federal prosecutors.

An influx of inexperienced examiners probably hindered his staff's ability to detect Daiwa's problems, Mr. Feldberg said, however. The reserve bank hired 250 examiners in 1992 and 1993 after Congress gave it oversight of foreign banks.

The examination staff had already been stretched thin working through the banking crisis of the early 1990s. It then had to train the new examiners and send them into uncharted waters - supervision of foreign banks.

"It was an incredibly difficult management challenge," Mr. Feldberg said.

The controversy has hurt examiner morale, he said. But he said he's not sure the New York Fed, even without the challenge of integrating the new examiners, could have detected an intentional fraud in the first place.

"We did the best we could with the resources we had at the time," Mr. Feldberg said. Examinations depend upon honest cooperation from bankers, he said.

"There is simply no way our examiners can do their jobs so as to prevent fraud from occurring," he said. "At the extreme, we'd need one examiner for each bank employee."

Speaking more generally, he said examiners always review the relationship between traders and operations personnel. "I firmly believe it is at least as important as asset quality, and in some cases, it can be even more important," he said.

Examiners cannot give the "Good Housekeeping seal of approval" to every bank operation, he said. Instead, they must concentrate on just a few areas of the bank. "When we have found significant breakdowns," he said, "more often than not, if we found them in areas A and B, similar problems existed in C, D, and E."

The New York Fed also has taken heat from community activists over its decisions to approve several deals involving Chase Manhattan Corp. The activists are displeased with Chase's record on Community Reinvestment Act compliance, although the Office of the Comptroller of the Currency gave the bank an "outstanding" CRA grade after its most recent exam.

Several activists have even sued the New York Fed, charging that it had violated the CRA by not considering their protests of two recent Chase mergers.

Mr. Feldberg said his troops did nothing wrong regarding Chase but said he's not surprised by the lawsuit. "I understand where these groups are coming from," he said. "We all have our roles."

The New York Fed conducts some of the most complex examinations in the system because it oversees large, complex institutions operating in dynamic financial markets. The reserve bank is the first to examine developments in derivatives, collateralized mortgage obligations, and foreign exchange deals.

Currently, the bank is exploring credit derivatives, which allow commercial banks to sell their credit risk.

Mr. Feldberg is a lifetime Fed employee, just like many senior officials at other reserve banks. "I came to the Fed thinking it would be a good place to learn about banking coming out of law school," he said. "The truth is, 32 years later, I can't figure out what I'd rather be doing."

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