In one of the first regulatory responses to the Daiwa and Barings bank scandals, the Federal Reserve Board will instruct its examiners to order more internal and external audits.
William A. Ryback, the Fed's associate director for international supervision, said the central bank would tell examiners to order audits when they discover signs of trouble. Examiners normally add the deficiency to a list of items to be checked during the next review.
"Now with Daiwa and Barings having an effect on our thinking, we are going to want to be more aggressive," Mr. Ryback said Tuesday during an interview after a speech to the Institute of International Bankers.
The Fed has always had the authority to order audits. But it often preferred to revisit trouble spots itself or to enter into written agreements with the bank to fix a particular problem. Mr. Ryback said the Fed now would focus more on audits, except for the most serious cases, which will continue to require written agreements.
The central bank's decision is part of a growing regulatory emphasis on audits.
New York State Banking Department Superintendent Neil D. Levin said Monday that his examiners would begin reviewing foreign banks soon to see whether they need greater internal or external audits.
"We need to get away from the mentality that having an internal or external audit is burdensome," Mr. Levin told the international bankers conference. Auditors can unearth problems that if left undetected could cost the bank millions of dollars, he said.
"We might save shareholders lots of losses if we get to these problems sooner rather than later," he said.
Daiwa lost its U.S. license and agreed to pay $340 million in fines for concealing $1.1 billion of losses on unauthorized bond trades. Barings failed after a Singapore trader bet too heavily on changes in the value of the Japanese stock market.
Banking industry officials criticized the new emphasis on audits. James McLaughlin, director of regulatory and trust affairs at the American Bankers Association, said audits increase costs without necessarily improving safety and soundness.
"It almost sounds as if they are getting a bit defensive," he said. "It is as if they don't trust themselves any more."
But Karen Shaw Petrou, president of the industry consulting firm ISD- Shaw Inc., said bankers shouldn't be surprised. "The risk management examiner guidelines themselves strongly emphasize internal and external audits," she said. "So this is practice following policy."
The new practice will be a boon for auditors. "You have CPAs dancing around the halls of New York skyscrapers," Ms. Petrou said.
