WASHINGTON — The Federal Reserve published a proposed guidance document this week laying out core principles for its supervision of systemically risky banks, the latest in a series of suggested changes that are top priorities for the new leadership at the central bank.

The proposal lays out principles in three critical areas: the effectiveness of senior management, management of the firm’s business line and the independent risk management structures within a banking organization. The proposed guidance would build on earlier proposals from August that would establish a rating system for large financial institutions and delineate responsibilities for bank boards of directors.


Randal Quarles, Fed vice chair of banking supervision
"I think that a significant part of the Fed’s engagement of the firms is through supervision rather than regulation," Federal Reserve Vice Chairman of Supervision Randal Quarles said in November. Bloomberg News

The proposal, issued Thursday, would expand on those plans in a handful of ways. First, the guidance would be applicable not only to U.S. bank holding companies with more than $50 billion in assets, but also foreign banking organizations and their U.S. affiliates that are subject to Fed jurisdiction.

The Fed’s earlier proposal “provides that an effective board of directors sets the firm’s strategy and risk tolerance, and this proposal contemplates that the firm’s senior management implements the strategy and risk tolerance approved by the board,” the proposed guidance said. “In this way, the proposed guidance would better distinguish the supervisory expectations for boards from those of senior management.”

The proposal stipulates that, similar to existing practice, banks’ entire business line risk management won’t necessarily be examined each year — rather, supervisors will target areas of the firm’s business that are most likely to present material risk to the firm or present a potential weakness for the firm’s governance and controls.

Among the criteria that supervisors would use to determine whether to examine a particular business line are the “size and complexity of the business line, recent supervisory experience, the relative growth and maturity of the business line, and significant changes to strategy, structure, or management since the last exam cycle,” according to the proposal.

Federal Reserve Vice Chairman for Supervision Randal Quarles, who assumed his role in October as the first of President Trump's nominees to the Fed, has said that adjusting the central bank's approach toward supervision is among his top priorities.

"I think that a significant part of the Fed’s engagement of the firms is through supervision rather than regulation," Quarles said in November. "I think that the regulatory part is probably the easier part."

The proposals issued in August, meanwhile, were telegraphed months in advance by Fed Gov. Jerome Powell in his then-capacity as chair of the Fed's supervisory committee, suggesting they represent a regulatory priority for him when he is likely to assume the chairmanship of the Fed in February.

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