WASHINGTON - Bank supervision under Federal Reserve Board Governor Edward W. Kelley Jr. will be all business.
Armed with a clipboard and crib notes, the new chairman of the Fed's banking supervision and regulation committee recently rattled off his priorities for the coming year, much as a chief executive officer would detail his operating plan to major stockholders.
The former manufacturer's primary concern: making sure the Fed isn't overwhelmed by the megamergers sweeping the industry. Mr. Kelley said the Fed's examiners must be better trained to keep tabs on the increasingly complex institutions.
Bank management, beware.
The Houston native, whose committee sets regulatory policies for the central bank and the 12 reserve banks, said examiners will sharpen their focus on the competence of a bank's top officials.
"Things move so fast that it is very difficult to be comfortable about asset quality that you looked at several months ago," Mr. Kelley said. "The challenge is to look at management."
Examiners must be able to spot weaknesses in an institution's internal controls as well as in top officials who do not understand the bank's capital markets activities, Mr. Kelley said.
Examiners also must learn to evaluate the accuracy of a bank's risk assessment models, which measure exposure to interest rate fluctuations and other economic factors.
Mr. Kelley's concerns reflect his obsession with safety and soundness. From his first days at the Fed in 1987, Mr. Kelley, who was appointed by President Ronald Reagan, has said the agency must put safety and soundness ahead of deregulation.
He's likely to find wide support for this approach among his fellow governors. Even President Clinton's two appointees - Vice Chairman Alan Blinder and Governor Janet Yellen - are expected to back this new focus.
"This is an issue that is being raised at the Bank for International Settlements," said Bert Ely, president of the industry consulting firm Ely & Co. "All the banking supervisors are starting to reach these conclusions."
But Mr. Ely said he doubts whether enough highly skilled people will devote their careers to the agency. "Do the best people want to be cops and work in that kind of legalistic environment?" Mr. Ely asked. "Is that what is most rewarding from a career standpoint?"
These people will flock to the private sector after they complete their Fed training, Mr. Ely predicted.
But Mr. Kelley said he is committed to doing "whatever it takes" to keep seasoned examiners on board, though he declined to say if that meant pay hikes.
Mr. Kelley's careful planning approach is not surprising.
He was a businessman before joining the Fed. A Harvard MBA, Mr. Kelley took over his family's multiple business interests at age 27, leading a vast expansion of Kelley Industries' industrial and consumer sheet metal subsidiaries.
After two decades he sold the company, and became chairman in 1981 of Investment Advisors Inc., a firm of professional money managers in Houston.
A lifelong Republican, Mr. Kelley, who goes by "Mike," was President Reagan's fifth nominee to the Fed. His primary tie to the administration was fellow Texan James A. Baker 3d, then Treasury secretary.
Mr. Kelley originally planned to leave Washington when his term expired in 1990. But, after his first wife died in 1988, he remarried and decided to stay. He accepted President Bush's nomination to a full 14-year term, which runs until January 2004.
He took over the bank supervision committee this spring after John P. LaWare resigned. The former Shawmut National Corp. chairman was the only member of the Fed board with banking experience.
Mr. Kelley appears comfortable in his new role. Yet he said he still hopes President Clinton will fill Mr. LaWare's seat with another banker.
During the rest of his tenure, Mr. Kelley said he expects to see banks expand into insurance and securities markets. The Fed, he said, must be ready.
Two competing proposals under consideration by Congress would let national banks sell these new products from either Fed-supervised holding company affiliates or bank subsidiaries regulated by the Office of the Comptroller of the Currency.
Mr. Kelley said he prefers the holding company approach, which ensures that the Fed retains a major role in the regulation of banks.
"I see no compelling reason why we should change what works so well," he said. "It is the best way to maintain the integrity of the safety net."
Several of the Fed's major regulatory initiatives are in limbo, waiting for Congress to either reform the law or abandon the issue.
For example, the Fed has a proposal outstanding to boost the 10% limit on bank-ineligible securities that section 20 affiliates are allowed to deal in.
But as long as Congress is actively debating Glass-Steagall repeal, the Fed won't act, he said.
If Congress does tear down the wall between commercial and investment banking, the Fed will reexamine its anti-tying rules, which prevent banks from requiring a customer to purchase one product in order to get a discount on another. The Fed last year issued several exemptions to the rules, permitting banks to provide discount brokerage services to its customers. "As product lines broaden, it will be important to ensure we allow synergisms," he said.
Foreign bank supervision also continues to pop up, he said. Congress gave the Fed responsibility for supervising the U.S. operations of foreign banks in 1991, shortly after the Bank of Credit and Commerce International scandal broke.
Mr. Kelley said the Fed is still evaluating each country's regulatory system to ensure that foreign banks with branches here are subject to "comprehensive supervision on a consolidated basis."
The Fed has approved several dozen countries so far; more are under review.