Fed Launches Review of Big Bank Examination Process

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WASHINGTON - The Federal Reserve announced two separate reviews Thursday to ensure that supervision of the largest banks is being handled correctly.

The central bank said Thursday that the Fed's inspector general will examine whether there are "adequate methods" for the Reserve Banks and the Board of Governors to obtain the relevant information needed to supervise the banks and "whether channels exist for decision-makers to be aware of divergent views among an examination team regarding material issues."

The board will also undergo its own review of the supervision process to determine whether board members are given enough information to make informed policy decisions regarding the big banks and whether they're made aware of "required reconciliation of divergent views related to supervision of those firms."

The announcement comes ahead of a hearing Friday on the issue of regulatory "capture" at the Federal Reserve Bank of New York.

Sen. Sherrod Brown, chair of the Banking Committee's subcommittee on financial institutions and consumer credit, organized the hearing following a report by ProPublica and the radio show "This American Life" earlier this fall that suggested Fed examiners were too deferential to Goldman Sachs when making policy decisions. Carmen Segarra, an examiner, secretly taped deliberations among colleagues, and says she was later fired for her dissenting views regarding oversight of the investment bank.

William Dudley, the New York Fed's president, is scheduled to testify at the hearing, along with several academics.

"The Federal Reserve will continue to improve its supervision and regulation of financial institutions. We understand the risks of doing our job poorly and of becoming too close to the firms we supervise. We work hard to avoid these risks and to be as fair, conscientious, and effective as possible," said Dudley in prepared testimony released ahead of the hearing. "Of course, we are not perfect. We cannot catch or correct every error by a financial institution, and we sometimes make mistakes. But in my view, a good measure of the effectiveness of supervision is the improved strength and stability of banks since the financial crisis."

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