By Nicole D. Prysby, J.D.
The Fed Vice Chair for Supervision recommended putting significant supervisory guidance out for public comment and adopting a rule that enforcement actions cannot be based on non-compliance with guidance.
Federal Reserve Board Vice Chair for Supervision Randal Quarles recommended incremental changes to increase transparency, accountability, and fairness in the banking supervision process in a Yale Law School Dean’s Lecture titled "Spontaneity and Order: Transparency, Accountability, and Fairness in Bank Supervision." His proposals include aligning intensity of supervision with categories established in recent regulatory tailoring rules, making stress tests more transparent, creating a word-searchable database with the historical interpretations of all significant rules, putting significant supervisory guidance out for public comment, and adopting a rule specifying that supervisory guidance is not binding and non-compliance may not form the basis for an enforcement action.
Quarles pointed out that notwithstanding the extensive reform of bank regulation after the financial crisis, the bulk of ongoing engagement with the banking industry is through the process of examination and supervision. Although supervision helps foster the safe, sound, and efficient operation of the financial industry, the confidential and tailored nature of the process is at odds with the formal framework used in the regulatory process. While banking regulations set core requirements for the system, the potential consequences of disruption in the financial system are so far-reaching that it is not reasonable to rely entirely on after-the-fact enforcement to ensure regulatory compliance. Supervision promotes good risk management and helps banks preemptively avert excessive risk taking that would be costly and inefficient to correct after the fact. However, clearly communicating expectations is essential to effective supervision, and greater transparency about expectations can make supervision more effective.
Quarles named several specific changes that would provide more transparency and clarity in the supervision process. First, the Fed should pursue a clear standard to align intensity of supervision with categories established in recent regulatory tailoring rules so that firms that pose greater risks meet higher standards and receive more scrutiny. Second, stress tests should be made more transparent without making them game-able and without diluting their potency as a supervisory tool. As an example, banks should be allowed to receive and study their supervisory stress testing results prior to submitting their capital plans. Third, the Fed should create a word-searchable database on its website with the historical interpretations of all significant rules, to provide a comprehensive resource for regulatory interpretations. Fourth, significant supervisory guidance should be put out for public comment. Fifth, the Fed should adopt a rule on how to use guidance in the supervisory process. In particular, that guidance is not binding and non-compliance with guidance may not form the basis for an enforcement action (such as a cease-and-desist order) or supervisory criticism (such as a Matter Requiring Attention).
MainStory: TopStory BankingOperations FederalReserveSystem FinancialStability PrudentialRegulation
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