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The US Fed's Changing Approach to Supervision

The US Fed's Changing Approach to Supervision

by Starling Insights

Starling Insights Editorial Board

May 24, 2024


Last week, Michael S. Barr, Vice Chair for Supervision on the US Federal Reserve Board, explained how the Fed is working to reform its supervision in the wake of the 2023 "banking turmoil" in written testimony submitted to the House Committee on Financial Services and the Senate Committee on Banking, Housing, and Urban Affairs.

"It has been a little over a year since the sudden failure of SVB and ensuing stress in the banking system—events which prompted questions about how banks manage risks and how we at the Federal Reserve and other agencies supervise that risk-taking," Barr wrote. "As noted in my testimonies last year, these events highlighted the need to improve the speed, force, and agility of supervision to align better with the risks, size, and complexity of supervised banks, as appropriate."

As shown by the 2023 bank failures, developments in the financial sector mean that risks can materialize, and become existential, more quickly than ever before. "Therefore, supervisors must take timely action as risks build up; deploy supervisory tools and escalation effectively; account for changes in market, economic, and financial conditions in their examination priorities and supervisory conclusions; and identify new and different patterns of risks," Barr explained. The Fed has sought to achieve this through several key areas of work.

"First, we are working to ensure supervision intensifies at the right pace as a bank grows in size and complexity," he wrote. "This involves more frequently assessing the condition, strategy, and risk management of large and complex banking organizations and engaging more frequently with these firms through the supervisory process." In this direction, supervisors are working to ensure that regional banks enhance their risk management capabilities commensurate with the growth of their risk profiles.

"Second, we are modifying supervisory processes so that once issues are identified, they are addressed more quickly by both banks and supervisors," he wrote. Over the past year, examiners have conducted additional supervisory activities for firms facing material vulnerabilities, requiring that any identified weaknesses in risk management are addressed promptly.

"Third, we are finding ways to better incorporate forward-looking analysis into supervision," Barr explained. "A forward-looking view supports the goal of identifying and addressing material risks before they become serious issues. Forward-looking risk analysis also may help to challenge supervisory assessments and foster meaningful action where risks are underappreciated."

In an In Focus interview from the 2023 Compendium, Randal Quarles, past-Vice Chair for Supervision at the US Federal Reserve Board, discussed the 2023 bank failures and called for supervision that focuses more on the risks associated with culture to prevent future ones.

"In my view, the Fed’s supervisory culture is not adequately focused, and lacks the right prioritization of attention," he said. "We need a supervisory culture that is less focused on administration and more focused on key risks that can be measured and ameliorated — which again puts a premium on seeking to find ways to measure and monitor key cultural risks." ▸ Read More

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