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Fed says it's overhauling standards for large-bank examiners
[NEW YORK] The Federal Reserve said it's setting tougher standards for examiners of the biggest US banks, following criticism by lawmakers that the agency has been captured by the Wall Street firms it supervises.
The planned changes include creating a formal process for examiners to express dissenting views on oversight, such as whether lenders are complying with banking rules and appropriately responding to regulators' requests. The overhaul follows a year-long review that found inconsistency across the Fed's 12 regional banks tied to supervision practices and reports produced by examiners.
Lawmakers questioned the quality of Fed oversight at Senate hearings last year following complaints by former New York Fed bank examiner Carmen Segarra, who said her ex-employer fired her for refusing to change negative findings about Goldman Sachs Group Inc. The New York Fed oversees several of the largest U.S. banks, including Goldman Sachs, Citigroup Inc, JPMorgan Chase & Co. and Morgan Stanley.
"'This is long overdue," said Mayra Rodriguez Valladares, a former New York Fed employee who conducts training for financial regulators as managing principal of consulting firm MRV Associates. "It's very, very difficult when you work at the Fed to be the person who really sticks out." Power Shift In addition to making it easier for examiners to speak out, a centralised committee called the Large Institution Supervision Coordinating Committee will oversee new minimum operating and documentation standards for all oversight activities, the Fed said in a statement Tuesday.
The group, known by the acronym LISCC, is a unit of economists, supervisors, lawyers and others looking for trends and risks shared across the largest US banks. It was organized in the aftermath of the 2008 financial crisis by Fed governor Daniel Tarullo, the central bank's point person on regulation and supervision, and former Chairman Ben S. Bernanke. The committee's creation reflected the shifting of more power over big-bank supervision to Washington from New York and other reserve banks.
Regulators have often been "too close to the institutions they police and given too much deference to bank executives," Senator Sherrod Brown, the top Democrat on the Senate Banking Committee, said in an e-mailed statement. The Fed's action Tuesday is an 'overdue but important step." Brown of Ohio has frequently advocated for tougher oversight of financial firms by regulators.
The Fed said its review found that 95 percent of the staff members interviewed felt empowered to raise differing opinions, but there was no "formal process for raising divergent views." To address that, the Fed said it will develop enhanced policies next year. The Fed also said it will develop a curriculum tailored to the supervision of large banks for its examiner training programmes.
The measures "will further strengthen our robust, multi- disciplinary approach to supervising the largest and most complex financial institutions," Michael Gibson, chair of the LISCC and director of Fed supervision and regulation, said in the statement.
The Fed announced its review last year on the eve of a Senate hearing exploring oversight of large banks. The hearing was prompted in part because of Segarra, who made secret recordings of her interactions with her New York Fed colleagues. The New York Fed denied her allegation that it fired her for refusing to go easy on Goldman Sachs.
A federal appeals court in September rejected Segarra's claims, upholding a lower court ruling that dismissed a lawsuit she filed accusing the New York Fed of interfering with her examination of Goldman Sachs.
In one tense exchange during last year's Senate hearing, Senator Elizabeth Warren, a Massachusetts Democrat, told New York Fed President William C. Dudley that if he couldn't fix the "cultural problem" at the reserve bank, "we need to get someone who will." Dudley was Goldman Sachs' chief US economist for almost a decade before joining the central bank in 2007.
Another Controversy Segarra's allegations aren't the only controversy involving the New York Fed and a bank it oversees.
On Nov 5, Goldman Sachs banker Rohit Bansal pleaded guilty to a misdemeanor tied to stolen documents that included information from the regulator about a midsize New York bank his group was advising. Jason Gross, a former New York Fed employee, pleaded guilty to passing Rohit the secret information. The two had worked together at the New York Fed.
Goldman Sachs said in a statement last month that it began an internal investigation once its management learned of the matter and alerted regulators. Last year it fired Bansal, who the Fed has permanently banned from working in the banking industry.
"We have zero tolerance for improper handling of confidential information," Goldman Sachs said in its Oct 26 statement. "We have reviewed our policies regarding hiring from governmental institutions and have implemented changes to make them appropriately robust."