Risk Management

Fed Tries to Distance Itself From Wall Street Culture

"We understand the risks of doing our job poorly and of becoming too close to the firms we supervise," said New York Fed president William Dudley.
Vincent RyanNovember 21, 2014
Fed Tries to Distance Itself From Wall Street Culture

Following criticism that the Federal Reserve’s relationships with the large banks it supervises are too cozy, the Fed announced on Thursday that it would be conducting reviews “to ensure that the examinations of large banking organizations are consistent, sound and supported by all relevant information.”

In one examination, the Federal Reserve’s inspector general will be studying “whether the Fed is able to obtain all necessary information from banks to property oversee them, as well as whether there is room for dissent among Fed officials regarding a bank’s status.” In particular, the inspector general plans to look into “whether channels exist for decision-makers to be aware of divergent views among [a bank] examination team regarding material issues.”

The announcement comes amid revelations of inappropriate ties between Goldman Sachs and the New York Federal Reserve that included the exchange of confidential information and New York Fed supervisors allegedly “going soft” on their regulation of Goldman.

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The second examination, by the Federal Reserve Board itself, will focus explicitly on the supervision of the largest financial institutions.

On Friday, William Dudley, president of the New York Fed, spoke at a Senate Banking Committee hearing on “regulatory capture” — a form of corruption in which a regulatory agency advances the commercial interests of the industry it is charged with regulating.

In his prepared remarks, Dudley tried to distance the New York Fed from the banks and highlight the substantive changes the Fed has made in large-bank regulation.

“Over the last five years, we have reassigned some of our most senior personnel to front-line positions at the largest supervised institutions,” Dudley said in prepared remarks. “We also recruited experienced executives with financial backgrounds from outside the New York Fed. The purpose of these personnel changes was to position leaders with the confidence and depth of professional experience necessary to challenge the leadership of supervised financial institutions.”

Dudley also underscored the 36 public enforcement actions taken by the Federal Reserve against banks supervised by the New York Fed, which resulted in $1.2 billion in fines.

Dudley admitted the lack of public trust in large financial institutions, but in responding to the committee’s questions he said, “I don’t think the Fed has the same serious cultural problems as the banks.”

Dudley listed four reforms he has proposed to “curb incentives for illegal and unduly risky conduct at banks.”

They include requiring banks to create “de facto performance bonds wherein deferred compensation for senior managers and material risk takers could be used to satisfy fines against the firm for banker misbehavior”; Congressional legislation creating a database that tracks employees dismissed for illegal or unethical behavior; and an amendment to the Federal Deposit Insurance Act “to impose a mandatory ban from the financial system — that is, both the regulated and shadow banking sectors — for any person convicted of a crime of dishonesty while employed at a financial institution.”

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