Fed Launches Review of Practices for Supervising Big Banks
Fed Review Comes Amid Accusations Central Bank Stifles Dissent
By Ryan Tracy
Updated Nov. 20, 2014 7:35 p.m. ET
http://online.wsj.com/articles/fed-launches-r...1416517408
WASHINGTON—The Federal Reserve launched a sweeping review of how it supervises big banks amid growing criticism that its process for policing Wall Street isn’t effective and stifles internal dissent.
The Fed said the review is focused on whether senior staff are given enough information when making decisions affecting the largest financial firms, including “whether channels exist for decision makers to be aware of divergent views.” A team of Fed staff in Washington will look into the matter, as will, separately, the Fed’s inspector general.
Criticism of the Fed’s oversight, which mounted in the wake of the 2008 financial crisis, has flared up in recent weeks. In September, a former examiner at the Federal Reserve Bank of New York said her desire to get tough on Goldman Sachs Group Inc. was suppressed by her supervisors. In October, the Fed’s inspector general said the regulator missed an opportunity to catch the risky trading that led to J.P. Morgan Chase & Co.’s “London whale” trading debacle in 2012, in which botched trades eventually cost the bank $6 billion.
The Fed has denied accusations of lax oversight and points to successes such as strengthening how banks fund and police themselves, new requirements for banks that want to pay dividends, and billions of dollars in settlements for misbehavior.
But the reports have helped prompt Congress to probe the Fed’s regulatory prowess. On Friday, New York Fed President William Dudley is to testify before a subcommittee of the Senate Banking Committee at a hearing examining “regulatory capture,” a term for regulators who are considered so close to firms they oversee that it clouds their judgment. Mr. Dudley and other Fed officials have denied the Fed is captured and said they are committed to improving their supervision.
“We are not perfect. We cannot catch or correct every error by a financial institution, and we sometimes make mistakes,” Mr. Dudley said in testimony prepared for Friday’s hearing and released by the New York Fed on Thursday. “But in my view, a good measure of the effectiveness of supervision is the improved strength and stability of banks since the financial crisis.”
Fed officials point out that big financial firms now fund themselves with far less borrowed money than before the crisis, a change they say makes the firms and the broader financial system more stable. And the central bank has begun to penalize banks that don’t have strong internal controls, failing Citigroup Inc. in its annual stress test earlier this year and preventing the bank from increasing the amount of capital it returns to its shareholders.
The Fed has also joined the Justice Department and other regulators in imposing multibillion-dollar fines and settlements with Wall Street banks for misdeeds ranging from sanctions violations and tax evasion to selling shoddy mortgage-backed securities.
Washington’s pursuit of Wall Street helped it collect a record sum of at least $33 billion in penalties and forfeitures in the 2014 year, the Justice Department said Wednesday. The amount surpasses the department’s entire annual budget, which stands at about $27 billion.
After moving to backstop Wall Street firms during the crisis in 2008 and 2009, the Fed undertook broad changes to its oversight regime that were designed to help it better detect budding risks. The regulator has raised requirements for how much loss-absorbing capital banks must maintain and created “stress tests” to examine banks’ ability to manage risks and weather a recession.
Decisions about the tests—along with other major decisions about banks’ compliance ratings and the priorities for examining the biggest firms—are now made at a committee led by senior Fed officials in Washington, rather than by officials at regional Fed branches. Mr. Dudley, in his testimony, said the New York Fed has three of the 16 seats on the committee.
But those efforts haven’t shaken some critics’ notion that the regulator is too close to Wall Street. The former New York Fed examiner whose complaints went public, Carmen Segarra, recorded internal Fed meetings that painted her former bosses as unwilling to stand up to Goldman Sachs. The records were earlier reported by the news organization ProPublica and the radio program “This American Life.”
Earlier this week, Sens. Elizabeth Warren (D., Mass.) and Joe Manchin (D., W.Va.) published an opinion essay in The Wall Street Journal saying the White House needs to fill two open slots on the Fed’s Washington-based governing board with strong Wall Street overseers, voicing concern the Fed “seems more worried about protecting Wall Street than protecting Main Street.”
On Thursday, Sen. Sherrod Brown (D., Ohio), who chairs the subcommittee holding Friday’s hearing, said the Fed’s move was a long time in coming.
“More than six years ago, when regulators got too cozy with the banks they were regulating, we saw the cost in lost jobs, retirement savings and homes. It’s past time that the Federal Reserve shows—with actions, not words—that it will protect consumers rather than Wall Street,” Mr. Brown said.
The Fed’s oversight is carried out by hundreds of personnel inside big banks’ offices, groups known as examination teams. In a letter to the Fed inspector general Nov. 17, two top Fed officials said the new review should focus on whether those teams’ voices are heard.
“Decision makers must have access to complete information and to the informed views of members of the examination team in order to reach appropriate decisions and supervisory conclusions regarding the examination of large banking organizations,” wrote General Counsel Scott Alvarez and Mike Gibson, head of the Fed’s Division of Banking Supervision and Regulation.
The New York Fed was also mired in a dust-up this week in which one of its former employees, Rohit Bansal, was fired from Goldman Sachs after allegedly sharing confidential information stemming from the Fed’s supervision of another bank.
Goldman, in a memo to employees, said the bank “determined that the confidential supervisory information was brought into the firm by the junior employee, who joined 10 weeks prior in late July from the Federal Reserve Bank of New York.”
The New York Fed said in a statement: “As soon as we learned that Goldman Sachs suspected one of its employees may have inappropriately obtained confidential supervisory information, we alerted law enforcement authorities.”
The New York Fed said it has been “working with law enforcement authorities since then. Because any public statement about the investigation could be prejudicial to a potential future criminal case, we are unable to comment on the specific facts that are under investigation.”
Goldman said it was assisting in the investigations. An attorney for Mr. Bansal declined to comment.
The New York Department of Financial Services, the Federal Bureau of Investigation and the Manhattan U.S. attorney’s office have begun preliminary investigations into the incident, according to people familiar with the probes.
“We have been actively and carefully reviewing this very serious matter,” said Matt Anderson, a spokesman for the New York financial-services regulator.
While lawmakers have pushed the Fed to get tougher, banks have complained about a series of Fed actions restricting their risk taking. They say stricter capital rules and other regulatory limits are pushing banks out of profitable business lines, such as financing corporate takeovers.
In addition to boosting capital cushions at the biggest banks, the Fed’s efforts have made it more expensive to engage in risky practices and reduced banks’ reliance on more-volatile forms of financing, such as short-term loans. Fed officials say their postcrisis efforts will better protect the financial system against the kind of systemic risk that the potential collapse of a large firm posed in the last meltdown.
—Victoria McGrane, Justin Baer and Christopher M. Matthews contributed to this article.
Write to Ryan Tracy at ryan.tracy@wsj.com
http://online.wsj.com/articles/fed-launches-r...1416517408
Fed Review Comes Amid Accusations Central Bank Stifles Dissent
By Ryan Tracy
Updated Nov. 20, 2014 7:35 p.m. ET
http://online.wsj.com/articles/fed-launches-r...1416517408
WASHINGTON—The Federal Reserve launched a sweeping review of how it supervises big banks amid growing criticism that its process for policing Wall Street isn’t effective and stifles internal dissent.
The Fed said the review is focused on whether senior staff are given enough information when making decisions affecting the largest financial firms, including “whether channels exist for decision makers to be aware of divergent views.” A team of Fed staff in Washington will look into the matter, as will, separately, the Fed’s inspector general.
Criticism of the Fed’s oversight, which mounted in the wake of the 2008 financial crisis, has flared up in recent weeks. In September, a former examiner at the Federal Reserve Bank of New York said her desire to get tough on Goldman Sachs Group Inc. was suppressed by her supervisors. In October, the Fed’s inspector general said the regulator missed an opportunity to catch the risky trading that led to J.P. Morgan Chase & Co.’s “London whale” trading debacle in 2012, in which botched trades eventually cost the bank $6 billion.
The Fed has denied accusations of lax oversight and points to successes such as strengthening how banks fund and police themselves, new requirements for banks that want to pay dividends, and billions of dollars in settlements for misbehavior.
But the reports have helped prompt Congress to probe the Fed’s regulatory prowess. On Friday, New York Fed President William Dudley is to testify before a subcommittee of the Senate Banking Committee at a hearing examining “regulatory capture,” a term for regulators who are considered so close to firms they oversee that it clouds their judgment. Mr. Dudley and other Fed officials have denied the Fed is captured and said they are committed to improving their supervision.
“We are not perfect. We cannot catch or correct every error by a financial institution, and we sometimes make mistakes,” Mr. Dudley said in testimony prepared for Friday’s hearing and released by the New York Fed on Thursday. “But in my view, a good measure of the effectiveness of supervision is the improved strength and stability of banks since the financial crisis.”
Fed officials point out that big financial firms now fund themselves with far less borrowed money than before the crisis, a change they say makes the firms and the broader financial system more stable. And the central bank has begun to penalize banks that don’t have strong internal controls, failing Citigroup Inc. in its annual stress test earlier this year and preventing the bank from increasing the amount of capital it returns to its shareholders.
The Fed has also joined the Justice Department and other regulators in imposing multibillion-dollar fines and settlements with Wall Street banks for misdeeds ranging from sanctions violations and tax evasion to selling shoddy mortgage-backed securities.
Washington’s pursuit of Wall Street helped it collect a record sum of at least $33 billion in penalties and forfeitures in the 2014 year, the Justice Department said Wednesday. The amount surpasses the department’s entire annual budget, which stands at about $27 billion.
After moving to backstop Wall Street firms during the crisis in 2008 and 2009, the Fed undertook broad changes to its oversight regime that were designed to help it better detect budding risks. The regulator has raised requirements for how much loss-absorbing capital banks must maintain and created “stress tests” to examine banks’ ability to manage risks and weather a recession.
Decisions about the tests—along with other major decisions about banks’ compliance ratings and the priorities for examining the biggest firms—are now made at a committee led by senior Fed officials in Washington, rather than by officials at regional Fed branches. Mr. Dudley, in his testimony, said the New York Fed has three of the 16 seats on the committee.
But those efforts haven’t shaken some critics’ notion that the regulator is too close to Wall Street. The former New York Fed examiner whose complaints went public, Carmen Segarra, recorded internal Fed meetings that painted her former bosses as unwilling to stand up to Goldman Sachs. The records were earlier reported by the news organization ProPublica and the radio program “This American Life.”
Earlier this week, Sens. Elizabeth Warren (D., Mass.) and Joe Manchin (D., W.Va.) published an opinion essay in The Wall Street Journal saying the White House needs to fill two open slots on the Fed’s Washington-based governing board with strong Wall Street overseers, voicing concern the Fed “seems more worried about protecting Wall Street than protecting Main Street.”
On Thursday, Sen. Sherrod Brown (D., Ohio), who chairs the subcommittee holding Friday’s hearing, said the Fed’s move was a long time in coming.
“More than six years ago, when regulators got too cozy with the banks they were regulating, we saw the cost in lost jobs, retirement savings and homes. It’s past time that the Federal Reserve shows—with actions, not words—that it will protect consumers rather than Wall Street,” Mr. Brown said.
The Fed’s oversight is carried out by hundreds of personnel inside big banks’ offices, groups known as examination teams. In a letter to the Fed inspector general Nov. 17, two top Fed officials said the new review should focus on whether those teams’ voices are heard.
“Decision makers must have access to complete information and to the informed views of members of the examination team in order to reach appropriate decisions and supervisory conclusions regarding the examination of large banking organizations,” wrote General Counsel Scott Alvarez and Mike Gibson, head of the Fed’s Division of Banking Supervision and Regulation.
The New York Fed was also mired in a dust-up this week in which one of its former employees, Rohit Bansal, was fired from Goldman Sachs after allegedly sharing confidential information stemming from the Fed’s supervision of another bank.
Goldman, in a memo to employees, said the bank “determined that the confidential supervisory information was brought into the firm by the junior employee, who joined 10 weeks prior in late July from the Federal Reserve Bank of New York.”
The New York Fed said in a statement: “As soon as we learned that Goldman Sachs suspected one of its employees may have inappropriately obtained confidential supervisory information, we alerted law enforcement authorities.”
The New York Fed said it has been “working with law enforcement authorities since then. Because any public statement about the investigation could be prejudicial to a potential future criminal case, we are unable to comment on the specific facts that are under investigation.”
Goldman said it was assisting in the investigations. An attorney for Mr. Bansal declined to comment.
The New York Department of Financial Services, the Federal Bureau of Investigation and the Manhattan U.S. attorney’s office have begun preliminary investigations into the incident, according to people familiar with the probes.
“We have been actively and carefully reviewing this very serious matter,” said Matt Anderson, a spokesman for the New York financial-services regulator.
While lawmakers have pushed the Fed to get tougher, banks have complained about a series of Fed actions restricting their risk taking. They say stricter capital rules and other regulatory limits are pushing banks out of profitable business lines, such as financing corporate takeovers.
In addition to boosting capital cushions at the biggest banks, the Fed’s efforts have made it more expensive to engage in risky practices and reduced banks’ reliance on more-volatile forms of financing, such as short-term loans. Fed officials say their postcrisis efforts will better protect the financial system against the kind of systemic risk that the potential collapse of a large firm posed in the last meltdown.
—Victoria McGrane, Justin Baer and Christopher M. Matthews contributed to this article.
Write to Ryan Tracy at ryan.tracy@wsj.com
http://online.wsj.com/articles/fed-launches-r...1416517408
