Federal Reserve to Drop Some Prior Demands on Banks to Fix Flaws
(Bloomberg) — The Federal Reserve has signaled that it plans to abandon some secret warnings it had previously sent to lenders to improve their operations, as Vice Chair Michelle Bowman said the central bank continues to loosen its grip on U.S. financial firms.
The Fed’s supervisory staff told banks across the country earlier this month that supervisors would begin reviewing outstanding alerts, which are specific orders to fix deficiencies, according to people familiar with the matter.
The warnings will be eliminated unless they comply with the Fed’s recent directive for supervisors to focus more on immediate risks to a bank’s financial health and less on processes and procedures, the sources said. Executives at each firm will have the opportunity to work on a plan to resolve the remaining alerts, said the people, who asked to remain anonymous because the change has not been publicly announced.
The Fed targets issues known as “matter requiring attention” and “matter requiring immediate intervention.” The second is an urgent demand for rapid action. Both can arise from concerns about numerous aspects of a bank’s operations, ranging from its financial health to cyber readiness or succession planning. The Fed will continue to issue these directives during its regular exams if auditors find something is wrong, but the threshold will be higher, according to people.
President Donald Trump’s financial regulators have vowed to loosen Washington’s matrix of rules that bankers argue have become too complex because they accumulated in the years after the Great Financial Crisis. Bankers say this burden increases costs and discourages lending without making the system safer. Bowman has committed to a comprehensive overhaul of how the agency oversees risks with greater transparency.
A Fed representative declined to comment.
The new review aims to help supervisors “improve the effectiveness of supervision by focusing on significant financial risks to a bank’s safety and soundness,” according to a memo the Fed sent to staff reviewed by Bloomberg.
The review will ensure that auditors’ supervisory findings “are based on deficiencies that, if not timely corrected, would create a greater than normal likelihood of harm to the financial condition of the audited firm,” rather than concerns about policies, procedures or controls, according to the Fed statement. Warnings must be made “in plain language and with sufficient clarity.”
The effort to reduce unresolved alerts will happen gradually through auditors’ reviews, the sources said. Sources said consumer shortcomings or financial risks were not included in the review.
Some said investigations have begun and will continue until the end of March. A final decision will be made by the end of July. Banks will then be asked to cooperate with their auditors to clarify what steps have or have not been taken to improve failures in areas such as risk management, compliance and finances. In some cases, the Fed may downgrade a compliance alert so that it becomes an audit observation that does not require a firm to resolve it.
The Fed’s review of a warning to a bank’s holding company could require consultation with the bank’s subsidiary’s federal or state regulator, the sources said.
Some Fed governors, including Michael Barr, have warned that loosening controls could undermine oversight of Wall Street’s lending giants.
The Fed’s review follows other coordinated moves by major bank watchdogs to refocus supervision on core financial risks.
In December, the Office of the Comptroller of the Currency lifted part of the fine it imposed on Citigroup Inc. a year ago; This is an important sign that the bank is nearing completion of its long-standing efforts to improve risk management and compliance.
The Federal Deposit Insurance Corp. also established a new audit appeals unit in January to serve as the “final level of review of significant audit decisions.”
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