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New York / AFP
US banking supvervisors should beef up their oversight of large banks beyond stress tests with deep-dive audits and greater use of outside examiners, a top regulator said.
Under a ‘full-scope’ exam, a team of regulators would converge on the largest US banks to pull ledgers, check whether loan payments are on time and “systematically review a cross-section of bank portfolios,” said Thomas Hoenig, vice chair of the Federal Deposit Insurance Corp.
Such exams, intended to uncover problems like the profusion of bad mortgages at the heart of the 2008 financial crisis, are routine at smaller banks, but not at the biggest ones, he said.
Hoenig, speaking at a conference at the Federal Reserve Bank of New York, said the Fed’s use of stress tests, which analyse banks’ ability to withstand a theoretical severe economic crisis, was helpful but not sufficient to protect the system.
“Supervisors of these firms have become overly reliant on bank models, model validation reviews, stress tests, and updates from bank management as a substitute for records review and hard questioning to draw conclusions regarding a firm’s condition,†he said.
“Full-scope examinations delve into the quality of portfolios and their implications for long-term resilience. A full-scope exam is a point-in-time analysis of a bank’s full balance-sheet quality and management competence,†he pointed out.
Hoenig, who has previously supported breaking up the largest US banks, also took a swipe at the Fed’s reliance on regulators who are stationed at largebanks.
The practice causes regulators to “develop a more insular perspective” that can make it hard to question a bank’s assumptions or identify potential disasters.
Hoenig said there is still a place for on-site examiners, but that they should be “subsumed” within a larger regulatory apparatus that includes a team of commissioned examiners who rotate from bank to bank.
Federal Reserve System, also known as the Federal Reserve or simply as the Fed, is the central banking system of the US. In its role as the central bank, the Fed serves as a banker’s bank and as the government’s bank. It also helps to assure the safety and efficiency of the payments system. As the government’s bank, or fiscal agent, the Fed processes a variety of financial transactions involving trillions of dollars.