Guidance aims to clarify risk management for large institutions

Aiming to clarify its supervisory expectations related to risk management at large financial institutions, the Federal Reserve Thursday proposed guidance as part of a broader attempt to develop a new rating system for the bigger institutions.

Comments will be due March 18.

The guidance, the Fed said, would apply to large financial institutions, including: domestic bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets; foreign banks operating in the United States with $50 billion or more in combined U.S. assets; and nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Fed Board.

In a release, the central bank said the new rating system would align with its the post-crisis supervisory program. It noted that the rating system was proposed in August, which would reflect assessments of a firm’s capital, liquidity, and governance and controls.

“The supervisory expectations described in today’s proposed guidance, as well as those for boards of directors, would help inform the Federal Reserve’s overall supervisory evaluation of a firm’s governance and controls,” the Fed said.

The proposed guidance, according to the Fed, identifies core principles for “effective senior management, who are directly accountable to the firm’s board of directors for the day-to-day management of the firm.” The agency said the principles include ensuring that the firm manages its risk in a way that is “prudent and consistent with its business strategy and risk management capabilities.”

It also identifies core principles for a firm’s business line management and independent risk management, the Fed said. “Business line management is responsible for the day-to-day management of specific business lines, such as residential mortgage operations. Independent risk management is responsible for conducting ongoing objective and critical assessments of a firm’s risks using personnel independent of the firm’s business line managers.”

Federal Reserve Board requests comment on proposed guidance that would clarify Board’s supervisory expectations related to risk management for large financial institutions