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From Banking and Finance Law Daily, January 5, 2018

Fed proposes guidance on risk management for large financial institutions

By Colleen M. Svelnis, J.D.

The Federal Reserve Board has requested comment on its proposed guidance describing core principles of effective senior management, the management of business lines, and independent risk management and controls for large financial institutions. The proposed supervisory guidance is intended to clarify the Fed’s supervisory expectations related to risk management for large financial institutions. The core 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. Comments on the proposal are due by March 15, 2018.

According to the Fed, the guidance is intended to consolidate and clarify the Fed’s existing supervisory expectations regarding risk management, and is part of a broader initiative to develop a new rating system for large financial institutions that will align with the post-crisis supervisory program. The Fed’s corporate governance proposal looks to enhance the effectiveness of boards of directors by refocusing the Fed's supervisory expectations for the largest firms’ boards on their core responsibilities, which will promote the safety and soundness of the firms. The Fed’s ratings proposal, also issued in August 2017, is intended to better align the Fed's rating system for large financial institutions with the post-crisis supervisory program for these firms (see Banking and Finance Daily, Aug. 3, 2017).

Questions for comments. The Fed invited comment on the following questions on the proposal.

  1. What considerations beyond those outlined in this proposal should be considered in the Federal Reserve’s assessment of whether a large financial institution has sound governance and controls such that the firm has sufficient financial and operational strength and resilience to maintain safe and sound operations?
  2. How could the roles and responsibilities between the board of directors set forth in the proposed board effectiveness guidance, and between the senior management, business line management, and independent risk management be clarified?
  3. What, if any, aspects of the structure and coverage of independent risk management and controls should be addressed more specifically by the guidance?
  4. The proposal tailors expectations for foreign business organizations, recognizing that the U.S. operations are part of a larger organization. How could this tailoring be improved?
  5. In what ways, if any, does the guidance diverge from industry practice? How could the guidance better reflect industry practice while facilitating effective risk management and controls? Are there any existing standards for internal control frameworks to which the guidance should follow more closely?
  6. Other supervisory communications have used the term "risk appetite" instead of risk tolerance. Are the terms "risk appetite" and "risk tolerance" used interchangeably within the industry, and what confusion, if any, is created by the terminology used in this guidance?
  7. The proposal would adopt different terminology than is used in the proposed large financial institution rating system, and the Board expects to align the terminology so the element in the governance and controls component would change from "management of core business lines" to "management of business lines." Does this proposal clearly explain this expected change? Do commenters anticipate any impact from this change?

The guidance would only apply to large financial institutions, such as domestic bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets, as well as the intermediate holding companies of foreign banking organizations operating in the United States, and nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Board.

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