November 20, 2014 / 9:20 PM / 5 years ago

U.S. Federal Reserve to review how it supervises major banks

WASHINGTON (Reuters) - The U.S. Federal Reserve said on Thursday it has launched a review of how it oversees major banks, calling on its inspector general to help with the probe after a series of critical reports.

A detail from the front of the United States Federal Reserve Board building is shown in Washington October 28, 2014. REUTERS/Gary Cameron

Separate studies to be undertaken by the Fed’s Washington-based Board of Governors and its Office of Inspector General are meant to ensure that “divergent views” about the state of large banks are adequately aired.

The reviews will determine whether frontline supervisors and other officials at the regional Federal Reserve banks, as well as at the board level, “receive the information needed to ensure consistent and sound supervisory decisions,” the Fed said in a press release.

That includes being made aware of “divergent views” about a bank’s operations, a reference to criticism that supervisors at the Fed’s regional banks have sometimes suppressed the views of staff members considered too critical of the banks they examine.

The issue will be the focus of a Senate Banking committee hearing on Friday that features New York Fed President William Dudley as the chief witness.

Several Fed regional banks are involved in supervising the country’s 15 largest financial institutions, including Citigroup and Bank of America, that generally have more than $50 billion in assets.

But the New York Fed in particular has come under fire for being lax with the banks it oversees and for not reacting forcefully enough in the run-up to the 2007-2009 financial crisis.

A recent inspector general’s report said supervision at the New York Fed was hampered by the loss of key personnel and an inadequate plan for succession into important positions. Secret recordings made by former New York Fed supervisor Carmen Segarra also portrayed the bank as cozy with major institutions like Goldman Sachs.

In testimony prepared for the Senate hearing but released on Thursday afternoon, Dudley said “it is undeniable that banking supervisors could have done better in their prudential oversight of the financial system” in advance of the financial crisis.

But changes made since then, including increased capital requirements and improved supervision, have made the system safer, he said.

Lawmakers in Congress have proposed legislation to tighten their oversight of the central bank, including a bill to make the New York Fed chief a presidential appointment requiring Senate confirmation.

Reporting by Howard Schneider; Editing by Paul Simao

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