NY Federal Reserve V.P. Discusses the Role of Bank Supervision

Executive Vice President of the Federal Reserve Bank of New York (“FRBNY”) Kevin Stiroh discussed the necessity of governmental supervision of the financial industry (oversight of firms’ governance, internal controls and financial condition) as opposed to mere regulation (rulemaking).

Mr. Stiroh, who is head of the FRBNY’s Supervision Group, discussed the theory and practice of bank supervision – considering the need for supervision, the FRBNY’s role in supervising banks, and some of the practical realities of conducting such supervision.

Mr. Stiroh stressed three developments which will be relevant to the FRBNY in executing its supervisory responsibilities.

  • Cybersecurity. Because the state of cybersecurity readiness varies across firms, Mr. Stiroh explained, supervisors must develop common principles for addressing cybersecurity risks and defending operations that are critical to the financial services sector.
  • FinTech. Mr. Stiroh questioned whether FinTech will “enhance or fundamentally disrupt” the financial service and payment industries. In that regard, he noted, investment in FinTech companies rose 10% between 2010 and 2015. Mr. Stiroh noted that firms and supervisors should be mindful of how technological change impacts bank risk and the supervisory framework.
  • Reputational Risk. Mr. Stiroh encouraged financial institutions to “consider the many factors that have contributed to recent, widespread misconduct and the perceived lack of trust in the financial sector.” He argued that firms should have strong incentives to manage their reputations, and that supervisors should support that goal.

Mr. Stiroh also cited two recent Federal Reserve Supervisory letters on capital planning (see Premium Content links on the right) as “specific examples” of how regulators approach firms that are more or less complex.

Mr. Stiroh delivered his remarks at the SIFMA Internal Auditors Society Education Luncheon at the Harvard Club in New York City.

Lofchie Comment: One of the reasons that the financial services industry is under pressure is because the government attacks its reputation constantly, and not always for good reasons. (To be fair, Mr. Stiroh noted both actual misconduct and a perception of a lack of trust.) With that in mind, consider the following observations: (i) most persons (including the government) tend to be less critical of themselves than of others, (ii) misconduct by government officials and a perceived lack of trust seems at least as common in government as in the financial services, and (iii) mistakes by those in government seem as frequent as mistakes by those in the financial sector. It is not true that the only so-called mistake made by government is insufficient regulation; many regulations are either unnecessary or spur conduct that undermines monetary growth. When the government becomes as critical of itself as it is of the financial industry, then both will improve together.

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