Governor Raskin said that the frantic days of rushed mergers; emergency applications of nonbanks to become bank holding companies; and large scale, targeted Federal Reserve programs to stabilize markets and restore the flow of credit are behind us. However, we are still dealing with the aftershocks of the subprime mortgage meltdown: dislocation, joblessness, and loss of confidence. She acknowledged that the vast majority of America’s community banks did not contribute to the subprime crisis but that we will all be dealing with the long-term consequences of the crisis for years to come.
One of these consequences is the expansive federal legislation that is known as the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). Governor Raskin said that it gives us a roadmap for updating the regulatory framework of our financial systems post-crisis but the question we must ask is: What constitutes effective supervision in the post-crisis world?
She offered her views on a financial system that in her opinion should be one with a diverse range of institutions of varying size and complexity. She went on to say that this system is preferable to a system that is highly concentrated and that the need for diversification is one of the great lessons of the crisis. Governor Raskin stated :
“We found that, irrespective of size, those banks most likely to weather the crisis were those with diverse loan portfolios, management information systems capable of monitoring concentrations, reasonably diversified funding sources and liquidity management processes, and forward-looking analyses that considered how loan portfolios might perform and affect bank conditions under periods of stress.”Governor Raskin said that policymakers need to find a balance between the responsibilities of examiners and the responsibilities of banks to ensure compliance with laws and regulations and to maintain a safe and sound banking system.
Bank responsibilities include:
- An effective corporate governance structure led by a board of directors that are willing and able to critically question senior management about important matters affecting risk and that set the “tone at the top” regarding activities and behaviors that are encouraged or frowned upon;
- Well-informed managers and staff who know their business and know their customer base because risk is best understood by those who are engaged in the day-to-day business of the bank;
- A strong internal audit function that reviews the bank’s operations, risk management, and internal controls because problem identification is first and foremost the responsibility of the bank.
- Need to understand and work within the scope of their role and not substitute their judgment for that of bank management by being overly engaged in the routine business of a healthy bank;
- Should not view banks as their customers or clients because although there are times when the interest of banks and regulators are aligned there are many instances where their objectives diverge. A regulator’s relationship with a supervised bank must not get in the way of his or her willingness and ability to make tough calls;
- Should strive for balance and consistency throughout the business cycle and not be too hands-off when times are good and not to overreact when times are bad.
Click here to read the full text of her speech.