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September 30, 2014

Major Management Challenges for the Board of Governors of the Federal Reserve System

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Management Challenge 1: Continuing to Implement a Financial Stability Regulatory and Supervisory Framework

As outlined in the Board of Governors of the Federal Reserve System's (Board) Strategic Framework 201215, continuing to build a robust infrastructure for regulating, supervising, and monitoring risks to financial stability remains a strategic priority for the agency. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) provided the Board with the authority to oversee nonbank financial companies designated by the Financial Stability Oversight Council (FSOC) as systemically important. In Supervision and Regulation Letter 12-17, the Board outlined its updated framework for consolidated supervision of large financial institutions as a result of lessons learned during the financial crisis. While Supervision and Regulation Letter 12-17 provides a high-level description of the framework and priorities for consolidated supervision for large institutions, including nonbank systemically important financial companies, we understand that the supporting guidance necessary to fully implement the framework is forthcoming. Finalizing the supporting guidance and effectively implementing it through examiner training programs will be a challenge for management in the coming years. The following sections describe specific challenges associated with implementing the financial stability regulatory and supervisory framework. 

Cultivating Effective Relationships With Other Regulators 

Effective consolidated supervision is predicated on the Board, as the consolidated supervisor for bank, financial, and savings and loan holding companies, cultivating strong cooperative relationships with the primary supervisors of holding company subsidiaries. Our evaluation work has revealed instances in which this cooperation could be improved. 

Agency Actions 

Since 2013, senior Board officials have made significant efforts to coordinate with their counterparts at the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation to align strategic objectives and minimize duplication of efforts with respect to the supervisory planning process. We also understand that similar efforts routinely occur at the examination-team level. 

Finalizing and Ensuring Compliance With New Regulations

While the Board has finalized many of the regulations mandated by the Dodd-Frank Act and other significant rulemakings supporting the financial stability framework, such as the Basel III capital rules, some rulemakings remain in the comment phase or have yet to be finalized. For example, the comment period for the Board's proposal to amend its emergency lending regulations to conform to the requirements of the Dodd-Frank Act has closed, but the rules have yet to be finalized.1

Further, the Board will face challenges as its focus shifts from rulemaking to interpreting the rules and ensuring compliance with recently issued regulations. As an example of challenges related to interpreting rules, we understand that following the issuance of the Basel III capital rules, responding to industry questions for interpretive guidance became a priority for the Board. With regard to ensuring compliance, the Volcker Rule took effect in April 2014, and the Board has indicated its intent to hold banks accountable for complying with the requirements of the final rule starting in July 2015. Under delegated authority from the Board, Federal Reserve Bank examiners will be expected to monitor and enforce compliance with prohibitions and restrictions related to proprietary trading and certain relationships with hedge funds or private equity funds. Supervisory guidance on this topic needs to be issued, and examiners will need to be trained on how to assess compliance with the rule's provisions. Similar training and implementation challenges also exist for other significant rulemakings. 

Agency Actions 

The Board has made considerable progress in fulfilling the regulatory mandates outlined in the Dodd-Frank Act and in finalizing other significant rulemakings supporting the financial stability framework. Our office will assess the Board's progress toward implementing its supervisory approach for these new, complex regulations. 

Developing Technology Infrastructure and Addressing Human Capital Challenges Associated With Monitoring Risks to Financial Stability

The Board faces operational and human capital challenges associated with its efforts to supervise and monitor risks to financial stability. Within the large bank portfolio, our evaluation work has revealed that supervisory teams have encountered challenges searching through the significant amounts of supervisory information that result from the Board's continuous monitoring activities. Within the regional and community bank portfolios, we understand that the Board is in the process of transitioning to a technology platform that will standardize the processes for conducting examinations across the Federal Reserve Banks. This project requires a multiyear implementation effort. The Board also faces challenges in attracting and retaining employees with the specialized subject-matter expertise necessary to execute its supervisory activities, as further discussed in the human capital management challenge. 

Agency Actions 

The Board recently improved supervisory teams' search capabilities for informal supervisory information related to specific institutions. Information previously stored in specific Lotus Notes databases has been transitioned to internal websites to facilitate these enhanced search capabilities. We also understand that the INSite platform will be implemented for the regional and community bank portfolios using a phased approach over multiple years.