On Tuesday, right as most Americans were running around doing last minute preparations for Thanksgiving, the Board of Governors of the Federal Reserve System published the second annual ‘Supervision and Regulation Report.’ I flipped through the first couple of pages which highlight rising loan growth, especially in America’s regional banks, and improved capital and liquidity in the U.S. banking system in comparison to the 2008 financial crisis.
Given the technology, data, and risk management challenges that I see almost on a daily basis at banks, I have to admit that I found the report to be a lot more glowing than I would have expected. It took me until the bottom of page 13 to “Large financial institutions are in sound financial condition, although nonfinancial weaknesses remain.” Nonfinancial refers to pretty important things like data quality, information technology infrastructure, internal controls, model risk management, and governance.
The report’s authors also stated that “Large financial institutions continue to remediate a significant number of supervisory findings (matters requiring attention (MRAs) or matters requiring immediate attention (MRIAs)). As a result, the number of outstanding supervisory findings has decreased over the past year for all groups of domestic and foreign firms.” While it is good that banks continue to remediate matters requiring attention, unfortunately, the report provides no details as to what the outstanding supervisory findings are, what banks have these supervisory problems, and how the challenges were resolved.
I find it troubling that 45% of U.S. banks with more than $100 billion in assets have supervisory ratings that are less than satisfactory. Satisfactory means getting a ‘C.’ Given that Americans bailed out numerous domestic and foreign banks in the last crisis, we deserve banks that get ‘As.’
The stability of these large banks is important to our country. After the financial crisis, the Federal Reserve developed a supervisory program to address systemic risks posed by large banks. According to the Federal Reserve, “Firms with less-than-satisfactory ratings generally exhibit weaknesses in one or more areas such as compliance, internal controls, model risk management, operational risk management, and/or data and information technology (IT) infrastructure. Some firms also continue to exhibit weaknesses in their Bank Secrecy Act (BSA) and anti-money-laundering (AML) programs.”