Banking Supervision Meets Industry Challenges
By Selma Meyerowitz
Fewer █ but larger and more complex █ banks, a broadening range of non-traditional
activities, a move toward PC banking, and other new ways to deliver services
to bank customers █ these trends characterize an industry that is evolving
and becoming more complex each day. Banking Supervision has responded
to the industry╠s increased complexity and sophistication by developing
new techniques and new talent in order to improve our process and our
people. The supervisory process is more dynamic, more integrated, and
more risk-focused. Supervision staff have developed new skills and competencies,
emphasizing teamwork and adaptability. And training and technology █ always
important █ are now being stressed even more.
The changes in the overall supervisory process are pervasive. As a start,
significantly more effort is now placed on ensuring that the process is
risk-focused. This involves tailoring the approach to the unique characteristics
of the individual organization. It also entails placing additional emphasis
on evaluating the organization╠s risk management processes, and on assessing
its condition on a real-time basis.
The entire process begins with developing an understanding of the organization,
including its strategy and risk profile. A supervision plan and examination
strategy which focus on the most important areas within the organization
are then defined and updated periodically. Examinations must be carefully
coordinated to reduce unnecessary burden and to recognize that risks or
issues in a particular area may have implications for other areas of the
organization. Furthermore, the focus is on assessing the processes used
to identify, monitor, and control risk, as opposed to detailed transaction
testing. Although effective risk management always has been central to
the safety and soundness of banking, it is even more important now, given
new technologies and products, and the size and speed of financial transactions.
To facilitate the risk-focused process, each banking organization is
assigned to a staff member who oversees the development, implementation,
and coordination of that institution╠s supervisory program. These staff
members establish lines of communication with their assigned institutions,
and coordinate closely with other regulators both in the U.S. and in other
countries. They also coordinate with their counterparts throughout the
Federal Reserve System to identify and share emerging issues and sound
All facets of the supervisory process, including applications processing,
compliance, international and domestic examinations, and ongoing monitoring,
are changing. For example, the applications process was streamlined for
bank holding companies in 1997 when the Board of Governors made substantial
changes to the implementing regulation. Furthermore, additional emphasis
is placed on incorporating macro information into the supervisory strategy.
Staff members follow international developments, as well as developments
in the dynamic areas of trading, securities, and risk management. They
also monitor applications of digital technology in banking to assess developments
in securitization, risk modeling, and credit quality. These analysts keep
the Bank properly positioned for evaluating evolving financial markets
and the banking industry╠s changing use of technology and delivery channels.
The changes benefit the supervised organizations, as well as the Federal
Reserve. The supervisory burden is reduced for well-run organizations
because on-site examinations are shorter and more focused. The process
adds greater value overall since it is more forward-looking. From the
Federal Reserve Bank's standpoint, it makes better use of resources and
facilitates earlier identification and resolution of issues.
Clearly, superior performance depends on the talent of an organization,
the quality of its people. Banking Supervision staff have met the challenges
of the changing environment by developing new technical skills in a variety
of areas, such as risk management, derivatives, and information technology.
In addition, the competency model for staff performance is focused on
such skills as the ability to adapt, to coordinate, and to understand
the big picture and how the individual pieces fit together. Application
of these competencies ensures that staff are able to provide effective
supervision as the industry continues to change.
Both training and technology are being aligned to support this changing
process. Training programs are being revamped, and training in risk assessment,
management information systems, and internal controls has been expanded.
More emphasis is placed on the use of technology with initiatives that
include automating parts of the examination process, improving management
information systems, and streamlining information access and storage.
In summary, we are striving to enhance our flexibility and adaptability
in this rapidly changing environment. The right supervisory techniques,
talent, training, and technology are critical to effective supervision.
Focusing on these areas ensures that the Bank continues to meet the challenges
of today╠s dynamic environment and is prepared for tomorrow╠s as well.