Banking Supervision Meets Industry Challenges

By Selma Meyerowitz

Fewer Û but larger and more complex Û banks, a broadening range of non-traditional activities, a move toward PC banking, and other new ways to deliver services to bank customers Û these trends characterize an industry that is evolving and becoming more complex each day. Banking Supervision has responded to the industryÌs 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 Û always important Û 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 organizationÌs 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 institutionÌs 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 practices.

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 industryÌs 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 todayÌs dynamic environment and is prepared for tomorrowÌs as well.