The proposal would refocus the Federal Reserve’s supervisory expectations for the largest firms’ boards of directors on their core responsibilities, which will promote the safety and soundness of the firms.
Boards’ core responsibilities include oversight of the types and levels of risk a firm may take and aligning the firm’s business strategy with those risk decisions. Additionally, the proposal would reduce unnecessary burden for the boards of smaller institutions.
The corporate governance proposal is made up of three parts. First, it identifies the attributes of effective boards of directors, such as setting a clear and consistent strategic direction for the firm as a whole, supporting independent risk management, and holding the management of the firm accountable. For the largest institutions, Federal Reserve supervisors would use these attributes to inform their evaluation of a firm’s governance and controls.
Second, it clarifies that for all supervised firms, most supervisory findings should be communicated to the firm’s senior management for corrective action, rather than to its board of directors. Third, the proposal identifies existing supervisory expectations for boards of directors that could be eliminated or revised.
The Fed also requested public comment on a proposal to better align the board’s rating system for large financial institutions with the post-crisis supervisory program for these firms. The current supervisory program for the largest firms was introduced in 2012 and sets higher standards to lower the probability of a firm’s failure or material distress, and also reduce risks to U.S. financial stability.
The proposed changes to the rating system will incorporate the regulatory and supervisory changes made by the Federal Reserve since 2012, which focus on capital, liquidity, and the effectiveness of governance and controls, including firms’ compliance with laws and regulations. Supervisors would assess and assign confidential ratings in each of these categories.
The proposed rating system would only apply to large financial institutions, such as domestic bank holding companies and savings and loan holding companies with $50 billion or more in total consolidated assets, as well as the intermediate holding companies of foreign banking organizations operating in the United States.
Firms with less than $50 billion in total consolidated assets, including community banks, would continue to use the current rating system, which reflects long-standing supervisory practices for those firms.
Comments are accepted for 60 days.