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The Federal Reserve is nearing completion of enhancements to its supervisory guidance to clarify its role as consolidated supervisor of bank and financial holding companies, vice chairman Donald Kohn said in a testimony before the US Senate, noting the fact that institutions grow larger and more complex.
The updated consolidated supervision guidance “provides for more consistent Federal Reserve supervisory practices and assessments across institutions with similar activities and risks, detailing expectations for understanding and assessing primary governance functions and risk controls, material business lines, non-bank operations, funding and liquidity management, consumer compliance, and other key activities and risks”.
Kohn recognized that the use of the Federal Reserve as a Primary Dealer Credit Facility during the Bear Stearns deal was necessary, finding that market circumstances were ‘unusual and exigent’. "We judged that without increased access to Federal Reserve liquidity by major securities firms, overall financial market conditions would have deteriorated further and would have had a substantially adverse effect on the economy," he said.
Kohn also noted that institutions are currently improving their liquidity and capital positions. “Broadly speaking, we believe that primary dealers are strengthening liquidity and capital positions to better protect themselves against extreme events”, he said. “We also believe their management has learned some valuable lessons from the events of the recent financial turmoil that should translate into better risk management.”