IG Reports on Progress in Developing Enhanced Prudential Standards

By Gregg D. Killoren, J.D., CCH State Banking Law Reporter, Bank Digest and Individual Retirement Plans Guide; co-author, Dodd-Frank Wall Street Reform and Consumer Protection Act—Law, Explanation and Analysis.

The Fed's Office of Inspector General has presented the results of its audit of the Fed's progress in developing enhanced prudential standards. Section 165 of the Dodd-Frank Act requires the Fed to establish enhanced prudential standards for bank holding companies (BHCs) with total consolidated assets equal to or greater than $50 billion (referred to in the report as large BHCs) and nonbank financial companies that are determined by the Financial Stability Oversight Council to pose a risk to financial stability. The audit was conducted to analyze the Fed's approach and activities for its supervision of large BHCs in preparing to meet the related requirements of Dodd-Frank.

The scope of the audit focused on the Fed's Division of Banking Supervision and Regulation's progress toward enhancing prudential standards for large BHCs that are currently supervised by one of three division sections: the Large Institution Supervision Coordinating Committee (LISCC), the Large Banking Organizations (LBO), and the International Banking Organizations (IBO). The field work was conducted between January 2011 and July 2011, and it included the selection of two financial institutions from the LISCC portfolio and compared the division's supervisory activities before and after the financial crisis.

Overall, the audit report found that the division had taken a proactive approach to enhancing its supervision of large BHCs, including initiating actions prior to the passage of the Dodd-Frank Act. The IG noted that the division has reorganized its sections to accommodate a new framework for supervision of large BHCs and has taken actions to meet the related requirements of Dodd-Frank. The audit provides two suggestions for management's consideration that the IG believes would further strengthen the division's efforts to supervise large BHCs and meet related Dodd-Frank requirements. First, the audit suggests that the LISCC define and document roles and responsibilities for its subgroups and for coordination with other Fed offices to ensure a clear understanding of each office's purposes and functions. Second, the audit recommends that the division finalize the process for distributing and maintaining a complete list of large BHCs that are subject to enhanced prudential standards, including BHCs that may fluctuate above or below the $50 billion threshold in asset size, to effectively and timely supervise BHCs under Dodd-Frank requirements.