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In a recent speech at the Large Bank Directors Conference in
Chicago, Illinois, Board of Governors of the Federal Reserve System
("FRB") Governor Jerome H. Powell detailed how supervisory expectations for
boards of directors were expanded after the financial crisis. He
also explained how a new proposal by the FRB would (i) better
define and reasonably limit those expectations, and (ii) better
differentiate between the obligations of directors and those of
senior management.
Mr. Powell stated that during the crisis, firms incurred
significant losses from products with risks that were "not
even on the radar screen" of firm directors. In response, FRB
reforms were implemented in order to ensure that directors could
evaluate firm strategic risks and that a firm had the requisite
"capital, liquidity, and risk management capabilities" to
manage the risk properly. In accordance with these reforms, Mr.
Powell said, boards of directors now have expansive
responsibilities that include stress testing and other regulatory
capital monitoring obligations.
Mr. Powell contends that the reforms have been successful, but
noted there are opportunities to lighten the regulatory burden on
boards of directors by reducing the amount of "granular
information" that directors must sort through as part of their
supervisory obligations. He also acknowledged that industry
participants have expressed a "widespread feeling" that
FRB guidance and regulations are blurring the difference between
the roles of boards and management.
Mr. Powell said that an FRB-proposed new framework for board
oversight addresses these concerns. The proposal,
"spotlight[s] . . . expectations of effective boards" by
distinguishing between the responsibilities of boards of directors
and those of senior management. He asserted that the proposal sets
forth a "principles-based approach" that identifies five
expectations for an effective board of directors (see
previous coverage). They include (i) establishing clear and
consistent business strategies and risk-tolerance criteria, (ii)
managing information flow and board of directors discussions, (iii)
holding senior management accountable, (iv) supporting independent
risk management (including compliance) and internal audit
functions, and the stature of both, and (v) maintaining a capable
board composition and governance structure.
Mr. Powell also mentioned one aspect of the proposal that has
garnered attention: directing matters requiring attention
("MRAs") to senior management rather than to a board of
directors. He explained that this measure was introduced in order
to allow directors to monitor MRAs through a board committee
instead of "getting into the granular details on every
MRA," since a large banking organization could have more than
one hundred MRAs outstanding at any given time. Mr. Powell noted
that the directors would continue to receive copies of all the
reports, and added that the FRB fully expects directors to hold
management accountable for remediating MRAs.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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