New York Fed Reorganizes Bank Supervision for Dodd-Frank Mandate

New York Fed's Sarah Dahlgren
Sarah Dahlgren, who became head of the group on Jan. 1, told Bloomberg News, Some of this is about changing a mindset internally, as well as reflecting externally that we have a broader mandate now under Dodd-Frank. Photographer: Andrew Harrer/Bloomberg

The Federal Reserve Bank of New York, which oversees some of the largest U.S. financial firms, has reorganized its bank supervision group to strengthen its oversight capabilities.

The division has been renamed the Financial Institution Supervision Group, in a nod to the Fed’s expanded authority under the Dodd-Frank Act, according to the New York Fed’s website. The Dodd-Frank Act, signed into law by President Barack Obama in July, gave the Fed authority for overseeing non-bank financial firms deemed “too big to fail” because their collapse might pose a risk to the financial system.

“Some of this is about changing a mindset internally, as well as reflecting externally that we have a broader mandate now under Dodd-Frank,” Sarah Dahlgren, who became head of the group on Jan. 1, told Bloomberg News on March 18 when asked about the changes. “We’re going to have to increase resources.”

The New York Fed oversees firms including JPMorgan Chase & Co. and Goldman Sachs Group Inc., both of New York, and is slated to gain responsibility for non-bank companies in its district such as Fairfield, Connecticut-based General Electric Co.’s GE Capital unit. Keith Sherin, GE’s chief financial officer, said on a Jan. 21 earnings call that the Fed would become GE Capital’s regulator “sometime in the first half of this year.”

Risk Management

The Fed bank has moved specialists from the supervision group’s risk management function to its relationship management teams, according to two people familiar with the reorganization who declined to be identified because the changes haven’t been made public officially. The relationship management teams are responsible for covering specific institutions, such as Citigroup Inc., while the risk analysts provide “cross-institutional analyses,” according to the New York Fed’s website.

The risk analysts will relocate from the New York Fed’s 33 Liberty Street headquarters in downtown Manhattan to on-site locations at the financial firms, increasing the number of on-site staff and giving the risk analysts better access to the institutions, according to the two people familiar.

The New York Fed has also created a new senior supervisory officer role within the relationship management teams. The senior supervisory officers will act as a liaison between the regulators and senior management of the financial institutions, and will also focus on piecing together the firms’ business strategy, revenue sources and risk management.

In addition, the New York Fed created new so-called business line specialists on the relationship management teams.

Money-Losing Strategy

Citigroup, which in the years prior to the crisis was the biggest bank supervised by the New York Fed, embarked on its ultimately money-losing strategy of expanding in subprime-mortgage-backed securities in 2005 on the recommendation of an outside consultant, former trading chief Thomas Maheras told the Financial Crisis Inquiry Commission.

Citigroup had to get a $45 billion federal bailout in late 2008. According to the Federal Deposit Insurance Corp., Citigroup’s biggest banking subsidiary, Citibank NA, had to get “open-bank assistance,” on Nov. 23, 2008, a label applied to banks that have to get government aid to avoid failing.

“This is really part of taking the lessons learned from the crisis and trying to fit those into what we need to do differently in light of the changes under Dodd-Frank,” said Dahlgren, 47, who previously ran the New York Fed’s Special Investments Management Group since it was formed in January 2010 to oversee assets acquired by the bank during the financial crisis.

‘The Vision’

“We laid out the vision and now we’re in the process of developing and implementing it, including on the staffing side,” Dahlgren said.

The largest U.S. banks have grown larger since the financial crisis, and the number of “too-big-to-fail” banks will increase by 40 percent over the next 15 years, according to the Bloomberg Government Study “Too-Big-to-Fail Banks Get Bigger After Dodd-Frank.”

The Fed said March 18 that some of the 19 largest U.S. banks will be able to restart dividend payments, buy back shares, or repay government capital after “significant improvement” in their capital positions and the economy. The 19 banks have increased common equity by more than $300 billion from the final quarter of 2008 through the end of 2010, the Fed said in a paper released last week in Washington on its most recent review of bank capital.

The Fed’s stress tests are part of a move toward higher standards for capital and risk management mandated by U.S. legislators and international regulatory accords.

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