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Fed Stresses Bank Governance in Letter to Boards, Supervisors

The Federal Reserve stressed the responsibility of boards and managers for governance in a letter to banks and their supervisors that also outlined other priorities for oversight.

A bank’s “board is expected to establish and maintain the firm’s culture, incentives, structure, and processes that promote its compliance with laws, regulations, and supervisory guidance,” the letter, released today in Washington, said. The letter also called for managers to set “appropriate compensation and other incentives that are consistent with the institutional risk appetite.”

Many of the items on the Fed’s letter, such as heightened standards for capital and liquidity, are already under way as a result of the annual stress tests and tougher supervisory oversight. Governance is one area the Fed rarely discusses.

The Fed has been evolving its approach to large bank supervision partly as a result of the Dodd-Frank Act and also in response to its own shortcomings during the 2008-2009 financial crisis. The Fed said the guidance in the letter “does not apply to community banking organizations, defined as institutions supervised by the Federal Reserve with total consolidated assets of $10 billion or less.”

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