Federal Reserve Focuses on Operational Risk

The Federal Reserve Bank ("FRB") has started to step-up its examination focus on operational risks in the nation's largest financial institutions as they seek to garner more supervisory authority through financial regulatory reform.  Not surprisingly, the FRB is looking at processes designed to support capital adequacy determinations, compliance with laws and regulations and compensation levels.  Operational Risk & Regulation Magazine provided the following report this week.

Although US regulators have not referred to the need to reform operational risk management regulation specifically, the Federal Reserve System has undertaken a series of horizontal reviews looking at op risk issues such as the Internal Capital Adequacy Assessment Process (Icaap), compliance risk and compensation. These are part of a broader programme of horizontal reviews looking at large, complex banking organisations (LCBOs).

As part of the same review, Fed supervisors are also reviewing compensation practices at regional, community and other banking organisations not classified as large and complex as part of the regular, risk-focused examination process. Ronald Stroz, assistant vice-president and head of the operational risk group at the Federal Reserve Bank of New York, commented during a panel discussion at OpRisk USA on March 24 this guidance will ensure incentives do not encourage excessive risk-taking, and that they are compatible with a sound risk management framework, supported by a strong corporate governance function with an active, effective board of directors that has risk management oversight.

Horizontal reviews of operational risk will continue in both frequency and intensity for the foreseeable future.  Are you prepared?  If not, visit www.WheelhouseAdvisors.com to learn how we can help.