What’s next for Fed supervision? Basel’s Pillar 2 may hold the key

By Kyle Campbell

Regulatory changes are coming to the Federal Reserve in response to this spring’s three large bank failures, and while some will take years to hash out, others can be implemented much more quickly…Karen Petrou, managing partner of Federal Financial Analytics, said Pillar 2 was created to address safety and soundness concerns that are difficult to control uniformly via top-down, standardized capital or liquidity requirements. It grants supervisors broad jurisdiction over concerns not explicitly addressed in Pillar 1 capital framework — namely credit risk, market risk and operational risk. “When the Basel Committee was figuring out how to handle interest rate risk in the express capital standards, they said supervisors and regulators need to do this themselves, either by express interest rate risk capital requirements suitable for their jurisdiction or supervision,” Petrou said. “Same thing with sovereign risk concentrations and a number of other governance issues. When regulators issue core principles for bank governance, those are Pillar 2 standards.”