Fed Bolsters Tools to Avert Collapse of Big Firms

By Cheyenne Hopkins and Phil Mattingly

The Federal Reserve sought to curb the threat of financial turmoil by compelling the biggest banks to follow a tougher standard for risk management and demanding stricter oversight by companies’ boards of directors. The proposed rules would set triggers for regulatory enforcement for weak firms and require boards of directors to oversee and approve plans for limiting liquidity risk. The Fed delayed releasing rules for supervision of foreign firms and for risk-based capital and leverage requirements. The draft standards aim at averting a recurrence of instability following the collapse of U.S. mortgage finance, targeting banks with assets totaling $50 billion or more and financial firms deemed “systemically important.” The Dodd- Frank law passed in July 2010 mandates a supervisory crackdown. The emphasis on the board of directors is a new regulatory trend and “a dramatic change in the level of care that boards need to take in these regulatory areas,” said Karen Shaw Petrou, a managing partner at Federal Financial Analytics in Washington D.C.