Fed to change supervision structure for Basel II

The Federal Reserve Bank of New York will change the way its supervisory departments are structured in order to implement Basel II, William Rutledge, executive vice president of the banking supervision group and a member of the management committee at the NY Fed said yesterday. Rutledge was speaking at the New York Capital Allocation conference hosted by Risk magazine.

“As we move towards the implementation of Basel II and having internal capital requirements being driven off internal estimates of these risks, there will be an increased need for expert supervisors able to critically evaluate complex systems,” said Rutledge. “Accordingly, there will be a need to accelerate the process of specialized skill development and to recruit or develop a cadre of true quantitative experts.”

Rutledge said there will be two types of supervisors at the New York Fed — those staff focused on overall oversight who will be responsible for having a solid understanding of the big concepts and risks, and quantitative risk analysis experts who will have a technical underpinning in statistics, modelling techniques, stress testing, model evaluation, and simulations. “We’re looking to establish a framework where risk management, supervision, capital quality and disclosure work in an integrated fashion,” said Rutledge.

Rutledge also said that supervision of foreign bank branches, subsidiaries, and other entities will not change dramatically once Basel II is implemented in the US. “We have been extremely process-oriented in the way we have evaluated operations at foreign bank branches and agencies for some years now,” he said. “We have focused less on statistical analysis and more on the rigour of risk management control processes. Some of the changes I’ve alluded to will lead to some evolutionary changes in the way we look at these processes, but I don’t think terribly dramatic ones.”

However, Rutledge did indicate that the NY Fed is prepared to work more closely with other national supervisors. “I do think that as we move forward towards Basel the interrelationship with the home country supervisors will have to become more frequent and more detailed,” he said. He added that there will be “even more of an expectation that our dialogue between key host supervisors and key home supervisors are quite candid and detailed.”BaselAlert.com