When she arrived at the Federal Reserve Board in late 2001, Susan Schmidt Bies brought banking, economic, and risk management experience to the job.
Having now been on both sides of the regulatory relationship, Bies, who left the Fed in March, has a unique view on this pairing. Regulators have many tools, some routine, some extreme, says Bies, but one stands out in her mind.
"I'm more convinced than ever that the primary tool we have is regular interaction with the banks that we supervise," says Bies. "It's important that examiners have good relations and good communications with bank management, and that they are aware of how the business operations at the bank are evolving. This gives examiners a good sense of how things stand, and about where we might want to focus in the next regular exam."
Because examiners see many banks, they develop a sense of "best practices," according to Bies, and can impart that to the banks they examine. "They can give value-added advice," says Bies. "They can say, 'You are really running this area well--you're ahead of the game, from what we see.' On the other hand, they may need to have the hard discussion, saying, 'Look, folks, your risks are changing and you haven't invested enough in strengthening your controls here, or here'."
The value of such relationships-and the loss where they don't exist--formed the basis for a parting interview.
ABA BJ Today's financial services business evolves at a breakneck pace. Does the regulatory apparatus need refreshing?
Bies The supervisory approach must reflect the emerging challenges of a very dynamic financial services sector. Here are a few of the areas that currently are presenting challenges.
First, we need to be constantly aware of a potential for an unlevel playing field, that even with regulations that apply to the entire industry, such as the Truth-in-Lending Act, the enforcement of those rules tends to be uneven. There are some independent organizations that do not receive routine examinations.
Another example reflects the fact that financial products are growing more and more complex. And in many cases the financial sophistication of the users of those products isn't keeping up with that complexity. While one solution is more disclosure about product features, this can have unintended consequences. Too much detail may make it more difficult for consumers to focus on the range of issues.
Another challenge for regulators is to appropriately respond to strategic changes in the structure of a line of business that may span various regulated and unregulated players. For example, let's look at the mortgage business. Oversight is very difficult because the industry itself has grown very fragmented.
We've seen strong growth of standalone mortgage brokers who originate loans and then sell them off to be securitized. We've got the securitizers, who want to be compensated for creating new products that can be sold to investors. Then we've got investors who are looking for a variety of asset classes that they can invest in, with pre-payment penalties to protect against early payoffs of those investments. And then you've got servicers, who work for the investors in those pools, and the borrower doesn't get to choose their servicer.
So you really have a great deal of fragmentation in the mortgage banking industry's structure. Each segment's profitability is driven by diverse factors. Further, each of those players could be regulated by different entities or not routinely supervised and so it gets to be a very complex picture.
ABA BJ In January you spoke on what I'd call the "right-sizing" of an institution's enterprise risk management. Do you feel the emphasis on risk management has been heard at all levels of the industry?
Bies Yes. People in all levels of management, and at all organizations, are more aware of the need to manage the risk of their business. …