October 14, 2023 / VOLUME NO. 283

Party Like It’s 2010

In a speech made earlier this week, Federal Reserve Vice Chair for Supervision Michael Barr defended upcoming capital requirements for large banks — the so-called Basel III endgame that will affect how risk is assessed, standardizing measurements of credit and operational risks. 

Despite concerns about its impact on lending, Barr said the “private costs” are worth the trade-off for a “healthier, more resilient financial system” that’s less prone to financial crises. 

Higher capital requirements are a legacy of the Dodd-Frank Act, passed in 2010. And now we have a proposed risk management rule that takes us back to Dodd-Frank, too. Last week, the Federal Deposit Insurance Corp. approved proposed guidelines for corporate governance and risk oversight that would apply to banks above $10 billion in assets — roughly 57 institutions. 

The rule would require, among other things, that those banks have a board-level risk committee. That’s in contrast to legislation from 2018 that raised that threshold from $10 billion, per Dodd-Frank, to $50 billion. 

And the FDIC will toughen expectations for boards around risk oversight. That includes composition of the board’s membership, with the FDIC noting that directors should be primarily independent and exhibit a diverse array of perspectives, based on “demographic representation, opinion, experience, and ownership level,” to address the various risks facing the institution. 

If passed, the guidelines could lead to enforcement actions around safety and soundness. The standards are stricter than the Office of the Comptroller of the Currency’s and the Federal Reserve’s, says Dennis Hild, a principal at Crowe. “That’s raising a lot of eyebrows,” he says. 

Due to the nature of the notational vote — there wasn’t a meeting, and votes and abstentions were obtained in writing — last week’s release came as a surprise to the industry. But the vote wasn’t unanimous, with Vice Chairman Travis Hill and FDIC Director Jonathan McKernan confirming their opposition.  

“I am skeptical that many of the provisions should rise to the level of enforceable safety and soundness standards, and I think we should be mindful that one-size-fits-all ‘best practices’ are rarely actually the best practices for the unique situation and circumstances of any particular institution,” wrote Hill. “I think our examiners should focus more on banks’ core financial condition rather than micromanaging these types of processes.”

• Emily McCormick, vice president of editorial & research for Bank Director

AI-Driven Fraud Is Banking’s Next Great Risk 

Fraudsters are using artificial intelligence against banks, but banks are responding with their own AI. 

“Generative AI is turbocharging zero-day threats.”

— Lee Wetherington, Jack Henry

• David Lepeska, freelance writer

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