US Regulators Tighten Control Over Wall St

US regulators have increased their scrutiny of the country’s largest banks in recent months, digging deeper into riskier activities and pushing institutions to conduct more rigorous “stress tests” of their financial health.

Wall Street sign
Paul Giamou | Aurora | Getty Images
Wall Street sign

Wall Street executives say that since the end of the financial crisis examiners from the Federal Reserve, the main banking watchdog, have become tougher and more detailed in their policing of large financial institutions.

“They are all over us,” said a senior Wall Street banker. “They want to see a lot more detail and are demanding a lot more information.”

The tighter oversight is part of the authorities’ efforts to reduce the chances of another financial crisis as devastating as the last one by closing regulatory gaps that allowed banks to take on huge risks and unsustainable amounts of debt.

The overhaul of US financial rules that became law last month gives the Fed sweeping powers to oversee a wide range of companies – from banks to insurers and hedge funds – whose failure would endanger the financial system.

Regulators such as the Fed and the Securities and Exchange Commissionhave been criticised for failing to curtail the excesses that led to the implosions of Lehman Brothers, AIG and Bear Stearns and forced the government to inject funds into Morgan Stanley, Goldman Sachs, Citigroup and Bank of America.

The New York Fed, which oversees most large financial groups, declined to comment on its scrutiny but executives said the tougher policing centred on the severity of internal stress tests and more detailed probes of banks’ profits. Federal examiners have asked banks for more details on the profitability of different businesses, such as trading, capital markets and investment banking, rather than focusing on group-wide balance sheets as in the past, bankers said.

The deeper analysis indicates authorities now recognise that before the crisis rising bank profits were often coupled with an increase in hidden risks. Before the turmoil, for example, regulators paid little attention to the increase in the amount of mortgage-backed securities on banks’ books.

Bankers say regulators are also putting pressure on them to be more pessimistic in stress tests aimed at measuring banks’ ability to respond to economic shocks.

The Fed’s new stance is similar to the more intrusive approach adopted by the UK’s Financial Services Authority last year.