Fed proposal won’t let boards off easy, but here’s why that’s OK

The Federal Reserve Board issued an important, long-awaited proposal on Aug. 3 designed to revise and clarify expectations for boards of directors at Fed-supervised institutions. The Fed has noted that board ineffectiveness at large banks was a central contributor to the financial crisis, but clear Fed guidance in this area has been slow in coming.

Following the crisis, regulators in practice increased scrutiny of large-bank boards, but the demands became too expansive, diverting board time and attention away from their central function of setting a bank’s strategic path. The new Fed proposal is welcome news for the industry since it would redirect supervisory expectations more squarely toward senior management.

Initial press reports highlighted the proposed narrowing of board responsibilities so board members can concentrate on strategic issues. Superficially, this may appear to be the case, but it would be a misreading of the Fed’s objectives to interpret the proposal as an overall lowering of supervisory standards for boards at large financial institutions. Banks shouldn’t mistake a clearer statement of expectations as an easing of standards. Indeed, by establishing more focused expectations — the new proposal provides five main measures for assessing board effectiveness — supervisors will have better tools to hold boards accountable.

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