WASHINGTON (MNI) – The following is an excerpt from the testimony
by the Federal Reserve’s General Counsel Scott Alvarez before the
Financial Crisis Inquiry Commission Wednesday, discussing the central
bank’s improvements to its supervisory approach:

This Commission has asked whether the Federal Reserve has made any
changes to the way it supervises institutions under its jurisdiction in
light of the financial crisis. Indeed, the Federal Reserve has
identified a number of ways to improve its supervisory approach based on
lessons learned during that time.

We have already made substantial changes to our supervisory
framework to improve both our consolidated supervision and our ability
to identify potential risks to the financial system. So that we can
better understand linkages among firms and markets that have the
potential to undermine the stability of the financial system, we have
adopted a more explicitly multidisciplinary approach, making use of the
Federal Reserve’s broad expertise in economics, financial markets,
payment systems, and bank supervision.

We are also augmenting our traditional supervisory approach that
focuses on firm-by-firm examinations with greater use of horizontal
reviews that look across a group of firms to identify common sources of
risks and best practices for managing those risks. To supplement
information from examiners in the field, we are developing an enhanced
quantitative surveillance program for large bank holding companies that
will use data analysis and formal modeling to help identify
vulnerabilities at both the firm level and for the financial sector as a
whole.

This analysis will be supported by the collection of more timely,
detailed, and consistent data from regulated firms. Many of these
changes draw on the successful experience of the Supervisory Capital
Assessment Program, also known as the banking stress test, which the
Federal Reserve led last year.

We are also working actively to implement the provisions of the
Dodd-Frank Act, which addressed a number of gaps in the statutory
framework for supervision. In particular, the Federal Reserve is working
to develop enhanced capital, risk management, liquidity, and other
requirements that would be applicable to large systemically important
financial organizations.

We are also working with the other banking and prudential
supervisors to develop resolution plans, incentive compensation
guidelines, and other tools to better address the risks posed by and to
financial firms.

** Market News International Washington Bureau: 202-371-2121 **

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