By Isaac Cohen*
This week will be released the final results of the yearly stress tests required from the 31 largest US financial institutions. As a preamble last week, Federal Reserve Chairwoman Janet Yellen described, in a speech in New York, how the central bank performs the oversight of large financial institutions.
As a consequence of the Great Recession, the regulatory and supervisory functions of the central bank were strengthened through legislative and organizational reforms. Chairwoman Yellen described these large firms as those whose “financial distress would pose a significant risk to financial stability.” Because these firms are “systemically important,” the central bank subjects 16 of them to higher levels of oversight. As an indicator of their importance, 8 of these sixteen companies hold 60 percent of all assets in the US banking system.
However beyond capital and liquidity requirements, to promote the safety and soundness of these banks, supervision also focuses on their management and governance. Because in recent years, Chairwoman Yellen said “bankers at these large institutions” have not followed the law, nor operated in an ethical manner, “sometimes brazenly.”
Also, to ensure regulatory and supervisory effectiveness, Chairwoman Yellen highlighted the need to avoid “regulatory capture.” This happens when “a regulatory agency advances the interests of the industry it is supposed to oversee rather than the broader public interest it should represent.”
*International analyst and consultant. Commentator on economic and financial issues for CNN en Español TV and radio. Former Director, UNECLAC.