The firms who received the warnings are among the largest banks in
the world, but the sources declined to name individual firms because
the enforcement actions are not public. Given the regular contact
between supervisors and bank officials, the warnings could have come
in meetings, phone calls, or letters.
Banks are responding to the stepped-up pressure by hiring people
with experience in data governance and analytics. One of the sources
said recruitment calls have spiked in the last 18 months as
regulators have issued more non-public enforcement actions.
The world's largest banks have only grown bigger since the 2007-2009
financial crisis, and now contain even more separate entities
involved in a dizzying web of credit obligations and trading
positions. Banks, hobbled by what regulators believe is poor
risk-management data, are struggling to get a handle on the full
scope of their trading activities and asset quality.
The result is that six years after the financial crisis, regulators
and the industry they oversee cannot confidently assess big-picture
threats to the U.S. financial system.
And what was once viewed as an issue for data geeks has now been
elevated to a safety-and-soundness concern that could eventually
lead to restrictions on bonuses, dividends and share repurchases.
"The information that external investors and supervisors have about
these firms is essentially hostage to the quality of the data
management within these firms," said Lewis Alexander, who between
2010-2011 helped lead the U.S. Treasury's effort to set up the
Office of Financial Research, or OFR.
Alexander is now U.S. chief economist at Nomura and also chairs the
OFR's advisory committee.
Regulators have been taking a two-pronged approach. Publicly,
officials including Federal Reserve Governor Daniel Tarullo and
Comptroller of the Currency Thomas Curry have issued warnings that
banks with more than $50 billion in assets need to fix shoddy
infrastructure that prevents them from identifying, measuring,
monitoring and controlling risk.
Curry in particular has hammered at this theme, especially after
JPMorgan Chase & Co's <JPM.N> risk models in 2012 failed to capture
the dangers of its "London Whale" derivatives trades that led to a
$6.2 billion loss.
And privately, regulators have been issuing enforcement actions in
A senior bank supervisor said in an interview that these warnings a
part of a "heightened expectations" program in which U.S. regulators
have clamped down on the largest U.S. banks and foreign bank units
with tougher risk management rules.
For example, the New York Fed sent a letter to Deutsche Bank in
December that criticized the U.S. divisions of Germany's largest
bank for producing financial reports that were "low quality,
inaccurate and unreliable," said a source familiar with the letter.
These private enforcement actions appear to build on some weaknesses
that were made public as part of the Fed's annual stress tests of
the largest banks.
Bank of America in April was forced to resubmit a capital plan, and
had to suspend planned increases in shareholder pay-outs, after it
had incorrectly reported data used to calculate capital ratios to
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A plan by Citigroup <C.N> was rejected altogether, with the Fed
saying the bank's internal examination process did not sufficiently
consider how its sprawling business across the world would weather a
hypothetical crisis scenario.
The increased risk scrutiny from U.S. regulators is playing out on
the international stage as well.
The Basel Committee of bank regulators in December said only
one-third of the world's 30 largest banks would have a sufficient
grip on their data by 2016. Another third would not be ready by the
deadline, while the remainder said they would be ready, but their
national regulators were skeptical.
And in January, a report by the Senior Supervisors Group, which
reports to the G20, also issued a warning about data, saying
regulators should prioritize this issue and make clear to their
firms it was paramount that they were able to spot risk on their
books at all times.
Stacy Coleman, who headed the New York Fed's bank operational risk
group until last year, said regulators have been frustrated that
firms haven't made more progress in quickly compiling their credit
exposures, in some cases taking several days.
"The process wasn't very automated," said Coleman, former member of
a Basel task force on systemically important banks, who is now at
advisory firm Promontory Financial Group. "Even today I think there
is a lot more manual processing required to compile the information
than supervisors want there to be."
Part of the problem is the sheer number of legal entities contained
in large banks. Another is the lack of a universal language to
describe the highly-specialized securities and many transactions the
firms have employed, obscuring any bird's-eye view of how vulnerable
the world remains to another crisis.
A paper by the Basel committee of banking supervisors in December
also seemed to show "growing frustration" from regulators who want
to push hard now to get results, said David Schraa, regulatory
counsel at the Institute of International Finance.
"That's probably not an altogether bad thing, to push banks when
budgets are constrained," he said, "provided the regulators are
realistic about the need to balance all the other demands on IT and
(Reporting by Jonathan Spicer in New York and Douwe Miedema in
Washington; Editing by Karey Van Hall and John Pickering)
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