E. Gerald Corrigan, president of the Federal Reserve Bank of New York, today called for stronger bank supervision to help prevent failures.
Federal and state examiners have come under increasing fire recently for their difficulties in catching problems at troubled institutions early enough to avoid costly collapses.
Corrigan recommended paying more attention to risk factors and items that are not included in the balance sheets but that could affect an institution's soundness, particularly interest-rate swaps. He also recommended better cross-border cooperation with supervisors in other countries and greater attention to function rather than form.
Corrigan said he supported deposit insurance reform, which would peg the premiums paid by institutions to the degree of risk in their investments. "Most important of all, the work skills of examiners should be brought up to speed," he said. He also warned, "No major financial institution should escape . . . oversight," a reference to bank holding companies whose other riskier activities can sometimes affect the soundness of their banks.
Corrigan addressed a forum on financial safety nets presented by the Wall Street Planning Group. The organization, composed of representatives of important financial firms and key government agencies, is assessing the adequacy of existing protections for financial institutions in the wake of recent failures.
Participants agreed on the need to protect depositors and the system, but not necessarily individual institutions and stockholders.
Corrigan said that the safety net has worked well, adding, "perhaps too well." The net tends to foster incentives to take on too much risk at public expense, he noted. State-chartered banks and thrifts, Corrigan said, must not be allowed to "do everything they want no matter how risky, when the federal sector has to pick up the tab if anything goes wrong. That is the nub of the issue."
A proponent of interstate banking, he said he did not expect big banks expanding across state borders to encounter more problems.