FED finalized the guidance on effectiveness of the Board of Directors and released the results of its review of 27 Supervision and Regulation and Consumer Affairs letters (SR Letters) that contain guidance on the roles and responsibilities for Boards of Directors of holding companies. Post review, FED decided to revise twelve SR Letters, make inactive nine SR Letters, and retain six SR letters without change. The supervisory guidance on Board effectiveness applies to all domestic bank holding companies and domestic savings and loan holding companies with consolidated assets of USD 100 billion or more. The guidance also applies to systemically important nonbank financial companies designated by the Financial Stability Oversight Council for supervision by FED.
The supervisory guidance on the effectiveness of Board of Directors adopts a principles-based approach to describe attributes of effective boards and provides illustrative examples of effective practices. The guidance notes that an effective board:
- oversees the development of strategy and reviews, approves, and periodically monitors the firm's strategy and risk appetite.
- directs senior management to provide directors with information that is sufficient in scope, detail, and analysis to enable the board to make sound, well-informed decisions and consider potential risks.
- oversees and holds senior management accountable for effectively implementing the firm's strategy, consistent with its risk appetite, while maintaining an effective risk management framework and system of internal controls.
- assesses and supports—through its risk and audit committees—the stature and independence of the firm's independent risk management and internal audit functions.
- considers whether the Board composition, governance structure, and practices support the firm's safety and soundness and promote compliance with laws and regulations (based on factors such as the firm's asset size, complexity, scope of operations, risk profile, and other changes that occur over time).
Firms subject to the large financial institution rating system are assigned three component ratings: Capital Planning and Positions, Liquidity Risk Management and Positions, and Governance and Controls. The supervisory assessment of Board effectiveness is one of the elements within the Governance and Controls component rating. As the board effectiveness guidance builds on the principles set forth in the large financial institution ratings framework, FED intends to use the board effectiveness guidance in informing its assessment of the governance and controls at all firms subject to the large financial institution rating system.
- Notification on Guidance
- Guidance (PDF)
- Review of Supervisory Expectations
- Changes to Supervisory Letters (PDF)
Keywords: Americas, US, Banking, Governance, Large Banks, Guidance, Operational Risk, FED
Previous ArticleEU Rule Amends Requirement for European Single Electronic Format
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.
At the global level, supervisory efforts are increasingly focused on addressing climate risks via better quality data and innovative use of technologies such as generative artificial intelligence (AI) and blockchain.
The finalization of the IFRS sustainability disclosure standards in late June 2023 has brought to the forefront the themes of the harmonization of sustainability disclosures
The European Banking Authority (EBA) recently issued several regulatory publications impacting the banking sector.
The Basel Committee on Banking Supervision (BCBS) launched a consultation on revisions to the core principles for effective banking supervision, with the comment period ending on October 06, 2023.
The U.S. banking agencies (FDIC, FED, and OCC) recently proposed rules implementing the final Basel III reforms, also known as the Basel III Endgame.
The Financial Stability Board (FSB) recently published the second annual progress report on the July 2021 roadmap to address climate-related financial risks.
The recognition of climate change as a systemic risk to the global economy has further intensified regulatory and supervisory focus on monitoring of the environmental, social, and governance (ESG) risks.