After the 2008 financial crisis the Federal Reserve Board established a Large Institution Supervision Coordinating Committee (LISCC1) responsible for developing a more “forward-looking and consistent” supervisory program for very large banking organizations. At one point the firms in the LISCC Program included the eight U.S. G-SIBs, a few very large foreign G-SIBs with significant operations in the United States, and the nonbank SIFIs.
The nonbank SIFIs eventually shed that status and then a few years later the foreign G-SIBs exited the LISCC portfolio as well, leaving just the eight U.S. G-SIBs. So, in layperson’s terms, the LISCC Program currently refers to the supervisory program applicable to JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, Morgan Stanley, BNY Mellon and State Street.
Calls for More Transparency re: LISCC Processes
As a general matter bank supervision is often opaque, and this has been true of the LISCC supervisory program as well. So much so that in 2020 then-Vice Chair for Supervision Quarles recommended steps to “demystify” the LISCC supervisory approach.
I think we should consider publishing the internal procedural materials that the Fed uses to supervise the LISCC firms, sometimes referred to as the Program Manual. The Manual contains a description of the main supervisory processes for identifying risks and our approach for addressing them. Publishing the Manual would help the public and the banks better understand why we take the actions that we take as supervisors and would demystify some of our processes.
Federal Reserve Board Governor Bowman has also in multiple speeches called for the same. For instance, in a speech last September:
Take, for example, the supervision criteria implemented by the Large Institution Supervision Coordinating Committee (the LISCC manual). Currently, these materials are not public. Making these materials public would not only improve transparency, doing so would also provide some assurance to the banks subject to them that they are being held to the same supervisory expectations as their peers over time. Without this clarity, it is far more challenging to build trust in this aspect of the supervisory process.
And then again last Monday:
We owe this duty of transparency to all regulated institutions. For example, I expect the Board will soon publish the supervision criteria implemented by the Large Institution Supervision Coordinating Committee—the LISCC manual. Banks should have some assurance that they are being held to the same standards as their peers over time. While publication of the manual may be only a modest improvement in transparency, I think it will be an important step.
As Governor Bowman anticipated, the Board yesterday did indeed release a document it called the Large Institution Supervision Coordinating Committee Program Manual.
Previous Descriptions of the LISCC Manual
Before getting to what the manual released yesterday says, it is worth looking back at how the LISCC Manual has previously been described. This is not an exhaustive catalog of past descriptions, but it should be illustrative.
In November 2015, the Federal Reserve Board released a review of the “Reserve Banks’ [LISCC] Information Flows and Communication Channels.” This was one of the outputs of a two-prong initiative announced by the Board in November 2014 to review the way that large banks are examined. (The announcement of the review was preceded a couple months earlier by a ProPublica / This American Life report that some found explosive and others found underwhelming.)
Anyways, as part of the November 2015 release, the Board noted that, in response to one recommendation:
The LISCC [Operating Committee] is drafting a Program Manual that will describe all elements of the LISCC Program, including minimum operating and documentation standards for supervisory activities to ensure consistency across the dedicated supervisory teams.
A September 2018 Federal Reserve Board OIG report on a related topic mentioned that the Manual was still in the works, but was almost done.
The Division of Supervision and Regulation is finalizing the LISCC Program Manual, which provides an overview of the LISCC program and includes information about conducting the liquidity program, including the [Comprehensive Liquidity Analysis and Review] CLAR program. The LISCC Program Manual sets forth the roles and responsibilities of the committees that compose the LISCC program’s governance structure.
This was consistent with responses provided by then-Vice Chair for Supervision Quarles earlier in 2018 to questions for the record from members of Congress, in which Quarles described the Manual’s status as “near-final.”
A GAO report later stated that, as of February 2021, the LISCC Manual had been “recently finalized.”
In August 2019, the Board of Governors told us that the LISCC supervisory program had taken several steps to "finalize and implement program-wide guidance for the LISCC Reserve Banks on implementing LISCC policies." The Board reported that in 2017 it had issued a near-final LISCC program manual, which they said will memorialize all aspects of the LISCC supervisory program. The Board added the updated manual will reflect the results of a self-assessment of the LISCC Program's first full year of operations under the LISCC core program model, and the initial implementation of the new Large Financial Institution Ratings Framework. The Board also said that, since the last update, the LISCC supervisory program's operating policies, procedures, and templates for the conduct of supervisory activities have been completed and implemented. In February 2021, the Board provided additional documents demonstrating that it had recently finalized the LISCC program manual and other program-wide guidance for LISCC banks.
In terms of the substance of what the Manual says, the descriptions of the Manual from Quarles and Bowman have suggested that the Manual includes the supervisory criteria for LISCC firms and, more than that, provides an explanation of why the Board takes the actions that it does. So, for instance, plugged-in law firms have suggested that the publication of the manual could provide “meaningful insights” into certain supervisory activities.
Publication of the LISCC manual could provide meaningful insights into the CLAR process in particular. In contrast to the CCAR program, the CLAR process has not been included in the Federal Reserve’s recent actions to increase the transparency of its supervisory stress tests.
Yesterday’s Release
Synthesizing the above, based on previous public statements from the Board itself, the Board’s Inspector General, the Government Accountability Office, multiple individual members of the Board, and informed outside observers, it would have been fair for a lay observer to expect the LISCC Manual to be pretty detailed. After all, its drafting apparently began in 2015 and was not finalized until at least 2018 (or maybe not even until 2021, depending on how you read that GAO report).2 And, if this lay observer took Vice Chair for Supervision Quarles and Governor Bowman seriously, it also would have been fair for them to expect the Manual to add materially to the public’s understanding of the LISCC program.
Subject to the caveats at the conclusion of this post, the document released by the Board yesterday, although it says LISCC Program Manual on the cover, does not seem to fit the bill.
The document is only 32 pages, and once you account for the front matter, TOCs and the boilerplate appendixes, you are down to 20. Then, of those 20 pages, the first eight of them are merely a nearly exact copy of content that was already on the LISCC page on the Board’s website.
The remaining twelve pages are a little better, but even here much of the content will already be known to many observers. For example, on horizontal examinations:
Horizontal exams are a hallmark of the LISCC Program. A horizontal exam is an examination of two or more firms focused on a discrete area. […] Ultimately, the approach to a specific horizontal exam depends on a range of factors. In some cases, the scope of a horizontal exam as applied to a particular firm may be tailored to incorporate relevant firm-specific factors.
Horizontal exams enable the LISCC Program to better understand the level of risk across firms and how it is changing, survey the range and maturity of risk-management practices across the examined firms, and more accurately differentiate the risk profile of individual firms and the implications for each firm's approach to risk management.
Similarly, the Manual published yesterday has a 1-2 page description of the enforcement action process and of enforcement action types, including a discussion of 4(m) letters, but this is not anything you could not find in a basic third-party overview, or indeed even in other publications from the Board and its Reserve Banks.
Take also the discussion relating to how LISCC examiners go about determining whether a bank has appropriately remediated outstanding supervisory findings. The Manual starts with a reasonably detailed description of the process:
Supervisors meet regularly with a firm regarding its progress in remediating supervisory findings. Supervisors also meet with the firm’s internal audit department to understand its assessment of the effectiveness of the firm’s remediation. Once a firm’s internal audit department has deemed a supervisory issue to be remediated, examiners will schedule an exam to verify the effectiveness of remediation.
Things then sort of peter out, however. The Manual explains that a supervisory finding might be found to be remediated. But it also might not.
The outcome of a remediation verification exam is either to close a supervisory finding if the remediation is found to be effective, or leave the finding open if the remediation is found not to be effective or proven sustainable.
More importantly, the Manual sheds no real new light on how examiners make that determination or the criteria they use to make it.
The LISCC Manual released yesterday is not only underwhelming from a bank’s perspective. As noted above, some of the perceived need for a more detailed written description of LISCC supervisory processes was driven by the fallout from the 2014 ProPublica/This American Life reporting, which depicted a supervisory environment that arguably was not conducive to the airing of divergent views from members of an examination team. Here too the document released yesterday is only general, with the actual details presumably left to some other, nonpublic document.3 A sentence says, “At the conclusion of an exam, the team members’ written evaluations are aggregated into a summary memo capturing key information, overall conclusions, and any divergent views,” but no further details are provided on the processes for following up on those divergent views or reconciling conflicting views with one another if they do arise.
In sum, this all sort of reads like an introduction to the LISCC Program Manual, with the real details — for example, on the CLAR program Cleary Gottlieb was keen to learn more about — found in other manuals not published yesterday.
Subject to the caveats that follow, it is pretty hard to believe that either former Vice Chair for Supervision Quarles or Governor Bowman would think this version of the Manual would “demystify” or provide additional clarity on much of anything. I therefore wonder if something got lost in translation here, and whether the LISCC Manual that they at one point imagined being published is not in fact what was published yesterday.
Caveats
I feel comfortable with the take laid out above, but even so there are (at least!) three reasons why this post may wind up looking pretty silly.
It is possible this is just the first step in what the Board plans to release, and additional portions of the Manual will be released soon, making this blog post look premature at best and in any case unfair to the Board.
It is also possible that I just missed something. I believe I have a decent sense of how the large bank supervisory process works, but others who live or have lived it every day also read the Manual yesterday. Perhaps, contrary to my take on this, these people noticed things that were different or interesting in the twelve pages of new content that I did not, making this blog post look comparatively underinformed. (I live in fear of this with every post, of course.)
Even if all of this is nothing new, and even if all of this is just a relatively standard description of the bank supervision process, it could still in theory be useful to banking organizations. LISCC firms now have a publicly available description (albeit one written at a high level of generality) of how the supervisory process for them is supposed to work. I suppose, then, that if for whatever reason the supervisory process for a particular bank ever feels to the bank like it is not proceeding by the book, the bank now has this manual to point to support its argument.
Thanks for reading! Am I being too unfair to the Board? Was there notable stuff in the Manual that I brazenly overlooked? Thoughts, challenges, criticisms on those and other topics are always welcome at bankregblog@gmail.com
To be fair, some of this is because the manual was largely done, but the Board was waiting to finalize it until the new LFI rating system was also finalized. So it is not the case that the manual was literally being worked on every day, every week or even every month for six years.
The 2015 Board report linked to above says that “the Federal Reserve has adopted a 2016 high priority initiative focusing on the development and implementation of policies and practices encouraging the exchange of, and response to, divergent views on all supervisory matters.”