Fed supervision focuses on potential risks to banks and assesses a firm’s ability to “identify, measure, monitor and control these risks,” according to the central bank’s website.
The regulator examines banks for weaknesses that could affect their safety and soundness or violate laws. If lapses are found, it can send a report to the company, issue an order, impose fines, remove officers or directors and bar them from the industry. Its oversight can include international operations of U.S. banks and the U.S. operations of foreign banks.
The Fed will investigate whether any foreign exchange manipulation was due to rogue traders or a wider practice in a bank sanctioned directly or indirectly by management, said Karen Shaw Petrou, managing partner of Federal Financial Analytics Inc., a Washington-based firm that does policy analysis on the financial services industry.
“The issue is are there any bad apples, how many are there and how rotten is the barrel?” Petrou said.
The Fed fined JPMorgan Chase & Co., the nation’s largest lender by assets, $200 million last year after a U.K. trader known as the London Whale for his outsized bets lost more than $6.2 billion on botched derivatives transactions. The regulator cited deficiencies in the New York-based company’s risk management and internal controls. JPMorgan paid more than $1 billion in penalties tied to the trades, including settlements with the Commodity Futures Trading Commission, the U.S. Securities and Exchange Commission, the Office of the Comptroller of the Currency and the U.K.’s Financial Conduct Authority.
Other recent Fed enforcement actions include a $50 million penalty last month against RBS, which is based in Edinburgh. The Fed faulted the firm for inadequate risk management and legal- review policies that are needed to prevent transactions with countries subject to U.S. economic sanctions.
Authorities are looking for manipulation in a widening list of benchmark financial rates, including the London interbank offered rate, or Libor, and ISDAfix, used to determine the value of interest-rate derivatives.
“Because foreign-exchange regulation is largely nonexistent, the task falls to the Fed to use its regulatory powers to ensure that the banks address all controls associated with currency trading,” Frenkel said.
The Fed hadn’t traditionally focused on rate setting until the Libor-rigging cases, which embarrassed banking regulators, Federal Financial Analytics’s Petrou said.
Foreign-exchange dealers from the world’s biggest banks told the Federal Reserve Bank of New York the global probe into manipulation of currency rates could prompt an overhaul of the way they handle customer orders, minutes from the Nov. 13 meeting released by the central bank show.
Currency chiefs from banks including JPMorgan, London-based Barclays and Citigroup met with six officials from the New York Fed at a meeting of the Foreign Exchange Committee -- an industry group sponsored by the New York Fed -- according to minutes released by the group.
“Private sector members suggested that any investigations and/or supervisory activity related to this subject could eventually result in recommended changes to best practice guidance,” according to the minutes from the meeting, which was hosted by JPMorgan.