Fed Warns Banks About High Risks

The Federal Reserve told banks Monday to be especially careful about the risks they take and said its examiners have been instructed to step up their efforts at supervising them.

In a rare “supervisory guidance” letter to bank officers who fall under the central bank’s regulatory thumb, the Fed said recent market turbulence as well as reviews it had conducted had revealed too much vulnerability.

“Losses stemming from the Asian crisis and the 1998 market turbulence, including those arising from bank hedge fund relationships, indicate that basic credit risk management policies, procedures and internal controls were insufficient to address the risks of new, fast-growing or evolving products and services,” the letter said.

Last year, the Federal Reserve Bank of New York had to step in to broker a meeting between faltering hedge fund Long-Term Capital Management and representatives of its lenders, which led to a $3.6-billion recapitalization of the firm.