(Bloomberg) -- Wall Street lenders must do more to spot risks from firms they do business with as the Federal Reserve steps up oversight of counterparty risks, according to the central bank’s vice chair for supervision.

Michael Barr said Tuesday that banks should bolster how they assess the credit risk of trading partners and their leverage. He cited the blowup of Archegos Capital Management, which led to more than $10 billion of reported losses across several lenders, as an example of what can happen if lenders don’t fully understand their exposures.

“Banks need reliable, comprehensive, granular, and frequent information about their counterparties to make prudent decisions,” Barr said in remarks for the New York Fed’s Conference on Counterparty Credit Risk Management. “Obtaining this information can be challenging because of client activity happening away from the bank.”

Barr said that that Fed supervisors must also use their own tools, including annual stress test results, to assess how such risk may threaten the banking system. The Fed’s annual stress test scenarios this year will include a broader array of hypothetical shocks that will help improve the central bank’s understanding of counterparty exposures in the system, he said. 

US regulators under President Joe Biden have been discussing ways to press banks to require more consistency in data they gather from counterparties like hedge funds, Bloomberg has reported. Some officials want the Financial Stability Oversight Council to look for risks stemming from relationships between hedge funds and their prime brokerages.

Read More: US Weighs Leaning on Banks to Curb Hedge Fund Leveraged Trading

Martin Gruenberg, head of the Federal Deposit Insurance Corp., has said more attention should be paid to the risks that hedge funds, mutual funds and nonbank lenders pose to the financial system. He has flagged high levels of leverage and mortgage lending as areas that warrant a closer look.

On Tuesday, Barr said properly measuring and dealing with counterparty risk requires:

  • Paying attention to a partner’s complex risk profile using various tools.
  • Aggregating risks by combining exposures to products, business lines and clients.
  • Putting in place a risk-measurement system that takes into account complex trading activities.
  • Ensuring margin levels are sufficient so banks can withstand a loss if a partner collapses.

(Updates with details from speech in final paragraph.)

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