Memo to employees at big Wall Street banks and securities firms: Be careful what you say on the elevator. You might be surrounded by regulators.
As part of a push to prevent another financial crisis, the Federal Reserve Bank of New York and the Office of the Comptroller of the Currency are increasing the number of examiners who go to work every day at the companies they regulate.
Much like reporters assigned to a military unit during war, these regulatory "embeds" get unprecedented access to financial firms such as Bank of America Corp., Goldman Sachs Group Inc. and Morgan Stanley. They file through the same security turnstiles, eat lunch at the company cafeteria and press top executives for answers to questions about mortgage-documentation procedures and exposure to European debt and municipal bonds.
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"We're a cop on the beat," says Steven Manzari, who helps oversee the Federal Reserve Bank of New York's embeds.
About 150 such regulators are scattered across banks and securities firms overseen by the New York Fed. That total will double by this fall, according to a person familiar with the situation. As a result, groups of 15 to 20 regulators per company will swell to as many as 35 people.
Other banks with on-site New York Fed supervision include Bank of New York Mellon Corp., Barclays PLC, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, J.P. Morgan Chase & Co. and UBS AG.
At the OCC, about 500 bank examiners work on location at big banks monitored by the federal agency. That total is expected to gradually rise by about 10%.
The Federal Reserve says its number of so-called field examiners has climbed to 1,948, up 40% from 2006. Many of them supervise smaller institutions.
Regulators have inspected their companies for safety and soundness, financial performance and the quality of management and directors for decades. The on-site reviews are thorough and can produce friction between the bank examiners and their subjects, according to bankers and regulators. The Fed's latest how-to "Commercial Bank Examination Manual" is 1,808 pages long, and examiners have the power to "review all books and records maintained by a financial institution."
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In addition to policing the rules, Fed examiners should "identify vulnerabilities in a firm early enough to head off major problems," says Daniel Tarullo, a Federal Reserve governor.
The job has become much tougher since the financial crisis erupted. Wall Street's last two independent investment-bank giants, Goldman and Morgan Stanley, now get much more scrutiny from the Fed because they became bank-holding companies in 2008. The move gave them access to the Fed's discount window as the financial system teetered after the collapse of Lehman Brothers Holdings Inc. and the emergency sale of Merrill Lynch & Co.
Now it is payback time. Federal regulators have hired more examiners with experience in specific parts of the financial markets and set up a committee led by officials in Washington to help examiners detect behavior by individual firms that could amplify overall risk. Regulators are also pushing examiners to challenge chief executives and boards of directors.
"It should be a drop-by relationship," says Sarah Dahlgren, who took over the New York Fed's financial-institution supervision group in January after leading a team that monitored the New York Fed's loan to insurer American International Group Inc.
The No. 1 embed at each firm is expected to meet with the CEO at least once a month. Michael Brosnan, an OCC official overseeing supervision of large U.S. banks, says the agency is "increasingly involved in governance and oversight" of the 15 largest banks.
On the list are most of the large banks overseen by the New York Fed, plus a group that includes Capital One Financial Corp., U.S. Bancorp, Wells Fargo & Co. and units of Royal Bank of Scotland Group PLC and HSBC Holdings PLC.
On-the-ground regulatory efforts by the OCC are led by examiners who usually have at least 20 years of experience, Mr. Brosnan adds.
Embeds already on the job are being buttressed with experts in risk and trading, while taking direction from more experienced on-site bosses.
One example: Michael Silva is a former chief of staff for the past two New York Fed presidents, William Dudley and Treasury secretary Timothy Geithner. The 50-year-old Mr. Silva worked at the New York Fed for 19 years and served six years as an officer in the U.S. Navy, where he flew in the same type of plane portrayed in the movie "Top Gun."
A New York Fed spokesman said Mr. Silva was unavailable to comment. Fed officials won't say where he is working. (For a list of the Fed's top embeds, go to WSJ.com/deals.)
At Morgan Stanley, the regulatory embeds work about a two-minute walk from the firm's headquarters near Times Square. The companies usually decide how to shoehorn all the regulators into the building and provide rent-free office space. Because of the growing number of embeds, regulators have started picking up the tab for phones and computers.
And, to keep information more secure, some Fed regulators have separate email addresses at the Fed and their assigned banks.
Both agencies generally limit the rotations to five years so officials won't get too comfortable about life inside a high-paying Wall Street firm.
Fed officials won't say how much top examiners are paid. In 2010, Fed Chairman Ben Bernanke got a salary of $199,700. Goldman Chairman and CEO Lloyd C. Blankfein's salary was $600,000, and his total compensation was valued at $14.1 million.
Good luck getting executives, traders and investment bankers to talk about what it is like to work with a bumper crop of regulators. None of the banks contacted for this article would comment.
Morgan Stanley Chairman John Mack said in 2009 that he "loved" having regulators nearby. Some officials at Wall Street firms say privately that they are trying hard to accommodate the push for more in-your-face supervision. Some complain, though, that different regulators don't always coordinate their requests for information.
Technology also makes it easier to gather information from afar, reducing the benefit of live-in regulators, skeptics say.
"Regulators, I can assure you, are much tougher in every way," J.P. Morgan Chief Executive James Dimon told Mr. Bernanke earlier this month in an impromptu speech about new bank regulations.
The Fed chairman responded that "the crisis revealed lots of weak spots."
Write to Aaron Lucchetti at aaron.lucchetti@wsj.com
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