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How We Supervise and Regulate Financial Institutions
A safe, sound, and efficient banking and financial system contributes to a strong economy for all Americans. That's why the Federal Reserve works to ensure that certain banks and other financial institutions follow the laws and regulations that apply to them.
Regulation involves setting the rules by which financial institutions operate, including their formation and activities. When Congress passes new laws affecting the financial industry, the Fed proposes rules to implement the laws and invites public comment on them. The Fed considers the comments and may amend rules before finalizing them.
Supervision involves monitoring and examining regulated financial institutions to help ensure that they comply with laws and rules. Once it establishes rules, the Federal Reserve Board issues the procedures Reserve Bank examiners will use to evaluate institutions' compliance. The Reserve Banks train examiners accordingly, and the examiners conduct inspections of institutions to gauge compliance. Meanwhile, the regulated institutions implement practices to ensure they are in compliance with the rules.
Who Does the Federal Reserve Supervise and Regulate?
The Fed oversees very small community banks as well as some of the largest, most recognized, and most complex financial institutions in the nation and the world.
These include bank holding companies, state member banks, savings and loan holding companies, foreign bank offices in the U.S., and foreign branches and operations of U.S. banks.
It also supervises and regulates other nonbank financial entities—such as financial market utilities—designated by the Financial Stability Oversight Council as systemically important—that is, their failure could pose a threat to U.S. financial stability.
The Federal Reserve shares responsibility for ensuring financial institutions operate safely and soundly. Based on a bank's activities and how it is formed, it may be supervised and regulated by an agency other than the Federal Reserve, such as the Federal Deposit Insurance Corporation or the Office of the Comptroller of the Currency.
Supervising the Whole Financial System
The Fed monitors banks and financial institutions for their impact on the U.S. economy as a whole—paying close attention to how financial institutions interact with each other and even with public institutions (including governments) that participate in our economy. This “macroprudential approach” focuses on the soundness and resilience of the overall financial system, including banks and other financial institutions, their customers, and other participants in the system.
Because financial institutions themselves evolve and innovate—including offering new products and services—the Fed must necessarily evolve its approach to supervising and regulating them.
Supervising Individual Financial Institutions
Having a clear view of developments within institutions is critical, so the Fed sends examiners into the banks it supervises to check their operations and activities. For example, examiners may test whether banks have enough capital to cover the risks from the loans they have made.
Examiners read bank documents, assess and test processes and activities, and meet with bank staff and management. They then provide banks with a written report of examination findings. Banks respond to examiners with plans to fix any identified weaknesses, and examiners later follow up to confirm fixes are working as intended.
When the Fed finds evidence that an institution hasn't followed laws or regulations, it requires the problem to be fixed and may even issue a penalty.
Or, if Fed supervisors and analysts notice trends and recurring activities across the financial system, the Federal Reserve may change or enact new regulations and supervisory programs that apply more broadly.
The Fed tailors bank exams, taking into account the size of the institution and the impact it may have on the financial system and economy. So, the very largest global bank and the smallest community bank are treated very differently.
Stress Testing Large Banks' Resilience
The Federal Reserve conducts annual stress testing of large banks to ensure they are financially resilient enough to continue lending to households and businesses even in a severe recession.
As part of the testing, the Fed develops scenarios and models for different hypothetical, adverse conditions that could occur in the economy. Banks submit detailed data in response to the scenarios and models, and the Fed evaluates the data to project how banks are likely to perform under the hypothetical conditions.
The Fed also uses the stress test results to, in part, set capital requirements for participating banks.
Letting the Public Know What It Finds
The Federal Reserve regularly informs the public and Congress about its supervisory and regulatory activities and policies, including its assessment of the health of the banking sector.
For instance, the Federal Reserve’s semiannual Supervision and Regulation Report provides analysis and updates on banking system conditions, recent regulatory changes, and supervision developments. These reports are often accompanied by testimony to Congress by the Board’s Vice Chair for Supervision.
Other efforts that promote accountability and transparency include
- releasing the results of the Fed’s annual stress testing of large banks, and
- website postings of its enforcement actions and orders on applications related to bank mergers, acquisitions, and other transactions.
A safe, sound, and efficient banking and financial system contributes to a strong economy for all Americans. That's why the Federal Reserve works to ensure that certain banks and other financial institutions follow the laws and regulations that apply to them.
Regulation involves setting the rules by which financial institutions operate, including their formation and activities. When Congress passes new laws affecting the financial industry, the Fed proposes rules to implement the laws and invites public comment on them. The Fed considers the comments and may amend rules before finalizing them.
Supervision involves monitoring and examining regulated financial institutions to help ensure that they comply with laws and rules. Once it establishes rules, the Federal Reserve Board issues the procedures Reserve Bank examiners will use to evaluate institutions' compliance. The Reserve Banks train examiners accordingly, and the examiners conduct inspections of institutions to gauge compliance. Meanwhile, the regulated institutions implement practices to ensure they are in compliance with the rules.
Who Does the Federal Reserve Supervise and Regulate?
The Fed oversees very small community banks as well as some of the largest, most recognized, and most complex financial institutions in the nation and the world.
These include bank holding companies, state member banks, savings and loan holding companies, foreign bank offices in the U.S., and foreign branches and operations of U.S. banks.
It also supervises and regulates other nonbank financial entities—such as financial market utilities—designated by the Financial Stability Oversight Council as systemically important—that is, their failure could pose a threat to U.S. financial stability.
The Federal Reserve shares responsibility for ensuring financial institutions operate safely and soundly. Based on a bank's activities and how it is formed, it may be supervised and regulated by an agency other than the Federal Reserve, such as the Federal Deposit Insurance Corporation or the Office of the Comptroller of the Currency.
Supervising the Whole Financial System
The Fed monitors banks and financial institutions for their impact on the U.S. economy as a whole—paying close attention to how financial institutions interact with each other and even with public institutions (including governments) that participate in our economy. This “macroprudential approach” focuses on the soundness and resilience of the overall financial system, including banks and other financial institutions, their customers, and other participants in the system.
Because financial institutions themselves evolve and innovate—including offering new products and services—the Fed must necessarily evolve its approach to supervising and regulating them.
Supervising Individual Financial Institutions
Having a clear view of developments within institutions is critical, so the Fed sends examiners into the banks it supervises to check their operations and activities. For example, examiners may test whether banks have enough capital to cover the risks from the loans they have made.
Examiners read bank documents, assess and test processes and activities, and meet with bank staff and management. They then provide banks with a written report of examination findings. Banks respond to examiners with plans to fix any identified weaknesses, and examiners later follow up to confirm fixes are working as intended.
When the Fed finds evidence that an institution hasn't followed laws or regulations, it requires the problem to be fixed and may even issue a penalty.
Or, if Fed supervisors and analysts notice trends and recurring activities across the financial system, the Federal Reserve may change or enact new regulations and supervisory programs that apply more broadly.
The Fed tailors bank exams, taking into account the size of the institution and the impact it may have on the financial system and economy. So, the very largest global bank and the smallest community bank are treated very differently.
Stress Testing Large Banks' Resilience
The Federal Reserve conducts annual stress testing of large banks to ensure they are financially resilient enough to continue lending to households and businesses even in a severe recession.
As part of the testing, the Fed develops scenarios and models for different hypothetical, adverse conditions that could occur in the economy. Banks submit detailed data in response to the scenarios and models, and the Fed evaluates the data to project how banks are likely to perform under the hypothetical conditions.
The Fed also uses the stress test results to, in part, set capital requirements for participating banks.
Letting the Public Know What It Finds
The Federal Reserve regularly informs the public and Congress about its supervisory and regulatory activities and policies, including its assessment of the health of the banking sector.
For instance, the Federal Reserve’s semiannual Supervision and Regulation Report provides analysis and updates on banking system conditions, recent regulatory changes, and supervision developments. These reports are often accompanied by testimony to Congress by the Board’s Vice Chair for Supervision.
Other efforts that promote accountability and transparency include
- releasing the results of the Fed’s annual stress testing of large banks, and
- website postings of its enforcement actions and orders on applications related to bank mergers, acquisitions, and other transactions.
