The Federal Reserve has supervisory and regulatory authority over a variety of financial institutions and activities. It plays an important role as the consolidated supervisor of bank holding companies (BHCs), including financial holding companies. And it is the primary federal supervisor of state banks that are members of the Federal Reserve System.
In the midst of general improvements in financial markets throughout the course of 2009, U.S. BHCs and state member banks continued to face substantial challenges. As a group, BHCs returned to profitability in 2009, reporting $14.5 billion in earnings following a $30.7 billion loss in 2008. But 41 percent of all BHCs representing 36.3 percent of assets reported losses in 2009. Improved market conditions boosted trading revenues and triggered appreciation in securities portfolios. Although BHC assets grew 15.2 percent from 2008, lending contracted 2.9 percent. The nonperforming assets ratio escalated to 4.7 percent of loans and foreclosed assets, an 18-year high. Weaknesses were broad based, encompassing residential mortgages (first- lien), commercial real estate--especially non-owner nonfarm nonresidential and construction other than single-family--and commercial and industrial (C&I) loans. BHC capital ratios improved substantially during 2009. Of the 596 BHCs that received funds from the U.S. Department of Treasury's (Treasury) Troubled Asset Relief Program (TARP), 57 have repaid all funds received; approximately 66 percent of all funds distributed have been repaid.
State member banks faced challenges similar to those faced by BHCs in 2009. As a group, state member banks sustained losses of $4.4 billion in 2009--in part attributed to a special assessment by the Federal Deposit Insurance Corporation (FDIC) and somewhat less than the $4.8 billion loss incurred in 2008. Earnings remained lackluster due to elevated provision levels and a sizable increase in securities losses to $4.2 billion, but benefited from higher trading revenue as market conditions improved. Mirroring trends at BHCs, the nonperforming assets ratio escalated to 4.6 percent of loans and foreclosed assets, reflecting both contracting loan balances and weakening asset quality. Construction lending accounted for one-third of the growth in problem loans, but weakness encompassed nonfarm nonresidential lending, residential mortgages, and C&I loans. The risk-based capital ratios for state member banks improved over 2009 in the aggregate, but the percent of state member banks deemed well capitalized by ratios, consistent with the designation under prompt corrective action standards, dropped to 96 percent from 98 percent at year-end 2008. State member banks repaid approximately $19.3 billion or 48 percent of funds received from TARP. In 2009, 16 state member banks with $13.4 billion in assets failed, with losses of $3.6 billion according to FDIC estimates.
In response to the market turmoil of 2008, Treasury and the Federal Reserve, working with other federal banking agencies, initiated the Supervisory Capital Assessment Program (SCAP). Popularly known as the bank "stress test," the SCAP was designed to ensure that 19 of the largest U.S. BHCs had sufficient financial strength to absorb losses under a more adverse than expected macroeconomic scenario, while remaining sufficiently capitalized to meet the needs of their creditworthy borrowers. As a result of our analysis, it was determined that 10 of the BHCs assessed under SCAP needed to augment their capital by a combined total of $185 billion, almost all in the form of common equity. The transparency around supervisors' loss estimates increased investor confidence in the banking system and helped open the public equity markets to these institutions. Actions taken by the 10 BHCs needing to increase their capital buffer, together with related actions to support repayment of Treasury capital by the 19 banking organizations, increased their aggregate tier 1 common capital by nearly $200 billion. In conjunction with these efforts, the Federal Reserve issued guidance on BHCs' capital planning in March 2009. All of these actions have significantly improved the quality of capital across the largest U.S. banking organizations.
In October 2009, the Federal Reserve issued interagency guidance on commercial real estate (CRE) loan restructurings and workouts.1 This policy statement provides guidance for examiners and for financial institutions that are working with CRE borrowers who are experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties. The statement is especially relevant to small businesses because owner-occupied CRE often serves as collateral for many small business loans. To underscore expectations regarding the guidance, the Federal Reserve conducted extensive outreach to examiners and the industry.
During 2009, the Federal Reserve continued to work with banking organizations to correct some of the risk-management weaknesses revealed by the financial crisis that began in mid-2007. These supervisory activities covered a number of areas, including firmwide risk identification, senior management oversight, and liquidity risk management. Where institutions did not make appropriate progress, supervisors downgraded supervisory ratings and used enforcement tools to bring about corrective action.
Federal Reserve staff continued to work with the other federal banking agencies to implement the advanced approaches of the Basel II Capital Accord in the United States, with the final rule taking effect on April 1, 2008.2 A number of institutions have begun their transition to the new rules after having developed implementation plans and worked to put in place systems that will comply with the final rule's qualification requirements.
In light of identified supervisory lessons learned, the Federal Reserve plans to augment its processes for conducting examinations and inspections as needed, as well as its processes for ensuring that there is appropriate follow-up with institutions about issues identified during examinations and inspections.
The Federal Reserve is the federal supervisor and regulator of all U.S. BHCs, including financial holding companies formed under the authority of the 1999 Gramm-Leach-Bliley Act, and state-chartered commercial banks that are members of the Federal Reserve System. In overseeing these organizations, the Federal Reserve seeks primarily to promote their safe and sound operation, including their compliance with laws and regulations.
The Federal Reserve also has responsibility for supervising the operations of all Edge Act and agreement corporations, the international operations of state member banks and U.S. BHCs, and the U.S. operations of foreign banking organizations.
The Federal Reserve exercises important regulatory influence over entry into the U.S. banking system, and the structure of the system, through its administration of the Bank Holding Company Act, the Bank Merger Act (with regard to state member banks), the Change in Bank Control Act (with regard to BHCs and state member banks), and the International Banking Act. The Federal Reserve is also responsible for imposing margin requirements on securities transactions. In carrying out these responsibilities, the Federal Reserve coordinates its supervisory activities with the other federal banking agencies, state agencies, functional regulators (that is, regulators for insurance, securities, and commodities firms), and the bank regulatory agencies of other nations.
To promote the safety and soundness of banking organizations, the Federal Reserve conducts on-site examinations and inspections and off-site surveillance and monitoring. It also takes enforcement and other supervisory actions as necessary.
The Federal Reserve conducts examinations of state member banks, the U.S. branches and agencies of foreign banks, and Edge Act and agreement corporations. In a process distinct from examinations, it conducts inspections of BHCs and their nonbank subsidiaries. Whether an examination or an inspection is being conducted, the review of operations entails (1) an evaluation of the adequacy of governance provided by the board and senior management, including an assessment of internal policies, procedures, controls, and operations; (2) an assessment of the quality of the risk-management and internal control processes in place to identify, measure, monitor, and control risks; (3) an assessment of the key financial factors of capital, asset quality, earnings, and liquidity; and (4) a review for compliance with applicable laws and regulations. The accompanying table (see next page) provides information on examinations and inspections conducted by the Federal Reserve during the past five years.
Inspections of BHCs, including financial holding companies, are built around a rating system introduced in 2005 that reflects the shift in supervisory practices away from a historical analysis of financial condition toward a more dynamic, forward-looking assessment of risk-management practices and financial factors. Under the system, known as RFI but more fully termed RFI/C(D), holding companies are assigned a composite rating (C) that is based on assessments of three components: Risk Management (R), Financial Condition (F), and the potential Impact (I) of the parent company and its nondepository subsidiaries on the subsidiary depository institution.3 The fourth component, Depository Institution (D), is intended to mirror the primary supervisor's rating of the subsidiary depository institution.
|State member banks|
|Total assets (billions of dollars)||1,690||1,854||1,519||1,405||1,318|
|Number of examinations||850||717||694||761||783|
|By Federal Reserve System||655||486||479||500||563|
|By state banking agency||195||231||215||261||220|
|Top-tier bank holding companies|
|Large (assets of more than $1 billion)|
|Total assets (billions of dollars)||15,744||14,138||13,281||12,179||10,261|
|Number of inspections||658||519||492||566||501|
|By Federal Reserve System1||640||500||476||557||496|
|By state banking agency||18||19||16||9||5|
|Small (assets of $1 billion or less)|
|Total assets (billions of dollars)||1,018||1,008||974||947||890|
|Number of inspections||3,264||3,192||3,186||3,449||3,420|
|By Federal Reserve System||3,109||3,048||3,007||3,257||3,233|
|By state banking agency||155||144||179||192||187|
|Financial holding companies|
1. For large bank holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews. Return to table
The Federal Reserve uses a risk-focused approach to supervision, with activities focused on identifying the areas of greatest risk to banking organizations and assessing the ability of the organizations' management processes for identifying, measuring, monitoring, and controlling those risks. Key aspects of the risk-focused approach to consolidated supervision of large complex banking organizations (LCBOs) include (1) developing an understanding of each LCBO's legal and operating structure, and its primary strategies, business lines, and risk-management and internal control functions; (2) developing and executing a tailored supervisory plan outlining the work required to maintain a comprehensive understanding and assessment of each LCBO, incorporating reliance to the fullest extent possible on assessments and information developed by other relevant domestic and foreign supervisors and functional regulators; (3) maintaining continual supervision of these organizations--including through meetings with banking organization management and analysis of internal and external information--so that the Federal Reserve's understanding and assessment of each organization's condition remains current; (4) assigning to each LCBO a supervisory team composed of Reserve Bank staff members who have skills appropriate for the organization's risk profile (the team leader is the Federal Reserve System's central point of contact for the organization, has responsibility for only one LCBO, and is supported by specialists capable of evaluating the risks of LCBO business activities and functions and assessing the LCBO's consolidated financial condition); and (5) promoting Systemwide and interagency information-sharing through automated systems and other mechanisms.
For other banking organizations, the risk-focused consolidated supervision program provides that examination and inspection procedures are tailored to each banking organization's size, complexity, risk profile, and condition. As with the LCBOs, these supervisory programs entail both off-site and on-site work, including planning, preexamination visits, detailed documentation, and examination reports tailored to the scope and findings of the examination.
At the end of 2009, 845 state-chartered banks (excluding nondepository trust companies and private banks) were members of the Federal Reserve System. These banks represented approximately 12 percent of all insured U.S. commercial banks and held approximately 14 percent of all insured commercial bank assets in the United States.
The guidelines for Federal Reserve examinations of state member banks are fully consistent with section 10 of the Federal Deposit Insurance Act, as amended by section 111 of the Federal Deposit Insurance Corporation Improvement Act of 1991 and by the Riegle Community Development and Regulatory Improvement Act of 1994. A full-scope, on-site examination of these banks is required at least once a year, although certain well-capitalized, well-managed organizations having total assets of less than $500 million may be examined once every 18 months.4 The Federal Reserve conducted 655 exams of state member banks in 2009.
At year-end 2009, a total of 5,634 U.S. BHCs were in operation, of which 4,974 were top-tier BHCs. These organizations controlled 5,710 insured commercial banks and held approximately 99 percent of all insured commercial bank assets in the United States.
Federal Reserve guidelines call for annual inspections of large BHCs and complex smaller companies. In judging the financial condition of the subsidiary banks owned by holding companies, Federal Reserve examiners consult examination reports prepared by the federal and state banking authorities that have primary responsibility for the supervision of those banks, thereby minimizing duplication of effort and reducing the supervisory burden on banking organizations. Noncomplex BHCs with consolidated assets of $1 billion or less are subject to a special supervisory program that permits a more flexible approach.5 In 2009, the Federal Reserve conducted 640 inspections of large BHCs and 3,109 inspections of small, noncomplex BHCs.
Under the Gramm-Leach-Bliley Act, BHCs that meet certain capital, managerial, and other requirements may elect to become financial holding companies and thereby engage in a wider range of financial activities, including full-scope securities underwriting, merchant banking, and insurance underwriting and sales. The statute streamlines the Federal Reserve's supervision of all BHCs, including financial holding companies, and sets forth parameters for the supervisory relationship between the Federal Reserve and other regulators. The statute also differentiates between the Federal Reserve's relations with regulators of depository institutions and its relations with functional regulators.
As of year-end 2009, 479 domestic BHCs and 46 foreign banking organizations had financial holding company status. Of the domestic financial holding companies, 35 had consolidated assets of $15 billion or more; 111, between $1 billion and $15 billion; 74, between $500 million and $1 billion; and 259, less than $500 million.
The Federal Reserve supervises the foreign branches and overseas investments of member banks, Edge Act and agreement corporations, and BHCs and also the investments by BHCs in export trading companies. In addition, it supervises the activities that foreign banking organizations conduct through entities in the United States, including branches, agencies, representative offices, and subsidiaries.
In supervising the international operations of state member banks, Edge Act and agreement corporations, and BHCs, the Federal Reserve generally conducts its examinations or inspections at the U.S. head offices of these organizations, where the ultimate responsibility for the foreign offices lies. Examiners also visit the overseas offices of U.S. banks to obtain financial and operating information and, in some instances, to evaluate the organization's efforts to implement corrective measures or to test their adherence to safe and sound banking practices. Examinations abroad are conducted with the cooperation of the supervisory authorities of the countries in which they take place; for national banks, the examinations are coordinated with the Office of the Comptroller of the Currency (OCC).
At the end of 2009, 53 member banks were operating 557 branches in foreign countries and overseas areas of the United States; 32 national banks were operating 503 of these branches, and 21 state member banks were operating the remaining 54. In addition, 18 nonmember banks were operating 26 branches in foreign countries and overseas areas of the United States.
Edge Act corporations are international banking organizations chartered by the Board to provide all segments of the U.S. economy with a means of financing international business, especially exports. Agreement corporations are similar organizations, state chartered or federally chartered, that enter into agreements with the Board to refrain from exercising any power that is not permissible for an Edge Act corporation.
Sections 25 and 25A of the Federal Reserve Act grant Edge Act and agreement corporations permission to engage in international banking and foreign financial transactions. These corporations, most of which are subsidiaries of member banks, may (1) conduct a deposit and loan business in states other than that of the parent, provided that the business is strictly related to international transactions, and (2) make foreign investments that are broader than those permissible for member banks.
At year-end 2009, 55 banking organizations, operating 10 branches, were chartered as Edge Act or agreement corporations. These corporations are examined annually.
The Federal Reserve has broad authority to supervise and regulate the U.S. activities of foreign banks that engage in banking and related activities in the United States through branches, agencies, representative offices, commercial lending companies, Edge Act corporations, commercial banks, BHCs, and certain nonbanking companies. Foreign banks continue to be significant participants in the U.S. banking system.
As of year-end 2009, 176 foreign banks from 53 countries were operating 204 state-licensed branches and agencies, of which 6 were insured by the FDIC, and 50 OCC-licensed branches and agencies, of which 4 were insured by the FDIC. These foreign banks also owned 8 Edge Act and agreement corporations and 3 commercial lending companies; in addition, they held a controlling interest in 58 U.S. commercial banks. Altogether, the U.S. offices of these foreign banks at the end of 2009 controlled approximately 17 percent of U.S. commercial banking assets. These 176 foreign banks also operated 78 representative offices; an additional 58 foreign banks operated in the United States through a representative office.
State-licensed and federally licensed branches and agencies of foreign banks are examined on-site at least once every 18 months, either by the Federal Reserve or by a state or other federal regulator. In most cases, on-site examinations are conducted at least once every 12 months, but the period may be extended to 18 months if the branch or agency meets certain criteria.
In cooperation with the other federal and state banking agencies, the Federal Reserve conducts a joint program for supervising the U.S. operations of foreign banking organizations. The program has two main parts. One part involves examination of those foreign banking organizations that have multiple U.S. operations and is intended to ensure coordination among the various U.S. supervisory agencies. The other part is a review of the financial and operational profile of each organization to assess its general ability to support its U.S. operations and to determine what risks, if any, the organization poses through its U.S. operations. Together, these two processes provide critical information to U.S. supervisors in a logical, uniform, and timely manner. The Federal Reserve conducted or participated with state and federal banking agencies in 430 examinations in 2009.
The Federal Reserve examines institutions for compliance with a broad range of legal requirements, including anti-money-laundering and consumer protection laws and regulations, and other laws pertaining to certain banking and financial activities. Most compliance supervision is conducted under the oversight of the Board's Division of Banking Supervision and Regulation, but consumer compliance supervision is conducted under the oversight of the Division of Community and Consumer Affairs. The two divisions coordinate their efforts with each other and also with the Board's Legal Division to ensure consistent and comprehensive Federal Reserve supervision for compliance with legal requirements.
The Treasury regulations implementing the Bank Secrecy Act (BSA) generally require banks and other types of financial institutions to file certain reports and maintain certain records that are useful in criminal, tax, or regulatory proceedings. The BSA and separate Board regulations require banking organizations supervised by the Board to file reports on suspicious activity related to possible violations of federal law, including money laundering, terrorism financing, and other financial crimes. In addition, BSA and Board regulations require that banks develop written BSA compliance programs and that the programs be formally approved by bank boards of directors. The Federal Reserve is responsible for examining institutions for compliance with applicable anti-money-laundering laws and regulations and conducts such examinations in accordance with the Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy Act/Anti-Money Laundering Examination Manual.6
The Federal Reserve conducts specialized examinations of banking organizations in the areas of information technology, fiduciary activities, transfer agent activities, and government and municipal securities dealing and brokering. The Federal Reserve also conducts specialized examinations of certain nonbank entities that extend credit subject to the Board's margin regulations.
In recognition of the importance of information technology to safe and sound operations in the financial industry, the Federal Reserve reviews the information technology activities of supervised banking organizations as well as certain independent data centers that provide information technology services to these organizations. All safety and soundness examinations include a risk-focused review of information technology risk-management activities. During 2009, the Federal Reserve continued as the lead agency in three interagency examinations of large, multiregional data processing servicers, and it assumed leadership in one additional examination.
The Federal Reserve has supervisory responsibility for state member banks and state member nondepository trust companies that reported $43.3 trillion and $33.9 trillion of assets, respectively, as of year-end 2009, held in various fiduciary and custodial capacities. On-site examinations of fiduciary and custody activities are risk-focused and entail the review of an organization's compliance with laws, regulations, and general fiduciary principles, including effective management of conflicts of interest; management of legal, operational, and reputational risk exposures; and audit and control procedures. In 2009, Federal Reserve examiners conducted 68 on-site fiduciary examinations, excluding transfer agent examinations, of state member banks.
As directed by the Securities Exchange Act of 1934, the Federal Reserve conducts specialized examinations of those state member banks and BHCs that are registered with the Board as transfer agents. Among other things, transfer agents countersign and monitor the issuance of securities, register the transfer of securities, and exchange or convert securities. On-site examinations focus on the effectiveness of an organization's operations and its compliance with relevant securities regulations. During 2009, the Federal Reserve conducted on-site transfer agent examinations at 16 of the 49 state member banks and BHCs that were registered as transfer agents.
The Federal Reserve is responsible for examining state member banks and foreign banks for compliance with the Government Securities Act of 1986 and with the Treasury regulations governing dealing and brokering in government securities. Eleven state member banks and four state branches of foreign banks have notified the Board that they are government securities dealers or brokers not exempt from the Treasury's regulations. During 2009, the Federal Reserve conducted five examinations of broker-dealer activities in government securities at these organizations. These examinations are generally conducted concurrently with the Federal Reserve's examination of the state member bank or branch.
The Federal Reserve is also responsible for ensuring that state member banks and BHCs that act as municipal securities dealers comply with the Securities Act Amendments of 1975. Municipal securities dealers are examined pursuant to the Municipal Securities Rulemaking Board's rule G-16 at least once every two calendar years. Of the 11 entities that dealt in municipal securities during 2009, five were examined during the year.
Under the Securities Exchange Act of 1934, the Board is responsible for regulating credit in certain transactions involving the purchase or carrying of securities. As part of its general examination program, the Federal Reserve examines the banks under its jurisdiction for compliance with the Board's Regulation U (Credit by Banks and Persons other than Brokers or Dealers for the Purpose of Purchasing or Carrying Margin Stock). In addition, the Federal Reserve maintains a registry of persons other than banks, brokers, and dealers who extend credit subject to Regulation U. The Federal Reserve may conduct specialized examinations of these lenders if they are not already subject to supervision by the Farm Credit Administration (FCA) or the National Credit Union Administration (NCUA).
At the end of 2009, 566 lenders other than banks, brokers, or dealers were registered with the Federal Reserve. Other federal regulators supervised 186 of these lenders, and the remaining 380 were subject to limited Federal Reserve supervision. The Federal Reserve exempted 168 lenders from its on-site inspection program on the basis of their regulatory status and annual reports. Fifty-one inspections were conducted during the year.
In 2009, the Federal Reserve continued its efforts to strengthen the resilience of the U.S. financial system in the event of unexpected disruptions, including focused supervisory efforts to evaluate the resiliency of the banking institutions under its jurisdiction. Particular emphasis was placed on large institutions' preparedness for a pandemic-like event and on the resiliency requirements imposed on core and significant market firms under the Interagency Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System.7
The Federal Reserve, together with other federal and state financial regulators, is a member of the Financial Banking Information Infrastructure Committee (FBIIC), which was formed to improve coordination and communication among financial regulators, enhance the resilience of the U.S. financial sector, and promote the public/private partnership. The FBIIC has established emergency communication protocols to maintain effective communication among members in the event of an emergency. The FBIIC protocols were active at various points in 2009 to monitor the status and impact of the H1N1 flu outbreak and each time a significant storm made landfall in the United States.
In January 2009, the Federal Reserve and the other FFIEC agencies participated in a pandemic-related tabletop exercise conducted through the FFIEC Task Force on Supervision. The exercise accomplished the following main objectives: validate current interagency pandemic planning and identify existing gaps in communications; share agency key response triggers, emphasizing response activation and resumption of normal business; consider ramifications of national infrastructure limitations; and review response context for any needed policymaking.
In September 2009, the Federal Reserve joined other financial regulatory agencies, the Financial Services Sector Coordinating Council, and the Financial Services Information Sharing and Analysis Center in conducting the Cyber Financial Industry and Regulators Exercise of 2009. This exercise brought together 76 registered participants, including regulators, exchanges, and firms from across the financial services sector to respond to a series of disruptive scenario events. One of the primary objectives of the exercise was to develop a better understanding of the dependencies of the sector upon the information and communications infrastructure that may impact the sector's security and resilience.
The Federal Reserve has enforcement authority over the banking organizations it supervises and their affiliated parties. Enforcement actions may be taken to address unsafe and unsound practices or violations of any law or regulation. Formal enforcement actions include cease-and-desist orders, written agreements, removal and prohibition orders, and civil money penalties. In 2009, the Federal Reserve completed 191 formal enforcement actions. Civil money penalties totaling $249,570 were assessed. As directed by statute, all civil money penalties are remitted to either the Treasury or the Federal Emergency Management Agency. Enforcement orders and prompt cor- rective action directives, which are issued by the Board, and written agreements, which are executed by the Reserve Banks, are made public and are posted on the Board's website.
In addition to taking these formal enforcement actions, the Reserve Banks completed 467 informal enforcement actions in 2009. Informal enforcement actions include memoranda of understanding and board of directors resolutions. Information about these actions is not available to the public.
The Federal Reserve uses automated screening systems to monitor the financial condition and performance of state member banks and BHCs between on-site examinations. Such monitoring and analysis helps direct examination resources to institutions that have higher risk profiles. Screening systems also assist in the planning of examinations by identifying companies that are engaging in new or complex activities.
The primary off-site monitoring tool used by the Federal Reserve is the Supervision and Regulation Statistical Assessment of Bank Risk model (SR-SABR). Drawing mainly on the financial data that banks report on their Reports of Condition and Income (Call Reports), SR-SABR uses econometric techniques to identify banks that report financial characteristics weaker than those of other banks assigned similar supervisory ratings. To supplement the SR-SABR screening, the Federal Reserve also monitors various market data, including equity prices, debt spreads, agency ratings, and measures of expected default frequency, to gauge market perceptions of the risk in banking organizations. In addition, the Federal Reserve prepares quarterly Bank Holding Company Performance Reports (BHCPRs) for use in monitoring and inspecting supervised banking organizations. The BHCPRs, which are compiled from data provided by large BHCs in quarterly regulatory reports (FR Y-9C and FR Y-9LP), contain, for individual companies, financial statistics and comparisons with peer companies. BHCPRs are made available to the public on the National Information Center (NIC) website, which can be accessed at www.ffiec.gov.
During 2009, three major upgrades to the web-based Performance Report Information and Surveillance Monitoring (PRISM) application were completed. PRISM is a querying tool used by Federal Reserve analysts to access and display financial, surveillance, and examination data. In the analytical module, users can customize the presentation of institutional financial information drawn from Call Reports, Uniform Bank Performance Reports, FR Y-9 statements, BHCPRs, and other regulatory reports. In the surveillance module, users can generate reports summarizing the results of surveillance screening for banks and BHCs.
The Federal Reserve works through the FFIEC Task Force on Surveillance Systems to coordinate surveillance activities with the other federal banking agencies.
In 2009, the Federal Reserve continued to provide technical assistance on bank supervisory matters to foreign central banks and supervisory authorities. Technical assistance involves visits by Federal Reserve staff members to foreign authorities as well as consultations with foreign supervisors who visit the Board or the Reserve Banks. The Federal Reserve, along with the OCC, the FDIC, and the Treasury, was an active participant in the Middle East and North Africa Financial Regulators' Training Initiative, which is part of the U.S. government's Middle East Partnership Initiative. The Federal Reserve also contributes to the regional training provision under the Asia Pacific Economic Cooperation Financial Regulators' Training Initiative.
In 2009, the Federal Reserve offered a number of training courses exclusively for foreign supervisory authorities, both in the United States and in a number of foreign jurisdictions. System staff also took part in technical assistance and training missions led by the International Monetary Fund, the World Bank, the Asian Development Bank, the Basel Committee on Banking Supervision (Basel Committee), and the Financial Stability Institute.
The Federal Reserve is also an associate member of the Association of Supervisors of Banks of the Americas (ASBA), an umbrella group of bank supervisors from countries in the Western Hemisphere. The group, headquartered in Mexico, promotes communication and cooperation among bank supervisors in the region; coordinates training programs throughout the region with the help of national banking supervisors and international agencies; and aims to help members develop banking laws, regulations, and supervisory practices that conform to international best practices. The Federal Reserve contributes significantly to ASBA's organizational management and to its training and technical assistance activities.
Partnership for Progress is a program created by the Federal Reserve to foster the strength and vitality of the nation's minority-owned and de novo depository institutions. Launched in 2008, the program seeks to help these institutions compete effectively in today's marketplace by offering a combination of one-on-one guidance and targeted workshops on topics of particular relevance to starting and growing a bank in a safe and sound manner.
Designated Partnership for Progress contacts in each of the 12 Reserve Bank Districts and at the Board answer questions and coordinate assistance for institutions requesting guidance. These contacts also host regional conferences and conduct other outreach activities within their Districts in support of minority and de novo institutions. In 2009, the Reserve Banks hosted over 15 such regional training sessions, workshops, and conferences to provide assistance on key aspects of banking supervision. In December 2009, the staff met with select CEOs from these institutions to learn about their business challenges and opportunities and solicit inputs for improving Partnership for Progress.
Additionally, the Federal Reserve coordinates its efforts with those of the other agencies through participation in an annual interagency conference for minority depository institutions. For the federal banking agencies, the conference provides an opportunity to meet with senior managers from minority-owned institutions and gain a better understanding of the institutions' unique challenges and opportunities. Finally, the agencies offer training classes and breakout sessions on emerging banking issues.
Additional information on the Partnership for Progress can be found online at www.fedpartnership.gov/.
The weak economic outlook entering 2009 contributed to uncertainty around the health and viability of U.S. financial institutions, jeopardizing the critical role banks play in lending to creditworthy households and businesses. With financial markets unwilling to provide capital to financial firms given this uncertainty, the Treasury worked with the Federal Reserve and the other federal banking agencies to initiate a supervisory exercise to assess whether major U.S. banking organizations needed an additional capital buffer, and to offer Treasury-contingent common equity to firms unable to raise the necessary capital through market issuance.
Beginning in February, the Federal Reserve led the effort to estimate potential losses--and resources available to absorb those losses--at 19 of the largest U.S. banking organizations, assuming an economic scenario more severe than was anticipated. This effort was designed to ensure that the firms would remain strongly capitalized and able to fulfill their function of providing credit to creditworthy borrowers. Termed the "Supervisory Capital Assessment Program," or "SCAP," this unprecedented effort involved over 150 examiners and analysts from across the Federal Reserve System and other federal banking agencies. Supervisors, economists, accountants, market specialists, and attorneys from the various agencies played a significant role in designing and executing the SCAP framework. The SCAP was unusually transparent for a supervisory exercise, as the Federal Reserve published a white paper detailing the methodology, process, and key economic assumptions underlying the analysis. The results were also published, with supervisors estimating total losses over 2009 and 2010 of $600 billion under the more adverse scenario.
In the aggregate, the 19 banking organizations were found to need $185 billion of capital, with the vast majority in the form of common equity, to establish the required capital buffer. The SCAP's emphasis on common equity reflects the fact that it is the first element of the capital structure to absorb losses, offers protection to more senior parts of the capital structure, and lowers the risk of insolvency. The 10 BHCs projected to have inadequate common stock under the stress test were required to submit a plan for raising such capital by early November. The Federal Reserve's identification of these organizations' capital needs, and its supervisory directive to these banking organizations to raise much-needed capital, helped restore confidence in the banking system and helped reopen the public equity markets to these institutions. In fact, the SCAP process, and related analysis of capital needed to support repayment of Treasury capital (led by the Federal Reserve), caused these 19 banking organizations to increase their tier 1 common capital by nearly $200 billion in 2009. These efforts have contributed to the recovery of nearly 70 percent of Treasury investments in the banking system.
The SCAP has served as a model for developing more effective and comprehensive supervision of the financial system. In the future, the Federal Reserve will increase its use of horizontal examinations and scenario analysis. As with the SCAP, these activities will involve multi-disciplinary perspectives, data-driven analysis to facilitate benchmarking across institutions, and expanded cooperation with primary and functional supervisors.
In December, the Board approved a final rule amending the risk-based capital adequacy frameworks for state member banks and BHCs following changes to the U.S. generally accepted accounting principles from the Financial Accounting Standard Board's (FASB's) Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140, and Statement of Financial Accounting Standards 167, Amendment to FASB Interpretation No. 46(R) (FAS 166 and FAS 167). The final rule eliminates the exclusion of certain consolidated asset-backed commercial paper programs from risk-weighted assets; provides for a transitional phase-in of the effect on risk-weighted assets and tier 2 capital resulting from the implementation of FAS 166 and FAS 167; and adds a reservation of authority addressing off-balance sheet entities. The final rule was issued by the federal banking agencies in January 2010.
During the year, the Board, in some instances together with the other federal banking agencies, issued several rulemakings and guidance documents:
In 2009, Board and Reserve Bank staff conducted supervisory analyses of a large number of complex capital issuances, private capital investments, and novel transactions to determine their qualification for inclusion in regulatory capital and consistency with safety and soundness. Much of the work involved evaluating enhanced forms of trust preferred securities, mandatory convertible securities, perpetual preferred stock, and convertible perpetual preferred stock (mandatory and optionally convertible). Board and Reserve Bank analyses of these capital issuances focused on compliance with the qualifying standards for tier 1 capital under the Board's capital rules, as well as consistency with safety and soundness. Staff required banking organizations to make changes needed for instruments to satisfy these criteria. Much of such staff review during 2009 focused on large amounts of common stockholders' equity raised under the SCAP process discussed above, as well as other banking organizations' capital issuances.
Board staff also participated in the review of many applications for private capital investments by private equity firms and other private investors to invest in banking organizations, including banking organizations in severely impaired financial condition. The focus of the analyses of such capital investments is compliance with the Board's capital standards for inclusion in tier 1 capital, as well as consistency with safety and soundness to ensure that the terms of such private investments do not (1) impede prudent action by issuing banking organizations to address financial issues or (2) impair the Federal Reserve's ability to take appropriate supervisory action.
Board and Reserve Bank staff also reviewed a significant number of exchange transactions conducted for the purpose of increasing GAAP equity to determine consistency with safety and soundness. These exchange transactions generally involved the exchange of billions of dollars of trust preferred securities at a deep discount in exchange for common stock, thereby increasing the percentage of banking organizations' tier 1 capital comprised of common stock.
Board staff also continued in 2009 to work closely with the Treasury on the terms of the capital instruments issued by banking organizations under the Capital Purchase Program (CPP), initiated in 2008, and the Capital Assistance Program (CAP), initiated in 2009. The purpose of these programs was to buttress the financial strength of banking organizations and the overall banking and financial systems to enable them to withstand severe financial stresses during 2009. Board staff reviewed the terms of securities structured by the Treasury for issuance by banking organizations under the CPP and CAP to determine their qualification for inclusion in tier 1 capital and consistency with safety and soundness. The Board issued interim final and final rules authorizing the inclusion in BHCs' tier 1 capital of CPP and CAP securities issued by publicly traded banking organizations. The Board also issued an interim final rule allowing the inclusion in BHCs' tier 1 capital of TARP securities issued by S corporations and mutual banking organizations to the Treasury.
In 2009, the Board evaluated the condition of banking organizations applying to participate in the Treasury's CPP, assessed the ongoing capital requirements of large banking organizations through the SCAP, and provided transparent guidelines regarding the capital requirements of banking organizations preparing applications to redeem the Treasury's capital investment in their firms. Among these activities during 2009 were the following:
The Federal Reserve strongly endorses sound corporate governance and effective accounting and auditing practices for all regulated financial institutions. Accordingly, the supervisory policy function is responsible for monitoring major domestic and international proposals, standards, and other developments affecting the banking industry in the areas of accounting, auditing, internal controls over financial reporting, financial disclosure, and supervisory financial reporting.
Federal Reserve staff members interact with key constituents in the accounting and auditing professions, including standard-setters, accounting firms, the financial services industry, accounting and financial sector trade groups, and other financial sector regulators. The Federal Reserve also participates in the Basel Committee's Accounting Task Force, which represents the Basel Committee at international meetings on accounting, auditing, and disclosure issues affecting global banking organizations. These efforts help inform our understanding of current domestic and international practices and proposed standards and the formulation of policy positions based on the potential impact of changes in standards or guidance (or other events) on the financial sector. As a consequence, Federal Reserve staff routinely provides informal input to standard-setters, as well as formal input through public comment letters on proposals, to ensure appropriate and transparent financial statement reporting.
During 2009, Federal Reserve staff participated in activities arising from global market conditions and in support of efforts related to financial stability. The financial crisis raised accounting and reporting challenges for the financial sector. Addressing these challenges was a priority for Federal Reserve staff members. Significant issues arising from stressed market conditions included accounting for financial instruments at fair value, accounting for impairment in securities and other financial instruments, and accounting for asset securitizations and other off-balance-sheet items. Staff members participated in a number of discussions with accounting and auditing standard-setters and provided commentary on a number of proposals relevant to the financial sector. For example, staff provided comment letters to the FASB on proposals related to the use of fair value when inactive markets and distressed transactions exist and the recognition and presentation of impairment on investment securities. Staff also contributed to the development of numerous comment letters related to accounting and auditing matters that were submitted to the International Accounting Standards Board (IASB) and the International Auditing and Assurance Standards Board through the Basel Committee.
With respect to the future of financial reporting, Federal Reserve staff provided a comment letter to the Securities and Exchange Commission (SEC) on a roadmap for potential use of International Financial Reporting Standards in the United States. This letter supported the long-term goal of a single set of high-quality global standards and also identified a few challenges that would need to be addressed before establishing a date for U.S. companies to utilize International Financial Reporting Standards. The Federal Reserve supported the efforts of the FASB and the IASB to continue toward the achievement of converged standards, which should help to improve comparability of financial reporting across national jurisdictions and promote more efficient capital allocation. The Federal Reserve was actively involved in monitoring standard-setting projects that affect convergence, particularly with regard to financial instrument accounting, off-balance-sheet accounting, fair-value measurements, and provisioning. Federal Reserve staff continued to stress the importance of effective financial reporting and global convergence of accounting standards through regular interactions with the FASB and the IASB.
Given the Federal Reserve's unique perspectives on the challenges facing financial institutions and our role in the financial markets, staff participated on the joint FASB and IASB Financial Crisis Advisory Group, which published in July its review of standard-setting activities following the global financial crisis. Federal Reserve staff also participated on the FASB's Valuation Resource Group, which was created to assist the FASB in matters involving valuation for financial reporting purposes.
The Federal Reserve issued supervisory guidance to financial institutions and supervisory staff on accounting matters as appropriate. In addition, Federal Reserve policy staff support the efforts of the Reserve Banks in financial institution supervisory activities related to financial accounting, auditing, reporting, and disclosure.
In 2009, the Federal Reserve provided training for staff on risk-focusing and the use of the FFIEC minimum BSA/Anti-Money-Laundering (AML) examination procedures in conjunction with broader efforts to increase consistency and address industry concerns about regulatory burden. The Federal Reserve currently chairs the FFIEC BSA/AML working group, which is a forum for the discussion of all pending BSA policy and regulatory matters, and participates in the Treasury-led Bank Secrecy Act Advisory Group, which includes representatives of regulatory agencies, law enforcement, and the financial services industry and covers all aspects of the BSA. Beginning in 2009, the FFIEC BSA/AML working group meeting participation was expanded, on a quarterly basis, to include the SEC, the Commodity Futures Trading Commission, the Internal Revenue Service, and the Office of Foreign Assets Control (OFAC) in an effort to share and discuss information on BSA/AML examination procedures and general trends.
The Federal Reserve and other federal banking agencies continued during 2009 to regularly share examination findings and enforcement proceedings with the Financial Crimes Enforcement Network under the interagency memorandum of understanding (MOU) that was finalized in 2004, and with the Treasury's Office of Foreign Assets Control under the interagency MOU that was finalized in 2006.
The Federal Reserve participates in a number of international coordination initiatives related to sanctions, money laundering, and terrorism financing. For example, the Federal Reserve has a long-standing role in the U.S. delegation to the intergovernmental Financial Action Task Force and its working groups, contributing a banking supervisory perspective to formulation of international standards on these matters.
The Federal Reserve also continues to contribute to international efforts to promote transparency and address risks faced by financial institutions involved in international funds transfers. The Federal Reserve participates in a subcommittee of the Basel Committee that focuses on AML/counter-terrorism financing issues. In May 2009, the Basel Committee released a paper titled Due Diligence and Transparency regarding Cover Payment Messages Related to Cross-Border Wire Transfers. The Federal Reserve, together with the other U.S. federal banking supervisors, issued interagency guidance clarifying the supervisors' perspective on certain points in the Basel Committee paper, including expectations for intermediary banks on OFAC sanctions screening and transaction monitoring to comply with BSA/AML requirements.
Federal Reserve staff conducted training and industry outreach to clarify supervisory expectations with respect to compliance risk management and to implement the Federal Reserve's 2008 guidance relating to firmwide compliance-risk management programs and oversight at large banking organizations with complex compliance profiles.
As a member of the Basel Committee, the Federal Reserve participates in efforts to advance sound supervisory policies for internationally active banking organizations and to improve the stability of the international banking system. During 2009, the Federal Reserve participated in ongoing cooperative work on strategic responses to the financial markets crisis, initiatives to enhance and implement Basel II, and many other policies. The Federal Reserve contributed to supervisory policy recommendations, reports, and papers issued by the Basel Committee, which were generally aimed at improving the supervision of banking organizations' risk-management practices. Among these final papers, consultative papers, and other publications were the following:
In 2009, the Federal Reserve continued to participate in the Joint Forum--an international group of supervisors of the banking, securities, and insurance industries established to address varied issues crossing the traditional borders of these sectors, including the regulation of financial conglomerates. The Joint Forum operates under the aegis of the Basel Committee, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors. National supervisors of these three sectors, who are members of the Joint Forum's founding organizations, jointly meet and work together to carry out the responsibilities of the Joint Forum.
During the year, the Federal Reserve contributed to the development of supervisory policy papers, reports, and recommendations that may be issued in the near future. The Joint Forum, through its founding organizations, issued a comprehensive report on the structure and use of special purpose vehicles, Report on Special Purpose Vehicles, published on September 28, 2009. On June 15, 2009, the Joint Forum also published a final paper, Stocktaking on the Use of Credit Ratings.
The Federal Reserve works with the other federal banking agencies to develop guidance on the management of credit risk; to coordinate the assessment of regulated institutions' credit risk; and to ensure that institutions properly identify, measure, and manage credit risk.
In October, the Federal Reserve, along with the other financial regulators of the FFIEC, issued a policy statement on Prudent Commercial Real Estate Loan Workouts. This statement was issued to update longstanding guidance regarding the classification and workout of CRE loans, especially in light of recent increases in loan workouts. The guidance promotes prudent CRE loan workouts at regulated financial institutions and instructs examiners to take a balanced and consistent approach in reviewing institutions' workout activities. Further, examiners were reminded that renewed or restructured loans to creditworthy borrowers on reasonable terms should not be subject to adverse classification solely because the value of the underlying collateral has declined.
As discussed in the statement, prudent workouts are often in the best interest of both the institution and the borrower. The Federal Reserve expects examiners to evaluate a regulated institution's loan workouts, considering a project's current and stabilized cash flows, debt service capacity, guarantor support, and other factors relevant to a borrower's ability and willingness to repay the debt. The statement sets forth the appropriate standards for evaluating the management practices, workout arrangements, credit classification, regulatory reporting, and accounting for CRE loan workouts. The statement includes examples of CRE loan workouts, illustrating an examiner's analytical process for credit classifications and assessment of an institution's accounting and reporting treatments for restructured loans.
In September, the Federal Reserve, FDIC, OCC, and Office of Thrift Supervision released summary results of the 2009 annual review of the Shared National Credit (SNC) Program. The agencies established the program in 1977 to promote an efficient and consistent review and classification of shared national credits. A SNC is any loan or formal loan commitment--and any asset, such as other real estate, stocks, notes, bonds, and debentures taken as debts previously contracted--extended to borrowers by a supervised institution, its subsidiaries, and affiliates. A SNC must have an original loan amount that aggregates to $20 million or more and either (1) is shared by three or more unaffiliated supervised institutions under a formal lending agreement or (2) a portion of which is sold to two or more unaffiliated supervised institutions, with the purchasing institutions assuming their pro rata share of the credit risk.
The 2009 SNC review was based on analyses of credit data as of December 31, 2008, provided by federally supervised institutions. The 2009 review found that the commitment volume of SNCs rose 3.3 percent over the 2008 review, to $2.9 trillion. However, the number of credits remained virtually unchanged. "Criticized" assets represented 22.3 percent of the SNC portfolio, compared with 13.4 percent in the 2008 review. Criticized assets were mainly associated with the media and telecom, utilities, finance and insurance, and oil and gas sectors. Within the "criticized" category, "special mention" (potentially weak) credits declined to $195 billion, accounting for 6.8 percent of the SNC portfolio, compared with 7.5 percent in the 2008 review; and "classified" credits (credits having well-defined weaknesses) rose to $447 billion from $163 billion, accounting for 15.5 percent of the SNC portfolio compared with 5.8 percent in the 2008 review. The rise in classified and criticized credits in part resulted from the deterioration in large, leveraged credits used to finance merger and acquisition activity over the past several years. The reasons for this decline in credit quality include reliance on overly optimistic projections, weak covenant protection, and borrower's inability to obtain new funding.
Underwriting standards in 2008 improved from prior years, with examiners identifying fewer loans with structurally weak underwriting characteristics compared to credits written in 2006 and 2007. However, the SNC portfolio contained loans with structurally weak underwriting characteristics that were committed before mid-2007 that contributed significantly to the increase in criticized assets.
In 2009, the Federal Reserve provided examiner training on Regulation R, adopted jointly by the Board and the SEC in September 2007, with a compliance date of January 1, 2009, for most banks. Regulation R implemented certain key exceptions for banks from the definition of the term "broker" under section 3(a) (4) of the Securities Exchange Act of 1934, as amended by the Gramm-Leach-Bliley Act.
The Federal Reserve's supervisory policy function is responsible for developing, coordinating, and implementing regulatory reporting requirements for various financial reporting forms filed by domestic and foreign financial institutions subject to Federal Reserve supervision. Federal Reserve staff members interact with other federal agencies and relevant state supervisors, including foreign bank supervisors as needed, to recommend and implement appropriate and timely revisions to the reporting forms and the attendant instructions.
The Federal Reserve requires that U.S. BHCs periodically submit reports providing financial and structure information. The information is essential in supervising the companies and in formulating regulations and supervisory policies. It is also used in responding to requests from Congress and the public for information about BHCs and their nonbank subsidiaries. Foreign banking organizations also are required to periodically submit reports to the Federal Reserve.
Reports in the FR Y-9 series--FR Y-9C, FR Y-9LP, and FR Y-9SP--provide standardized financial statements for BHCs on both a consolidated and a parent-only basis. The reports are used to detect emerging financial problems, to review performance and conduct pre-inspection analysis, to monitor and evaluate risk profiles and capital adequacy, to evaluate proposals for BHC mergers and acquisitions, and to analyze a holding company's overall financial condition. Nonbank subsidiary reports--FR Y-11, FR 2314, FR Y-7N, and FR 2886b--help the Federal Reserve determine the condition of BHCs that are engaged in nonbank activities and also aid in monitoring the number, nature, and condition of the companies' nonbank subsidiaries. The FR Y-8 report provides information on transactions between an insured depository institution and its affiliates that are subject to section 23A of the Federal Reserve Act; it is used to monitor bank exposures to affiliates and to ensure banks' compliance with section 23A of the Federal Reserve Act. The FR Y-10 report provides data on changes in organization structure at domestic and foreign banking organizations. The FR Y-6 and FR Y-7 reports gather additional information on organization structure and shareholders from domestic banking organizations and foreign banking organizations, respectively; the information is used to monitor structure so as to determine compliance with provisions of the Bank Holding Company Act and Regulation Y and to assess the ability of a foreign banking organization to continue as a source of strength to its U.S. operations.
During 2009, a number of revisions to the FR Y-9C report were implemented, including (1) new data items and revisions to existing data items on trading assets and liabilities, (2) new data items associated with the Treasury CPP, (3) new data items and revisions to existing data items on regulatory capital requirements, (4) new data items and revisions to several data items applicable to noncontrolling (minority) interests in consolidated subsidiaries, (5) clarification of the definition of loans secured by real estate, (6) clarification of the instructions for reporting unused commitments, (7) exemptions from reporting certain existing data items for BHCs with less than $1 billion in total assets, (8) instructional guidance on quantifying misstatements, (9) new data items and deletion of existing items for holdings of collateralized debt obligations and other structured financial products, (10) new data items and revisions to existing data items for holdings of commercial mortgage-backed securities, (11) new data items and revisions to existing data items for unused commitments with an original maturity of one year or less to asset-backed commercial paper conduits, (12) new data items and revisions to existing data items for fair-value measurements by level for asset and liability categories reported at fair value on a recurring basis, (13) new data items for pledged loans and pledged trading assets, (14) new data items for collateral held against over-the-counter derivative exposures (for BHCs with $10 billion or more in total assets), (15) new data items and revisions and deletions of existing data items for investments in real estate ventures, and (16) new data items and revisions to existing data items for credit derivatives.
Also effective in March 2009, the Consolidated Report of Condition and Income for Edge and Agreement Corporations (FR 2886b) was revised to reduce the reporting frequency to annual for Edge Act and agreement corporations with total assets of $50 million or less; collect a new Schedule RC-D, Trading Assets and Liabilities, comparable to, but less detailed than, Schedule HC-D, Trading Assets and Liabilities, on the FR Y-9C report; and collect additional information on option contracts and other swaps.
In addition, effective March 2009, the FR Y-11, FR 2314, and FR Y-7N reports were revised to collect new information on assets held in trading accounts.
Effective June 2009, the FR Y-9SP was revised to also collect new data items associated with the Treasury's CPP, and the FR Y-8 was revised to require respondents to submit all reports electronically.
Effective December 2009, the FR Y-10 report was updated to reference the accounting standard (FAS 167) with respect to the exclusion of reporting of variable interest entities. In addition, the instructions for the FR Y-6 were modified to incorporate the extended deadline for completion of the annual audit for nonpublic companies as amended by part 363 of section 112 of the Federal Deposit Insurance Corporation Improvement Act, to include the reporting of warrants issued to the Treasury through the TARP CPP program when the warrants represent 5 percent or more of voting stock, and to elucidate the legal responsibilities of the person attesting to the validity of the report.
In 2009, the Federal Reserve proposed a number of revisions to the FR Y-9C for implementation in 2010. The proposed revisions include items to identify other-than-temporary impairment losses on debt securities; additional items for unused credit card lines and other unused commitments and a related additional item for other loans; reformatting of the schedule that collects information on quarterly averages; additional items for assets covered by FDIC loss-sharing agreements; and clarification of the instructions for unused commitments.
As the federal supervisor of state member banks, the Federal Reserve, along with the other banking agencies through the FFIEC, requires banks to submit quarterly Call Reports. Call Reports are the primary source of data for the supervision and regulation of banks and the ongoing assessment of the overall soundness of the nation's banking system. Call Report data, which also serve as benchmarks for the financial information required by many other Federal Reserve regulatory financial reports, are widely used by state and local governments, state banking supervisors, the banking industry, securities analysts, and the academic community.
During 2009, the FFIEC implemented revisions to the Call Report to enhance the banking agencies' surveillance and supervision of individual banks and enhance their monitoring of the industry's condition and performance. The revisions included new items on (1) the date on which the bank's fiscal year ends; (2) real estate construction and development loans on which interest is capitalized; (3) holdings of commercial mortgage-backed securities and structured financial products, such as collateralized debt obligations; (4) fair value measurements for assets and liabilities reported at fair value on a recurring basis; (5) pledged loans and pledged trading assets; (6) collateral and counterparties associated with over-the-counter derivatives exposures; (7) credit derivatives; (8) remaining maturities of unsecured other borrowings and subordinated notes and debentures; (9) unused short-term commitments to asset-backed commercial paper conduits; (10) investments in real estate ventures; and (11) held-to-maturity and available-for-sale securities in domestic offices. In addition, revisions were made to (1) modify several data items relating to noncontrolling (minority) interests in consolidated subsidiaries; (2) provide for exemptions from reporting certain existing items by banks having less than $1 billion in total assets; (3) clarify the definition of the term "loan secured by real estate"; (4) provide guidance in the reporting instructions on quantifying misstatements in the Call Report; (5) eliminate the confidential treatment of data collected from trust institutions on fiduciary income, expenses, and losses; and (6) expand information collected on trust department activities.
In addition, during 2009, the Report of Assets and Liabilities of U.S. Branches and Agencies of Foreign Banks (FFIEC 002) was revised. Effective in March, a number of items were eliminated from Schedule O--Other Data for Deposit Insurance Assessment. In June, additional space was provided in the USA Patriot Act Section 314(a) Anti-Money Laundering section to allow for the optional reporting of additional contact information. In September, revisions were made to Schedule O in response to the temporary increase in the deposit insurance limit from $100,000 to $250,000 that has been extended through December 31, 2013.
Also during 2009, the FFIEC proposed a number of revisions to the Call Report for implementation in 2010. The proposed revisions include items to identify other-than-temporary impairment losses on debt securities; additional items for unused credit card lines and other unused commitments and a related additional item for other loans; new items pertaining to reverse mortgages; an additional item on time deposits and revisions to reporting of brokered deposits; and additional items for assets covered by FDIC loss-sharing agreements. In addition, revisions were proposed to change the reporting frequency of the number of certain deposit accounts from annually to quarterly; eliminate an item for internal allocations of income and expense from foreign offices; clarify the instructions for unused commitments; and change the reporting frequency of loans to small businesses and small farms from annually to quarterly.
Information technology supporting Federal Reserve supervisory activities is managed within the System Supervisory Information Technology (SSIT) function in the Board's Division of Banking Supervision and Regulation. SSIT works through assigned staff at the Board and the Reserve Banks, as well as through System committees, to ensure that key staff members throughout the System participate in identifying requirements and setting priorities for information technology initiatives.
In 2009, the SSIT function completed an update to the supervision function's IT strategic plan. In addition, the following strategic initiatives were initiated or completed: (1) with the other federal regulatory agencies, continued the phased implementation of the new SNC system; (2) implemented new tools to improve secure document exchange and work team collaboration; (3) developed an IT architecture blueprint and roadmap; (4) adopted a strategy to simplify application security; (5) identified and implemented improvements to make technology and data more accessible to staff working in the field; (6) broadened the use of business intelligence tools to integrate supervisory and management information systems that support both office-based and field staff; and (7) implemented a tool for comprehensively tracking exam findings Systemwide.
The NIC is the Federal Reserve's comprehensive repository for supervisory, financial, and banking-structure data. It is also the main repository for many supervisory documents. NIC includes (1) data on banking structure throughout the United States as well as foreign banking concerns; (2) the National Examination Desktop (NED), which enables supervisory personnel as well as federal and state banking author- ities to access NIC data; (3) the Banking Organization National Desktop (BOND), an application that facil- itates secure, real-time electronic information-sharing and collaboration among federal and state banking agencies for the supervision of banking organizations; and (4) the Central Document and Text Repository, which contains documents supporting the supervisory processes.
Within the NIC, the supporting systems have been modified over time to extend their useful lives and improve business workflow efficiency. During 2009, work continued on upgrading the entire NIC infrastructure to provide easier access to information, a consistent Federal Reserve enterprise information data repository, a comprehensive metadata repository, and uniform security across the Federal Reserve System. Comprehensive testing was performed and application developers throughout the System were briefed on upcoming changes. Implementation was extended to begin in April 2010 and is expected to continue throughout 2010 as System applications are transitioned to use the new infrastructure. Also during the year, numerous programming changes were made to NIC applications in support of business needs, primarily to ensure NIC information remains current with the changing needs based on the continuing changes with the financial and banking markets.
NIC support also includes supporting the Shared National Credit Modernization Project (SNC Mod). The SNC Program is an interagency program established in 1977 to provide periodic credit-risk assessments of the largest and most complex credit facilities owned or agented by federally supervised institutions. The SNC Mod is a multi-year, interagency, information technology effort led by the Federal Reserve to improve the efficiency and effectiveness of the IT systems that support the SNC Program. SNC Mod focuses on a complete rewrite of the current legacy systems to take advantage of modern technology to enhance and extend the system's capabilities. A significant milestone was reached in December 2009 when the project team implemented the second phase of SNC Mod. This phase of the project was primarily focused on improving the data collection and validation processes including (1) collection of additional data elements to further describe the credits; (2) collection of Basel II metrics at the credit level; (3) collection of SNC data from banks that are participants in syndicated loans; (4) ability to collect SNC data from some banks on a quarterly basis rather than annually; and (5) improvements in data quality and the data validation processes by providing immediate feedback to reporting banks regarding the quality of their reported data. This significantly improves the efficiency of the data collection process and improves the quality of the data.
Finally, the Federal Reserve participated in a number of technology-related initiatives supporting the supervision function as part of FFIEC task forces and subgroups.
The Federal Reserve's staff development program is responsible for the ongoing development of nearly 2,400 professional supervisory staff and ensuring that these staff have the skills necessary to meet supervisory responsibilities today and in the future. The Federal Reserve also provides course offerings to staff at state banking agencies. Training activities in 2009 are summarized in the table opposite.
The Examiner Commissioning Program (ECP) involves approximately 22 weeks of instruction. Individuals move through a combination of classroom offerings, self-paced assignments, and on-the-job training over a period of two to five years. Achievement is measured by two professionally validated proficiency examinations: the first proficiency exam is required of all ECP participants; the second proficiency exam is offered in two specialty areas--safety and soundness, and consumer affairs. A third specialty, in information technology, requires that individuals earn the Certified Information Systems Auditor certification offered by the Information Systems Audit Control Association. In 2009, 164 examiners passed the first proficiency exam and 98 passed the second proficiency exam (75 in safety and soundness and 23 in consumer affairs).
|Course sponsor or type||Number of enrollments||Instructional time (approximate training days)1||Number of course offerings|
|Federal Reserve personnel||State and federal banking agency personnel|
|Federal Reserve System||2,322||369||730||146|
|The Options Institute2||16||6||3||1|
1. Training days are approximate. System courses were calculated using five days as an average, with FFIEC courses calculated using four days as an average. Return to table
2. The Options Institute, an educational arm of the Chicago Board Options Exchange, provides a three-day seminar on the use of options in risk management. Return to table
Other formal and informal learning opportunities are available to examiners, including other schools and programs offered within the System and FFIEC-sponsored schools. System programs are also available to state and federal banking agency personnel. The Rapid Response T program, introduced in 2008, offers System and state personnel 60-90 minute teleconference presentations on emerging issues or urgent training needs associated with implementation or issuance of new laws, regulations, or guidance.
The Federal Reserve administers five federal statutes that apply to BHCs, financial holding companies, member banks, and foreign banking organizations--the Bank Holding Company Act, the Bank Merger Act, the Change in Bank Control Act, the Federal Reserve Act, and the International Banking Act. In administering these statutes, the Federal Reserve acts on a variety of proposals that directly or indirectly affect the structure of the U.S. banking system at the local, regional, and national levels; the international operations of domestic banking organizations; or the U.S. banking operations of foreign banks. The proposals concern BHC formations and acquisitions, bank mergers, and other transactions involving bank or nonbank firms. In 2009, the Federal Reserve acted on 633 proposals representing 2,143 individual applications filed under the five statutes. As a result of the declining economic conditions, an increased number of these proposals involved banking organizations in less than satisfactory financial condition.
Under the Bank Holding Company Act, a corporation or similar legal entity must obtain the Federal Reserve's approval before forming a BHC through the acquisition of one or more banks in the United States. Once formed, a BHC must receive Federal Reserve approval before acquiring or establishing additional banks. Also, BHCs generally may engage in only those nonbanking activities that the Board has previously determined to be closely related to banking under section 4(c)(8) of the Bank Holding Company Act. Depending on the circumstances, these activities may or may not require Federal Reserve approval in advance of their commencement.8
When reviewing a BHC application or notice that requires prior approval, the Federal Reserve may consider the financial and managerial resources of the applicant, the future prospects of both the applicant and the firm to be acquired, the convenience and needs of the community to be served, the potential public benefits, the competitive effects of the proposal, and the applicant's ability to make available to the Federal Reserve information deemed necessary to ensure compliance with applicable law. In the case of a foreign banking organization seeking to acquire control of a U.S. bank, the Federal Reserve also considers whether the foreign bank is subject to comprehensive supervision or regulation on a consolidated basis by its home-country supervisor. In 2009, the Federal Reserve acted on 250 applications and notices filed by BHCs to acquire a bank or a nonbank firm, or to otherwise expand their activities, including proposals involving private equity firms.
A BHC may repurchase its own shares from its shareholders. When the company borrows money to buy the shares, the transaction increases the company's debt and decreases its equity. The Federal Reserve may object to stock repurchases by holding companies that fail to meet certain standards, including the Board's capital adequacy guidelines. In 2009, the Federal Reserve acted on one stock repurchase proposal by a BHC.
The Federal Reserve also reviews elections submitted by BHCs seeking financial holding company status under the authority granted by the Gramm-Leach-Bliley Act. Bank holding companies seeking financial holding company status must file a written declaration with the Federal Reserve. In 2009, 16 domestic financial holding company declarations and one foreign bank declaration were approved.
The Bank Merger Act requires that all proposals involving the merger of insured depository institutions be acted on by the relevant federal banking agency. The Federal Reserve has primary jurisdiction if the institution surviving the merger is a state member bank. Before acting on a merger proposal, the Federal Reserve considers the financial and managerial resources of the applicant, the future prospects of the existing and combined organizations, the convenience and needs of the community(ies) to be served, and the competitive effects of the proposed merger. The Federal Reserve also must consider the views of the U.S. Department of Justice regarding the competitive aspects of any proposed bank merger involving unaffiliated insured depository institutions. In 2009, the Federal Reserve approved 61 merger applications under the act.
The Change in Bank Control Act requires individuals and certain other parties that seek control of a U.S. bank or BHC to obtain approval from the relevant federal banking agency before completing the transaction. The Federal Reserve is responsible for reviewing changes in the control of state member banks and BHCs. In its review, the Federal Reserve considers the financial position, competence, experience, and integrity of the acquiring person; the effect of the proposed change on the financial condition of the bank or BHC being acquired; the future prospects of the institution to be acquired; the effect of the proposed change on competition in any relevant market; the completeness of the information submitted by the acquiring person; and whether the proposed change would have an adverse effect on the Deposit Insurance Fund. A proposed transaction should not jeopardize the stability of the institution or the interests of depositors. During its review of a proposed transaction, the Federal Reserve may contact other regulatory or law enforcement agencies for information about relevant individuals. In 2009, the Federal Reserve approved 119 change in control notices related to state member banks and BHCs, including proposals involving private equity firms.
Under the Federal Reserve Act, a member bank may be required to seek Federal Reserve approval before expanding its operations domestically or internationally. State member banks must obtain Federal Reserve approval to establish domestic branches, and all member banks (including national banks) must obtain Federal Reserve approval to establish foreign branches. When reviewing proposals to establish domestic branches, the Federal Reserve considers, among other things, the scope and nature of the banking activities to be conducted. When reviewing proposals for foreign branches, the Federal Reserve considers, among other things, the condition of the bank and the bank's experience in international banking. In 2009, the Federal Reserve acted on new and merger-related branch proposals for 1,503 domestic branches and granted prior approval for the establishment of three new foreign branches.
State member banks must also obtain Federal Reserve approval to establish financial subsidiaries. These subsidiaries may engage in activities that are financial in nature or incidental to financial activities, including securities-related and insurance agency-related activities. In 2009, one financial subsidiary application was approved.
U.S. banking organizations may engage in a broad range of activities overseas. Many of the activities are conducted indirectly through Edge Act and agreement corporation subsidiaries. Although most foreign investments are made under general consent procedures that involve only after-the-fact notification to the Federal Reserve, large and other significant investments require prior approval. In 2009, the Federal Reserve approved 47 applications and notices for overseas investments by U.S. banking organizations, many of which represented investments through an Edge Act or agreement corporation.
The International Banking Act, as amended by the Foreign Bank Supervision Enhancement Act of 1991, requires foreign banks to obtain Federal Reserve approval before establishing branches, agencies, commercial lending company subsidiaries, or representative offices in the United States.
In reviewing proposals, the Federal Reserve generally considers whether the foreign bank is subject to comprehensive supervision or regulation on a consolidated basis by its home-country supervisor. It also considers whether the home-country supervisor has consented to the establishment of the U.S. office; the financial condition and resources of the foreign bank and its existing U.S. operations; the managerial resources of the foreign bank; whether the home-country supervisor shares information regarding the operations of the foreign bank with other supervisory authorities; whether the foreign bank has provided adequate assurances that information concerning its operations and activities will be made available to the Federal Reserve, if deemed necessary to determine and enforce compliance with applicable law; whether the foreign bank has adopted and implemented procedures to combat money laundering and whether the home country of the foreign bank is developing a legal regime to address money laundering or is participating in multilateral efforts to combat money laundering; and the record of the foreign bank with respect to compliance with U.S. law. In 2009, the Federal Reserve approved seven applications by foreign banks to establish branches, agencies, or representative offices in the United States.
Certain decisions by the Federal Reserve that involve an acquisition by a BHC, a bank merger, a change in control, or the establishment of a new U.S. banking presence by a foreign bank are made known to the public by an order or an announcement. Orders state the decision, the essential facts of the application or notice, and the basis for the decision; announcements state only the decision. All orders and announcements are made public immediately; they are subsequently reported in the Board's weekly H.2 statistical release. The H.2 release also contains announcements of applications and notices received by the Federal Reserve upon which action has not yet been taken. For each pending application and notice, the related H.2 gives the deadline for comments. The Board's website (www.federalreserve.gov) provides information on orders and announcements as well as a guide for U.S. and foreign banking organizations that wish to submit applications or notices to the Federal Reserve.
The Federal Reserve's enforcement responsibilities also extend to the disclosure of financial information by state member banks and the use of credit to purchase and carry securities.
State member banks that are not members of BHCs and that issue securities registered under the Securities Exchange Act of 1934 must disclose certain information of interest to investors, including annual and quarterly financial reports and proxy statements. By statute, the Board's financial disclosure rules must be substantially similar to those of the SEC. At the end of 2009, 14 state member banks were registered with the Board under the Securities Exchange Act.
Under the Securities Exchange Act, the Board is responsible for regulating credit in certain transactions involving the purchasing or carrying of securities. The Board's Regulation T limits the amount of credit that may be provided by securities brokers and dealers when the credit is used to purchase debt and equity securities. The Board's Regulation U limits the amount of credit that may be provided by lenders other than brokers and dealers when the credit is used to purchase or carry publicly held equity securities if the loan is secured by those or other publicly held equity securities. The Board's Regulation X applies these credit limitations, or margin requirements, to certain borrowers and to certain credit extensions, such as credit obtained from foreign lenders by U.S. citizens.
Several regulatory agencies enforce the Board's securities credit regulations. The SEC, the Financial Industry Regulatory Authority (formed through the combination of the National Association of Securities Dealers and the regulation, enforcement, and arbitration functions of the New York Stock Exchange), and the Chicago Board Options Exchange examine brokers and dealers for compliance with Regulation T. With respect to compliance with Regulation U, the federal banking agencies examine banks under their respective jurisdictions; the FCA and the NCUA examine lenders under their respective jurisdictions; and the Federal Reserve examines other Regulation U lenders.
At the end of 2009, 2,288 banks were members of the Federal Reserve System and were operating 57,663 branches. These banks accounted for 34 percent of all commercial banks in the United States and for 71 percent of all commercial banking offices.
1. Interagency Policy Statement on Prudent CRE Loan Restructurings and Workouts (November 2009); www.federalreserve.gov/newsevents/bcreg/20091030a.htm. Return to text
2. The Basel II Capital Accord, an international agreement formally titled "International Convergence of Capital Measurement and Capital Standards: A Revised Framework," was developed by the Basel Committee on Banking Supervision, which is made up of representatives of the central banks or other supervisory authorities of 19 countries. The original document was issued in 2004; the original version and an updated version issued in November 2005 are available on the website of the Bank for International Settlements (www.bis.org). Return to text
3. Each of the first two components has four subcomponents: Risk Management--(1) Board and Senior Management Oversight; (2) Policies, Procedures, and Limits; (3) Risk Monitoring and Management Information Systems; and (4) In- ternal Controls. Financial Condition--(1) Capital; (2) Asset Quality; (3) Earnings; and (4) Liquidity. Return to text
4. The Financial Services Regulatory Relief Act of 2006, which became effective in October 2006, authorized the federal banking agencies to raise the threshold from $250 million to $500 million, and final rules incorporating the change into existing regulations were issued on September 21, 2007. Return to text
5. The special supervisory program was implemented in 1997 and modified in 2002. See SR letter 02-01 for a discussion of the factors considered in determining whether a BHC is complex or noncomplex, (www.federalreserve.gov/boarddocs/srletters/). Return to text
6. The FFIEC is an interagency body of financial regulatory agencies established to prescribe uniform principles, standards, and report forms and to promote uniformity in the supervision of financial institutions. The Council has six voting members: the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the chair of the State Liaison Committee. Return to text
7. The population under review included core clearing and settlement organizations and firms that play a critical role in financial markets and are subject to resiliency guidelines issued in April 2003, also called the "Sound Practices Paper." Return to text
8. Since 1996, the act has provided an expedited prior notice procedure for certain permissible nonbank activities and for acquisitions of small banks and nonbank entities. Since that time the act has also permitted well-run bank holding companies that satisfy certain criteria to commence certain other nonbank activities on a de novo basis without first obtaining Federal Reserve approval. Return to text