Board of Governors of the Federal Reserve System

Supervision and Regulation

The Federal Reserve has supervisory and regulatory authority over a variety of financial institutions and activities with the goal of promoting a safe, sound, and efficient financial system that supports the growth and stability of the U.S. economy. As described in this report, the Federal Reserve carries out its supervisory and regulatory responsibilities and supporting functions primarily by

• promoting the safety and soundness of individual financial institutions supervised by the Federal Reserve;
• taking a macroprudential approach to the supervision of the largest, most systemically important financial institutions (SIFIs);¹
• developing supervisory policy (rulemakings, supervision and regulation letters (SR letters), policy statements, and guidance);
• identifying requirements and setting priorities for supervisory information technology initiatives;
• ensuring ongoing staff development to meet evolving supervisory responsibilities;
• regulating the U.S. banking and financial structure by acting on a variety of proposals; and
• enforcing other laws and regulations.

2017 Developments

During 2017, the U.S. banking system and financial markets continued to improve following their recovery from the financial crisis that started in mid-2007.

Performance of bank holding companies. Bank holding company (BHC) earnings declined in 2017, largely due to the one-time effect of the 2017 Tax Cuts and Jobs Act, which resulted in certain BHCs paying taxes on overseas profits and writing down the value of deferred tax assets. U.S. BHCs, in aggregate, reported net income of $140 billion for 2017, down from $162 billion for the year ending December 31, 2016. The proportion of unprofitable BHCs was 2.7 percent, up slightly from 2.3 percent in 2016. Assets from unprofitable BHCs increased to 12.3 percent in 2017, up from 3.1 percent in 2016. Provisions were 0.26 percent of average assets, unchanged from 2016 and near historic lows. Nonperforming assets continued to decline, falling to 2.0 percent of loans and foreclosed assets from 2.4 percent as of year-end 2016. (See "Bank Holding Companies" later in this section.)

Performance of state member banks. The performance of state member banks improved from 2016 to 2017. In aggregate, state member banks reported profits of $27.5 billion for 2017, up 12.7 percent from $24.4 billion in 2016. Return-on-assets and return-on-equity both improved year-over-year, but both measures continue to lag pre-crisis levels. The percentage of unprofitable state member banks remained flat, as 2.7 percent of firms reported a loss for the year. Problem loans declined in 2017 to 1.3 percent, but problem loans increased in state member bank commercial and industrial and agricultural loan portfolios. Provisions as a share of average loans were unchanged at 0.28 percent. The total risk-based capital ratio for state members decreased slightly from 14.5 percent in 2016 to 14.4 percent in 2017. In 2017, one state member bank, with $34.4 million in assets, failed. (See "State Member Banks" later in this section.)

Enhanced prudential standards. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) directs the Board, in part, to establish prudential standards in order to prevent or mitigate risks to U.S. financial stability that could arise from the material financial distress or failure, or ongoing activities of, large, interconnected financial institutions. In January 2017, the Board issued a final rule that modified its capital plan and stress testing rules for the 2017 capital planning cycle, which reduces significant burden on large and noncomplex firms by eliminating the qualitative element of the Comprehensive Capital Analysis and Review (CCAR) of such firms. In addition, while the Federal Reserve publicly discloses a significant amount of information regarding its supervisory stress tests, in December 2017, the Board requested comment on a package that would increase the transparency of its stress testing program while maintaining the Board's ability to test the resilience of the nation's largest and most complex banking organizations. (See "Enhanced Prudential Standards" later in this section and see box 1 for details.)

Tailoring of supervision and regulation. The Federal Reserve seeks to tailor its regulations, guidance, and supervisory programs to an institution's size, risk, and complexity. The Federal Reserve took a number of steps in 2017 to tailor regulation and supervision across community, regional, and large banking organizations, including continuing to apply the most stringent requirements to the most systemically important firms, implementing a new risk-focused supervisory program for certain smaller institutions, tailoring capital planning and stress testing requirements, and reducing regulatory reporting requirements for smaller financial institutions. (See box 2 for more information on tailoring.)

Completion of the Basel III Post-Crisis Reforms. In 2017, the Federal Reserve contributed to the finalization of the international Basel III reform package, which establishes a framework that increases the robustness and reliability of the regulatory capital requirements for banking organizations. This reform package is intended to improve risk sensitivity, reduce regulatory capital variability, and level the playing field among internationally active banks. (See box 3 for more information on the Basel III post-crisis reforms.)

Supervision

The Federal Reserve is the federal supervisor and regulator of all U.S. BHCs, including financial holding companies (FHCs), savings and loan holding companies (SLHCs), and state-chartered commercial banks that are members of the Federal Reserve System. 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. Furthermore, through the Dodd-Frank Act, the Federal Reserve has been assigned responsibilities for nonbank financial firms and financial market utilities (FMUs) designated by the Financial Stability Oversight Council (FSOC) as systemically important.

In overseeing the institutions under its authority, the Federal Reserve seeks primarily to promote safety, soundness, and efficiency, including compliance with laws and regulations.

Safety and Soundness

The Federal Reserve uses a range of supervisory activities to promote the safety and soundness of financial institutions and maintain a comprehensive understanding and assessment of each firm. These activities include horizontal reviews, firm-specific examinations and inspections, continuous monitoring and surveillance activities, and implementation of enforcement or other supervisory actions as necessary. The Federal Reserve also provides training and technical assistance to foreign supervisors and minority-owned and de novo depository institutions.

Examinations and Inspections

The Federal Reserve conducts examinations of state member banks, FMUs, 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 holding companies and their nonbank subsidiaries. Whether an examination or an inspection is being conducted, the review of financial performance and operations entails

• an evaluation of the adequacy of governance provided by the board and senior management, including an assessment of internal policies, procedures, risk limits, and controls;
• an assessment of the risk-management and internal control processes in place to identify, measure, monitor, and control risks;
• analysis of the key financial factors of capital, asset quality, earnings, and liquidity; and
• a review for compliance with applicable laws and regulations.

Table 1 provides information on examinations and inspections conducted by the Federal Reserve during the past five years.

Table 1. State member banks and bank holding companies, 2013-17

Consolidated Supervision

Consolidated supervision, a method of supervision that encompasses the parent company and its subsidiaries, allows the Federal Reserve to understand the organization's structure, activities, resources, risks, and financial and operational resilience. Working with other relevant supervisors and regulators, the Federal Reserve seeks to ensure that financial, operational, or other deficiencies are addressed before they pose a danger to the consolidated organization, its banking offices, or to the broader economy.²

Large financial institutions increasingly operate and manage their integrated businesses across corporate boundaries. Financial trouble in one part of a financial institution can spread rapidly to other parts of the institution. Risks that cross legal entities or that are managed on a consolidated basis cannot be monitored properly through supervision that is directed at only one of the legal entity subsidiaries within the overall organization.

To strengthen its supervision of the largest, most complex financial institutions, the Federal Reserve created a centralized, multidisciplinary body called the Large Institution Supervision Coordinating Committee (LISCC). The LISCC coordinates the Federal Reserve's supervision of domestic bank holding companies and foreign banking organizations that pose elevated risk to U.S. financial stability as well as other nonbank financial institutions designated as systemically important by the FSOC.

The framework for the consolidated supervision of LISCC firms and other large financial institutions was issued in December 2012.³ This framework strengthens traditional microprudential supervision and regulation to enhance the safety and soundness of individual firms and incorporates macroprudential considerations to reduce potential threats to the stability of the financial system. The framework has two primary objectives:

1. Enhancing resiliency of a firm to lower the probability of its failure or inability to serve as a financial intermediary. Each firm is expected to ensure that the consolidated organization (or the combined U.S. operations in the case of foreign banking organizations) and its core business lines can survive under a broad range of internal or external stresses. This requires financial resilience by maintaining sufficient capital and liquidity, and operational resilience by maintaining effective corporate governance, risk management, and recovery planning.
2. Reducing the impact on the financial system and the broader economy in the event of a firm's failure or material weakness. Each firm is expected to ensure the sustainability of its critical operations and banking offices under a broad range of internal or external stresses. This requires, among other things, effective resolution planning that addresses the complexity and the interconnectivity of the firm's operations.

The framework is designed to support a tailored supervisory approach that accounts for the unique risk characteristics of each firm, including the nature and degree of potential systemic risk inherent in a firm's activities and operations, and is being implemented in a multi-stage approach.

The Federal Reserve uses a range of supervisory activities to maintain a comprehensive understanding and assessment of each large financial institution:

• Coordinated horizontal reviews. These reviews involve examining several institutions simultaneously and encompass firm-specific supervision and the development of cross-firm perspectives. In addition, the Federal Reserve uses a multidisciplinary approach to draw on a wide range of perspectives, including those from supervisors, examiners, economists, financial experts, payments systems analysts, and other specialists. Examples include analysis of capital adequacy and planning through CCAR as well as horizontal evaluations of resolution plans and incentive compensation practices.
• Firm-specific examinations and/or inspections and continuous monitoring activities. These activities are designed to maintain an understanding and assessment across the core areas of supervisory focus. These activities include review and assessment of changes in strategy, inherent risks, control processes, and key personnel, and follow-up on previously identified concerns (for example, areas subject to enforcement actions) or emerging vulnerabilities.
• Interagency information sharing and coordination. In developing and executing a detailed supervisory plan for each firm, the Federal Reserve generally relies to the fullest extent possible on the information and assessments provided by other relevant supervisors and functional regulators. The Federal Reserve actively participates in interagency information sharing and coordination, consistent with applicable laws, to promote comprehensive and effective supervision and limit unnecessary duplication of information requests. Supervisory agencies continue to enhance formal and informal discussions to jointly identify and address key vulnerabilities and to coordinate supervisory strategies for large financial institutions.
• Internal audit and control functions. In certain instances, supervisors may be able to rely on a firm's internal audit or internal control functions in developing a comprehensive understanding and assessment.

The Federal Reserve uses a risk-focused approach to supervision, with activities directed toward identifying the areas of greatest risk to financial institutions and assessing the ability of institutions' management processes to identify, measure, monitor, and control those risks. For medium- and small-sized financial institutions, the risk-focused, consolidated supervision program provides that examination and inspection procedures are tailored to each organization's size, complexity, risk profile, and condition. The supervisory program for an institution, regardless of its asset size, entails both off-site and on-site work, including development of supervisory plans, pre-examination visits, detailed documentation of the examination process, and preparation of examination reports tailored to the scope and findings of the review.

Capital Planning and Stress Tests

Since the financial crisis, the Board has led a series of initiatives to strengthen the capital positions of the largest banking organizations. Two related initiatives are the CCAR and the Dodd-Frank Act stress tests (DFAST).

CCAR is a supervisory exercise to evaluate capital adequacy, internal capital planning processes, and planned capital distributions simultaneously at all large and complex BHCs. In CCAR, the Federal Reserve assesses whether these BHCs have sufficient capital to withstand highly stressful operating environments and be able to continue operations, maintain ready access to funding, meet obligations to creditors and counterparties, and serve as credit intermediaries. Capital is central to a BHC's ability to absorb losses and continue to lend to creditworthy businesses and consumers. Through CCAR, a BHC's capital adequacy is evaluated on a forward-looking, post-stress basis as the BHC is required to demonstrate in its capital plan how it will maintain, throughout a very stressful period, capital above minimum regulatory capital requirements. From a microprudential perspective, CCAR provides a structured means for supervisors to assess not only whether these BHCs hold enough capital, but also whether they are able to rapidly and accurately determine their risk exposures, including how those might evolve under stress, which is an essential element of effective risk management. From a macroprudential perspective, the use of a common scenario allows the Federal Reserve to assess not just individual institutions, but also how a particular risk or combination of risks might affect the banking system as a whole under stressful conditions. The 2017 CCAR results are available at www.federalreserve.gov/publications/files/2017-ccar-assessment-framework-results-20170628.pdf.

DFAST is a supervisory stress test conducted by the Federal Reserve to evaluate whether large BHCs have sufficient capital to absorb losses resulting from stressful economic and financial market conditions. The Dodd-Frank Act also requires BHCs and other financial companies supervised by the Federal Reserve to conduct their own stress tests. Together, the Dodd-Frank Act supervisory stress tests and the company-run stress tests are intended to provide company management and boards of directors, the public, and supervisors with forward-looking information to help gauge the potential effect of stressful conditions on the capital adequacy of these large banking organizations. The 2017 DFAST results are available at www.federalreserve.gov/publications/files/2017-dfast-methodology-results-20170622.pdf.

State Member Banks

At the end of 2017, a total of 1,688 banks (excluding nondepository trust companies and private banks) were members of the Federal Reserve System, of which 815 were state chartered. Federal Reserve System member banks operated 54,344 branches, and accounted for 34 percent of all commercial banks in the United States and for 70 percent of all commercial banking offices. State-chartered commercial banks that are members of the Federal Reserve, commonly referred to as state member banks, represented approximately 16 percent of all insured U.S. commercial banks and held approximately 17 percent of all insured commercial bank assets in the United States.

Under 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, the Federal Reserve must conduct a full-scope, on-site examination of state member banks at least once a year.⁴ However, qualifying well-capitalized, well-managed state member banks with less than $1 billion in total assets are eligible for an 18-month examination cycle.⁵ The Federal Reserve conducted 354 examinations of state member banks in 2017.

 

Bank Holding Companies

At year-end 2017, a total of 4,470 U.S. BHCs were in operation, of which 3,984 were top-tier BHCs. These organizations controlled 4,223 insured commercial banks and held approximately 97 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.

Inspections of BHCs, including FHCs, are built around a rating system introduced in 2005. The system 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. The fourth component, Depository Institution (D), is intended to mirror the primary supervisor's rating of the subsidiary depository institution.⁶ Noncomplex BHCs with consolidated assets of $1 billion or less are subject to a special supervisory program that permits a more flexible approach.⁷ See the "Other Rulemakings" section for proposed changes to the rating system for firms with $50 billion or more in total assets. In 2017, the Federal Reserve conducted 574 inspections of large BHCs and 2,252 inspections of small, noncomplex BHCs.

Financial Holding Companies

Under the Gramm-Leach-Bliley Act, BHCs that meet certain capital, managerial, and other requirements may elect to become FHCs and thereby engage in a wider range of financial activities, including full-scope securities underwriting, merchant banking, and insurance underwriting and sales. As of year-end 2017, a total of 492 domestic BHCs and 42 foreign banking organizations had FHC status. Of the domestic FHCs, 27 had consolidated assets of $50 billion or more; 44, between $10 billion and $50 billion; 149, between $1 billion and $10 billion; and 272, less than $1 billion.

Savings and Loan Holding Companies

The Dodd-Frank Act transferred responsibility for supervision and regulation of SLHCs from the former Office of Thrift Supervision to the Federal Reserve in July 2011. At year-end 2017, a total of 414 SLHCs were in operation, of which 223 were top-tier SLHCs. These SLHCs control 227 thrift institutions and include 18 companies engaged primarily in nonbanking activities, such as insurance underwriting (11 SLHCs), securities brokerage (3 SLHCs), and commercial activities (4 SLHCs). The 25 largest SLHCs accounted for more than $1.5 trillion of total combined assets. Approximately 90 percent of SLHCs engage primarily in depository activities. These firms hold approximately 14 percent ($251 billion) of the total combined assets of all SLHCs. The Office of the Comptroller of the Currency (OCC) is the primary regulator for most of the subsidiary savings associations of the firms engaged primarily in depository activities. Table 2 provides information on examinations of SLHCs for the past five years.

Table 2. Savings and loan holding companies, 2013-17

Several complex policy issues continue to be addressed by the Board, including those related to consolidated capital requirements for insurance SLHCs, issues pertaining to intermediate holding companies for commercial SLHCs, and the adoption of formal rating systems.⁸ A request for public comment on the adoption of the formal rating system for certain SLHCs closed on February 13, 2017. The proposal would not apply the formal rating system to SLHCs engaged in significant insurance or commercial activities.

Savings and loan holding companies primarily engaged in insurance underwriting activities. The Federal Reserve supervises 11 insurance SLHCs (ISLHCs), with $1.04 trillion in estimated total combined assets, and $151 billion in thrift assets. Of the eleven, four firms have total assets greater than $50 billion, three firms have total assets between $10 billion and $50 billion, and four firms have total assets less than $10 billion. With the exception of one ISLHC, which owns a thrift subsidiary that comprises more than half of the firm's total assets, thrift subsidiary assets for most ISLHCs represent less than 25 percent of total assets.

As the consolidated supervisor of ISLHCs, the Federal Reserve evaluates the organization's risk-management practices, the financial condition of the overall organization, and the impact of the nonbank activities on the depository institution. The Federal Reserve focuses supervisory attention on legal entities and activities that are not directly supervised or regulated by state insurance regulators, including intercompany transactions between the depository institution and its affiliates. The Federal Reserve relies to the fullest extent possible on the work of state insurance regulators as part of the overall supervisory assessment of ISLHCs. The Federal Reserve has been active in engaging with the state departments of insurance and the National Association of Insurance Commissioners (NAIC) on general insurance supervision matters.

Financial Market Utilities

FMUs manage or operate multilateral systems for the purpose of transferring, clearing, or settling payments, securities, or other financial transactions among financial institutions or between financial institutions and the FMU. Under the Federal Reserve Act, the Federal Reserve supervises FMUs that are chartered as member banks or Edge Act corporations and coordinates with other federal banking supervisors to supervise FMUs considered bank service providers under the Bank Service Company Act.

In July 2012, the FSOC voted to designate eight FMUs as systemically important under title VIII of the Dodd-Frank Act. As a result of these designations, the Board assumed an expanded set of responsibilities related to these designated FMUs that include promoting uniform risk-management standards, playing an enhanced role in the supervision of designated FMUs, reducing systemic risk, and supporting the stability of the broader financial system. For certain designated FMUs, the Board established risk-management standards and expectations that are articulated in the Board's Regulation HH. In addition to setting minimum risk-management standards, Regulation HH establishes requirements for the advance notice of proposed material changes to the rules, procedures, or operations of a designated FMU for which the Board is the supervisory agency under title VIII. Finally, Regulation HH also establishes minimum conditions and requirements for a Federal Reserve Bank to establish and maintain an account for, and provide services to, a designated FMU.⁹

The Federal Reserve's risk-based supervision program for FMUs is administered by the FMU Supervision Committee (FMU-SC). The FMU-SC is a multidisciplinary committee of senior supervision, payment policy, and legal staff at the Board of Governors and Reserve Banks who are responsible for, and knowledgeable about, supervisory issues for FMUs. The FMU-SC's primary objective is to provide senior-level oversight, consistency, and direction to the Federal Reserve's supervisory process for FMUs. The FMU-SC coordinates with the LISCC on issues related to the roles of LISCC firms in FMUs as well as the payment, clearing, and settlement activities of LISCC firms and the FMU activities and implications for financial institutions in the LISCC portfolio.

In an effort to promote greater financial market stability and mitigate systemic risk, the Board works closely with the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), both of which also have supervisory authority for certain FMUs. The Federal Reserve's work with these agencies under title VIII, including the sharing of appropriate information and participation in designated FMU examinations, aims to improve consistency in FMU supervision, promote robust FMU risk management, and improve regulators' ability to monitor and mitigate systemic risks.

Designated Nonbank Financial Companies

The Federal Reserve's supervisory approach for designated companies is tailored to account for different material characteristics of a firm. The Dodd-Frank Act requires the Board to apply enhanced prudential standards to the nonbank financial companies designated by the FSOC for supervision by the Board. The act authorizes the Board to tailor the application of these standards and requirements to different companies on an individual basis or by category.

In June 2016, the Board issued an advance notice of proposed rulemaking (ANPR) inviting comment on conceptual frameworks for capital standards that could apply to companies with significant insurance activities.¹⁰ The Board also issued a proposed rule to apply enhanced prudential standards relating to corporate governance, risk management, and liquidity risk-management standards to such companies. Additionally, the Federal Reserve monitors developments of a designated nonbank financial company and exercises its supervisory authority to foster safe and sound practices and to promote financial stability. Currently only Prudential Financial, Inc., is subject to Federal Reserve supervision.

International Activities

The Federal Reserve supervises the foreign branches and overseas investments of state member banks, Edge Act and agreement corporations, and BHCs (including 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.

Foreign operations of U.S. banking organizations. 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 resides. Examiners also visit the overseas offices of U.S. banking organizations to obtain financial and operating information and, in some instances, to test their adherence to safe and sound banking practices and compliance with rules and regulations. 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 OCC.

At the end of 2017, a total of 31 member banks were operating 329 branches in foreign countries and overseas areas of the United States; 16 national banks were operating 278 of these branches, and 15 state member banks were operating the remaining 51. In addition, 7 nonmember banks were operating 15 branches in foreign countries and overseas areas of the United States.

Edge Act and agreement corporations. 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 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 2017, out of 36 banking organizations chartered as Edge Act or agreement corporations,
3 operated 7 Edge Act and agreement branches. These corporations are examined annually.

U.S. activities of foreign banks. Foreign banks continue to be significant participants in the U.S. banking system. As of year-end 2017, a total of 144 foreign banks from 48 countries operated 157 state-licensed branches and agencies, of which 6 were insured by the FDIC, and 57 OCC-licensed branches and agencies, of which 4 were insured by the FDIC. These foreign banks also owned 7 Edge Act and agreement corporations. In addition, they held a controlling interest in 42 U.S. commercial banks. Altogether, the U.S. offices of these foreign banks controlled approximately 21 percent of U.S. commercial banking assets. These 144 foreign banks also operated 86 representative offices; an additional 37 foreign banks operated in the United States through a representative office. The Federal Reserve--in coordination with appropriate state regulatory authorities--examines state-licensed, non-FDIC-insured branches and agencies of foreign banks on-site at least once every 18 months.¹¹ 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. As part of the supervisory process, a review of the financial and operational profile of each organization is conducted to assess the organization's ability to support its U.S. operations and to determine what risks, if any, the organization poses to the banking system through its U.S. operations. The Federal Reserve conducted or participated with state and federal regulatory authorities in 590 examinations of foreign banks in 2017.

Compliance with Regulatory Requirements

The Federal Reserve examines institutions for compliance with a broad range of legal requirements, including anti-money-laundering (AML) 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 Supervision and Regulation (S&R), but consumer compliance supervision is conducted under the oversight of the Division of Consumer and Community Affairs (DCCA).¹² 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.

Anti-Money-Laundering Examinations

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 AML laws and regulations and conducts such examinations in accordance with the Federal Financial Institutions Examination Council's (FFIEC's) Bank Secrecy Act/Anti-Money Laundering Examination Manual.¹³

Specialized Examinations

The Federal Reserve conducts specialized examinations of supervised financial institutions 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.

Information Technology Activities

As part of its role in ensuring the safe and sound operations of financial institutions, the Federal Reserve conducted reviews of the information technology activities of supervised financial institutions and their technology service providers (TSPs). In February 2017, the Federal Reserve released the Information Technology Risk Examination Program (InTREx). In general, InTREx applies to state member and non-member banks with less than $50 billion in total consolidated assets. The Federal Reserve also applies InTREx to foreign banking organizations' U.S. branches and agencies with less than $50 billion in assets as well as certain BHCs and SLHCs with less than $50 billion in total consolidated assets. InTREx was developed in collaboration with the FDIC and state banking agencies, and provides Federal Reserve examiners risk-focused and tailored examination procedures for conducting information technology reviews and assessing information technology risks at supervised institutions.

The Federal Reserve also contributed to FFIEC information technology supervisory matters, emerging technology issues, and updates to the FFIEC's IT Examination Handbook. The Federal Reserve chaired the FFIEC's IT Subcommittee, the primary interagency group responsible for coordination across member agencies on information technology activities. The IT Subcommittee conducted a conference for IT examiners from all of the FFIEC member agencies, which highlighted current and emerging technology issues affecting supervised institutions and their service providers. Additionally, the Federal Reserve contributed to handbook updates to incorporate a more enterprise-wide risk-management approach to the assessment of information technology risks at supervised institutions.

In July 2017, the IT Subcommittee and Cybersecurity and Critical Infrastructure Working Group (CCIWG) hosted an FFIEC Industry Outreach webinar to provide information on the update to the handbook and the Cybersecurity Assessment Tool. The webinar also provided financial institutions the opportunity to ask clarifying questions about other information technology-related matters. In addition, the FFIEC hosted an Examiner Exchange webinar to provide supervisory staff the opportunity to address specific questions on emerging issues in a peer-to-peer learning environment.

Fiduciary Activities

The Federal Reserve has supervisory responsibility for state member banks and state member nondepository trust companies, which hold assets in various fiduciary and custodial capacities. On-site examinations of fiduciary and custodial 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 compliance risk exposures; the quality and level of earnings; the management of fiduciary assets; and audit and control procedures. In 2017, Federal Reserve examiners conducted 115 fiduciary examinations--excluding transfer agent examinations--of state member banks.

Transfer Agents

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 2017, the Federal Reserve conducted transfer agent examinations at four state member banks that were registered as transfer agents.

Government and Municipal Securities Dealers and Brokers

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. Fourteen state member banks and six 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 2017, the Federal Reserve conducted four 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. Three entities supervised by the Federal Reserve that dealt in municipal securities were examined during 2017.

Securities Credit Lenders

Under the Securities Exchange Act of 1934, the Board is responsible for regulating credit in certain transactions involving the purchasing 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. 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).

Cybersecurity and Critical Infrastructure

The Federal Reserve collaborated with other financial regulators, the U.S. Treasury, private industry, and international partners to promote appropriate and cost-effective safeguards against cyber threats to the financial services sector and to bolster the sector's cyber resiliency. Federal Reserve examiners continued to conduct targeted cybersecurity assessments of the largest, most systemically important financial institutions, FMUs, and TSPs. The Federal Reserve worked with the OCC and FDIC to develop and implement common examination procedures for the cybersecurity assessments of TSPs. Federal Reserve examiners also continued to conduct cybersecurity assessments at community and regional banking organizations that were tailored to their specific risk profiles. As part of these efforts, the Federal Reserve coordinated with other financial regulators to
align supervisory expectations and examination approaches with the National Institute for Standards and Technology's Cybersecurity Framework and other best practices in the financial sector.

In 2017, the Federal Reserve contributed to interagency groups such as the FFIEC's CCIWG, the Financial and Banking Information Infrastructure Committee (FBIIC), and the Cybersecurity Forum for Independent and Executive Branch Regulators to share information and collaborate on cybersecurity and critical infrastructure issues impacting the financial sector. In coordination with FBIIC members, the Federal Reserve collaborated with government and industry partners to plan and execute sector-wide and regional tabletop exercises focused on identifying areas where sector resiliency, information sharing, and public-private collaboration can be enhanced with respect to potential cybersecurity incidents. The exercises focused on tactical, strategic, operational, and financial stability considerations that tested both government and private sector processes and capabilities for addressing cyber incidents across the financial services sector.

The Federal Reserve also contributed to key cybersecurity areas that were identified during the FFIEC's 2014 pilot assessment of cybersecurity readiness, including risk management and oversight, threat intelligence and collaboration, cybersecurity controls, external dependency management, and cyber incident management and resilience. Through participation in the CCIWG, the Federal Reserve also contributed to a May 2017 update of the Cybersecurity Assessment Tool. The update addressed changes to the FFIEC IT Examination Handbook by providing a revised mapping to the updated Information Security and Management booklets. The updated tool also provided additional response options, allowing financial institution management to include supplementary or complementary behaviors, practices, and processes that represent current practices of an institution in supporting its cybersecurity activity assessment (www.ffiec.gov/press/pr053117.htm). In October 2017, the Federal Reserve participated in an FFIEC Examiner Exchange webinar to provide examiners an opportunity to collaborate with industry professionals on cyber-related risks.

In addition, the Federal Reserve was actively involved in international policy coordination on approaches to address cyber-related risks and efforts to bolster cyber resiliency. The Federal Reserve supported the Group of Seven (G-7) Fundamental Elements of Cybersecurity for the Financial Sector and other activities to enhance international coordination and knowledge sharing. The Federal Reserve also supported the Financial Stability Board's (FSB's) stock-take of regulations, guidance, and supervisory activities in order to explore the degree of uniformity and gaps that exist across jurisdictions (www.fsb.org/2017/10/fsb-publishes-stocktake-on-cybersecurity-regulatory-and-supervisory-practices/).

Enforcement Actions

The Federal Reserve has enforcement authority over the financial institutions 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, prompt corrective action directives, removal and prohibition orders, and civil money penalties. In 2017, the Federal Reserve completed 83 formal enforcement actions. Civil money penalties totaling $690,320,000 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 corrective 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 (www.federalreserve.gov/apps/enforcementactions/search.aspx).

In 2017, the Reserve Banks completed 89 informal enforcement actions. Informal enforcement actions include memoranda of understanding (MOU), commitment letters, and board of directors' resolutions.

Surveillance and Off-Site Monitoring

The Federal Reserve uses automated screening systems to monitor the financial condition and performance of state member banks and BHCs in the period 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 (SR-SABR) model. 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.

Federal Reserve analysts use Performance Report Information and Surveillance Monitoring (PRISM), a querying tool, 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. During 2017, one major and five minor upgrades to the web-based PRISM application were completed to enhance the user's experience and provide the latest technology.

The Federal Reserve works through the FFIEC Task Force on Surveillance Systems to coordinate surveillance activities with the other federal banking agencies.

Training and Technical Assistance

The Federal Reserve provides training and technical assistance to foreign supervisors and minority-owned depository institutions.

International Training and Technical Assistance

In 2017, the Federal Reserve continued to provide training and technical assistance on 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 of Governors or the Reserve Banks.

The Federal Reserve offered a number of training programs for the benefit of foreign supervisory authorities, which were held both in the United States and in many foreign jurisdictions. Federal Reserve staff took part in technical assistance and training assignments led by the International Monetary Fund, the World Bank, and the Financial Stability Institute. The Federal Reserve also contributed to the regional training provided under the Asia-Pacific Economic Cooperation Financial Regulators Training Initiative. Other training partners that collaborated with the Federal Reserve during 2017 to organize regional training programs included the South East Asian Central Banks Research and Training Centre, the Caribbean Group of Banking Supervisors, the Banque de France, the Reserve Bank of India, the Central Bank of the United Arab Emirates, and the Association of Supervisors of Banks of the Americas.

Efforts to Support Minority-Owned
Depository Institutions

The Federal Reserve System implements its responsibilities under section 367 of the Dodd-Frank Act primarily through its Partnership for Progress (PFP) program. Established in 2008, this program promotes the viability of minority depository institutions (MDIs) by facilitating activities designed to strengthen their business strategies, maximize their resources, and increase their awareness and understanding of supervisory expectations. In addition, the Federal Reserve continues to maintain the PFP website, which supports MDIs by providing them with technical information and links to useful resources (www.fedpartnership.gov). Representatives from each of the 12 Federal Reserve Districts, along with staff from the S&R and DCCA divisions at the Board of Governors, continue to offer technical assistance tailored to MDIs by providing targeted supervisory guidance, identifying additional resources, and fostering mutually beneficial partnerships between MDIs and community organizations. As of year-end 2017, the Federal Reserve's MDI portfolio included 16 state member banks.

Throughout 2017, the Federal Reserve System continued to support MDIs through the following activities:

• Co-organized the biannual Interagency Minority Depository Institutions and Community Development Financial Institutions (CDFI) Bank Conference that took place April 5-6, 2017, in Los Angeles, California. The meeting was hosted at the Los Angeles branch of the Federal Reserve Bank of San Francisco, and all planning was done in conjunction with staff from the OCC and FDIC. The theme of the conference was "Expanding the Impact: Increasing Capacity & Influence," and attendance included over 175 people, mostly consisting of MDI bank leadership.
• Co-organized a post-conference workshop with the CDFI Fund to educate non-CDFI MDIs about the benefits of and application process for CDFI certification.
• Strengthened the partnership between the Board's DCCA and S&R divisions to share management of the PFP program and diversify the resources and programing available to MDIs. The Federal Reserve System also worked to encourage partnership between examination and community development staff at the Federal Reserve Banks to bring additional resources to MDIs around the country.
• Attended the annual National Bankers Association meeting in Washington, D.C., and hosted an exhibit table.
• Provided technical assistance to MDIs on a wide variety of topics, including improving regulatory ratings, navigating the regulatory applications process, understanding changes to the Community Reinvestment Act, and refining capital planning practices.
• Co-sponsored the "Forum for Minority Bankers" with the Federal Reserve Banks of Kansas City (lead sponsor), Atlanta, Richmond, Philadelphia, and St. Louis. The forum is a national program that provides minority bank leaders with industry knowledge and professional development and was held in September 2017 in Kansas City, Missouri.
• Facilitated in-person meetings between Federal Reserve and MDI leaders to better understand the challenges and opportunities facing Federal Reserve-regulated MDIs.
• Presented Federal Reserve-commissioned research on MDIs at the biannual interagency conference in Los Angeles (see above). The Federal Reserve has commissioned additional studies for 2018 to broaden the body of research material available to MDIs.

Supervisory Policy

The Federal Reserve's supervisory policy function, carried out by the Board, is responsible for developing regulations and guidance for financial institutions under the Federal Reserve's supervision as well as guidance for examiners. The Board, often in concert with the OCC and the FDIC (together, the federal banking agencies), issues rulemakings, public SR letters, and other policy statements and guidance in order to carry out its supervisory policies. Federal Reserve staff also take part in supervisory and regulatory forums, provide support for the work of the FFIEC, and participate in international policymaking forums, including the Basel Committee on Banking Supervision (BCBS), the Financial Stability Board (FSB), the Committee on Payments and Market Infrastructures (CPMI), and the International Association of Insurance Supervisors (IAIS).

Consistent with the Federal Reserve's risk-focused approach to supervision and as provided by law, the Federal Reserve tailors supervisory rules and guidance in a way that applies the most stringent requirements to the largest, most complex banking organizations that pose the greatest risk to the financial system.

Enhanced Prudential Standards

The Board, sometimes in conjunction with other federal agencies, is responsible for issuing a number of rules and guidance statements under the Dodd-Frank Act. Listed below are the initiatives undertaken by the Board in 2017.

• In January, the Board issued a final rule that modified its capital plan and stress testing rules for the 2017 capital planning cycle. Among other changes, the final rule removed large and noncomplex firms from the qualitative component of the Federal Reserve's CCAR assessment, reducing significant burden on these firms. The final rule defines large and noncomplex firms as firms that have total consolidated assets of at least $50 billion but less than $250 billion, have total consolidated nonbank assets of less than $75 billion, and are not identified as global systemically important banks (G-SIBs). These firms continue to be subject to the quantitative requirements of CCAR as well as normal supervision by the Federal Reserve regarding their capital planning. The final rule also reduces certain reporting requirements for these firms. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2017-02-03/pdf/2017-02257.pdf.
• In September, the Board issued a final rule that improved the resolvability and resilience of systemically important U.S. banking organizations and systemically important foreign banking organizations. Under the final rule, any U.S. top-tier BHC identified by the Board as a G-SIB, the subsidiaries of any U.S. G-SIB (other than national banks, federal savings associations, state nonmember banks, and state savings associations), and the U.S. operations of any foreign G-SIB (other than national banks, federal savings associations, state nonmember banks, and state savings associations) would be subject to restrictions regarding the terms of their non-cleared qualified financial contracts (QFCs). The final rule also amends certain definitions in the Board's capital and liquidity rules; these amendments are intended to ensure that the regulatory capital and liquidity treatment of QFCs to which a covered entity is party is not affected by the final rule's restrictions on such QFCs. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2017-09-12/pdf/2017-19053.pdf.

• In December, the Board requested comment on a package that would increase the transparency of its stress testing program while maintaining the Board's ability to test the resilience of the nation's largest and most complex banking organizations. The package includes the following three elements:

  • A notice of enhanced model disclosure that describes three proposals to disclose additional detail about supervisory stress test models and how they function. The Board proposed to expand and standardize descriptions of supervisory models; to publish loss rates assigned by supervisory models to subgroups of loans and summary statistics associated with the loans in each subgroup; and to publish portfolios of hypothetical loans along with estimated loss rates assigned to these hypothetical portfolios. The notice of enhanced model disclosure includes an example of these proposals for the corporate loan supervisory model. The notice of enhanced model disclosure is available at www.gpo.gov/fdsys/pkg/FR-2017-12-15/pdf/2017-26856.pdf.
  • A proposed Stress Testing Policy Statement describing the Board's approach to model development, implementation, use, and validation. This statement elaborates on prior disclosures and provides details on the principles and policies that guide the Board's development of its stress testing models. The proposed statement is available at www.gpo.gov/fdsys/pkg/FR-2017-12-15/pdf/2017-26857.pdf.
  • A proposal to modify the Board's framework for the design of the annual hypothetical economic scenarios. The modifications aim to enhance transparency and to further promote the resilience of the banking system throughout the economic cycle. In particular, the revisions include a quantitative guide for the hypothetical path of house prices, as well as notice that the Board is exploring the addition of variables to test for funding risks in the hypothetical scenarios. The proposal is available at www.gpo.gov/fdsys/pkg/FR-2017-12-15/pdf/2017-26858.pdf.

Other Rulemakings

In 2017, the Board issued several other rulemakings and guidance documents related to liquidity and regulatory capital, as listed below.

• In July, the federal banking agencies issued a proposed rule that would raise the threshold for commercial real estate transactions requiring an appraisal from $250,000 to $400,000. Instead of an appraisal, the proposal would require that a commercial real estate transaction at or below the threshold receive an evaluation that provides a market value estimate of the real estate pledged as collateral, which is less detailed than an appraisal and does not require completion by a state licensed or certified appraiser. The proposal is available at www.gpo.gov/fdsys/pkg/FR-2017-07-31/pdf/2017-15748.pdf.
• In August, the Board issued proposed guidance that addresses supervisory expectations of boards of directors at institutions that are regulated by the Board. The proposal would refocus the Board's supervisory expectations for the largest firms' boards of directors on their core responsibilities, which include overseeing the types and levels of risk a firm may take and aligning the firm's business strategy with decisions on how to address such risk. Additionally, the proposal would reduce unnecessary burden for the boards of smaller institutions. The proposed guidance is available at www.gpo.gov/fdsys/pkg/FR-2017-08-09/pdf/2017-16735.pdf.
• In August, the Board issued a proposed rule to better align the Board's rating system for large financial institutions with the post-crisis supervisory program for these firms. The proposed changes to the rating system would incorporate recent changes related to capital and liquidity requirements, and to expectations regarding the effectiveness of governance and controls, including firms' compliance with laws and regulations. The proposed rating system would only apply to large financial institutions, such as domestic BHCs and SLHCs with $50 billion or more in total consolidated assets as well as intermediate holding companies of foreign banking organizations. The proposed rule is available at www.gpo.gov/fdsys/pkg/FR-2017-08-17/pdf/2017-16736.pdf.
• In September, the federal banking agencies proposed a rule intended to reduce regulatory burden by simplifying several requirements in the agencies' regulatory capital rule. Specifically, the proposed rule would simplify the capital treatment for certain acquisition, development, and construction loans; mortgage servicing assets; certain deferred tax assets; investments in the capital of unconsolidated financial institutions; and minority interest. The proposed rule is consistent with the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) report issued by the agencies in 2017 whereby the federal banking agencies committed to meaningfully reduce regulatory burden, especially on community banking organizations, while at the same time maintaining safety and soundness and the quality and quantity of regulatory capital in the banking system. The proposed rule is available at www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170927a1.pdf.
• In October, the federal banking agencies issued guidance regarding frequently asked questions (FAQs) on implementation of the liquidity coverage ratio (LCR) and modified LCR rules, published by the Board in SR letter 17-11, "Interagency Frequently Asked Questions on Implementation of the Liquidity Coverage Ratio Rule." The purpose of the FAQs is to clarify certain aspects of the existing LCR and modified LCR rules based on questions received since the rules were published. The FAQs do not represent new rules or regulations, nor do they amend any of the existing requirements of the rules. The FAQs are available at www.federalreserve.gov/supervisionreg/srletters/sr1711.htm.
• In November, the federal banking agencies issued a final rule that extended for certain banking organizations the transitional capital requirements applicable during 2017 for certain items (e.g., mortgage servicing assets, certain deferred tax assets, and minority interest). The final rule prevents certain requirements from taking full effect for these items while the agencies consider broader simplifications of the capital rules. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2017-11-21/pdf/2017-25172.pdf.

International Coordination on
Supervisory Policies

As a member of several international financial standard-setting bodies, the Federal Reserve actively participates in efforts to advance sound supervisory policies for internationally active financial organizations and to enhance the strength and stability of the international financial system.

Basel Committee on Banking Supervision

During 2017, the Federal Reserve contributed to supervisory policy recommendations, reports, and papers issued for consultative purposes or finalized by the BCBS that are designed to improve the supervision of banking organizations' practices and to address specific issues that emerged during the financial crisis. Of note, the Federal Reserve contributed to the finalization of the Basel III reform package --a central element of the BCBS's response to the financial crisis --which establishes a framework that increases the robustness and reliability of the regulatory capital requirements for banking organizations. The Federal Reserve also participated in ongoing international initiatives to track the progress of implementation of the BCBS framework in member countries.

Final BCBS documents issued in 2017 include

• Frequently asked questions on market risk capital requirements (issued in January and available at www.bis.org/bcbs/publ/d395.pdf).
• Basel III -- The Net Stable Funding Ratio: frequently asked questions (issued in February and available at www.bis.org/bcbs/publ/d396.pdf).
• Pillar 3 disclosure requirements -- consolidated and enhanced framework (issued in March and available at www.bis.org/bcbs/publ/d400.pdf).
• Regulatory treatment of accounting provisions -- interim approach and transitional arrangements(issued in March and available at www.bis.org/bcbs/publ/d401.pdf).
• Basel III -- The Liquidity Coverage Ratio framework: frequently asked questions (issued in June and available at www.bis.org/bcbs/publ/d406.pdf).
• Implementation of Basel standards (issued in July and available at www.bis.org/bcbs/publ/d412.pdf).
• Basel III definition of capital -- Frequently asked questions (issued in September and available at www.bis.org/bcbs/publ/d417.pdf).
• Basel III: Finalizing post-crisis reforms (issued in December and available at www.bis.org/bcbs/publ/d424.pdf).
• Supervisory and bank stress testing: range of practices (issued in December and available at www.bis.org/bcbs/publ/d427.pdf).

Consultative BCBS documents issued in 2017 include

• Global systemically important banks -- revised assessment framework (issued in March and available at www.bis.org/bcbs/publ/d402.pdf).
• Simplified alternative to the standardised approach to market risk capital requirements (issued in June and available at www.bis.org/bcbs/publ/d408.pdf).
• Capital treatment for simple, transparent and comparable short-term securitisations (issued in July and available at www.bis.org/bcbs/publ/d413.pdf).
• Sound Practices: Implications of fintech developments for banks and bank supervisors (issued in August and available at www.bis.org/bcbs/publ/d415.pdf).
• The regulatory treatment of sovereign exposures (issued in December and available at www.bis.org/bcbs/publ/d425.pdf).
• Stress testing principles (issued in December and available at www.bis.org/bcbs/publ/d428.pdf).

Financial Stability Board

In 2017, the Federal Reserve continued its participation in the activities of the FSB, an international group that helps coordinate the work of national financial authorities and international standard-setting bodies, and develops and promotes the implementation of financial sector policies in the interest of financial stability.

FSB publications issued in 2017 include

• Guidance on Central Counterparty Resolution and Resolution Planning (issued in July and available at www.fsb.org/wp-content/uploads/P050717-1.pdf).
• Analysis of Central Clearing Interdependencies (issued in July jointly with the BCBS, CPMI, and IOSCO and available at www.fsb.org/wp-content/uploads/P050717-2.pdf).
• Guiding Principles on the Internal Total Loss-absorbing Capacity of G-SIBs ("Internal TLAC") (issued in July and available at www.fsb.org/wp-content/uploads/P060717-1.pdf).

Committee on Payments and Market Infrastructures

In 2017, the Federal Reserve continued its active participation in the activities of the CPMI, a forum in which central banks promote the safety and efficiency of payment, clearing, settlement, and related arrangements. In conducting its work on financial market infrastructures and market-related reforms, the CPMI often coordinates with the International Organization of Securities Commissions (IOSCO). Over the course of 2017, CPMI-IOSCO continued to monitor implementation of the Principles for Financial Market Infrastructures and published further guidance on these principles to enhance the resilience of central counterparties and strengthen recovery arrangements for financial market infrastructures. Additionally, CPMI-IOSCO produced a consultative framework for supervisory stress testing of central counterparties. This framework is designed to support supervisory stress tests that examine the potential macro-level impact of a common stress event affecting multiple central counterparties. The CPMI also produced a consultative note in 2017 outlining a strategy to help focus industry efforts in addressing the increasing threat of wholesale payments fraud related to endpoint security. Additional information is available at www.bis.org.

International Association of Insurance Supervisors

The Federal Reserve continued its participation in 2017 in the development of international supervisory standards and guidance to ensure that they are appropriate for the U.S. insurance market. The Federal Reserve continues to participate actively in standard setting at the IAIS in consultation and collaboration with state insurance regulators, the NAIC, and the Federal Insurance Office to present a coordinated U.S. voice in these processes. The Federal Reserve's participation focuses on those aspects most relevant to the supervision of FSOC-designated insurance firms and in research and analysis related to capital frameworks and financial stability topics.

In 2017, the IAIS issued for public consultation the revised text of 14 Insurance Core Principles (ICPs) as well as certain associated standards and guidance specific to the supervision of internationally active insurance groups.¹⁴

The IAIS also issued a version of its developing Insurance Capital Standard for extended field testing in August 2017. In addition, the IAIS issued several final and consultative reports as well as research reports in 2017.¹⁵

Final papers and reports:

• FinTech Developments in the Insurance Industry (issued in March and available at www.iaisweb.org/page/news/other-papers-and-reports/file/65625/report-on-fintech-developments-in-the-insurance-industry).
• Application Paper on the Regulation and Supervision of Mutuals, Cooperatives and Community‑Based Organizations in Increasing Access to Insurance Markets (issued in September and available at www.iaisweb.org/page/supervisory-material/application-papers/file/68822/application-paper-on-mutuals-cooperatives-and-community-based-organisations-september-2017).
• Application Paper on Group Corporate Governance (issued in November and available at www.iaisweb.org/page/supervisory-material/application-papers/file/69940/application-paper-on-group-corporate-governance).
• Application Paper on Product Oversight in Inclusive Insurance (issued in November and available at www.iaisweb.org/page/supervisory-material/application-papers/file/70163/application-paper-on-product-oversight-in-inclusive-insurance).

Consultative papers:

• Issues Paper on Index Based Insurances (issued in December and available at www.iaisweb.org/page/consultations/closed-consultations/2018/draft-issues-paper-on-index-based-insurances ).
• Activities-Based Approach to Systemic Risk (issued in December and available at https://www.iaisweb.org/page/consultations/closed-consultations/2018/activities-based-approach-to-systemic-risk/file/70440/interim-aba-cp-final-for-launch).

Accounting Policy

The Federal Reserve supports sound corporate governance and effective accounting and auditing practices for all regulated financial institutions. Accordingly, the Federal Reserve's accounting policy function is responsible for providing expertise in policy development and implementation efforts, both within and outside the Federal Reserve System, on issues affecting the banking and insurance industries in the areas of accounting, auditing, internal controls over financial reporting, financial disclosure, and supervisory financial reporting.

Federal Reserve staff regularly consult with key constituents in the accounting and auditing professions, including domestic and international standard-setters, accounting firms, accounting and financial sector trade groups, and other financial sector regulators to facilitate the Board's understanding of domestic and international practices; proposed accounting, auditing, and regulatory standards; and the interactions between accounting standards and regulatory reform efforts. The Federal Reserve also participates in various accounting, auditing, and regulatory forums in order to both formulate and communicate its views.

The Financial Accounting Standards Board (FASB) issued an accounting standard in 2016 that overhauls the accounting for credit losses with a new impairment model based on "expected credit losses methodology" (CECL). CECL's implementation will affect a broad range of supervisory activities, including regulatory reports, examinations, and examiner training. During 2017, the Federal Reserve together with the other federal banking agencies continued to monitor the industry's implementation efforts, and provided comments on significant interpretations as observers of the FASB's Transition Resource Group and through outreach and routine discussions with standard setters and other stakeholders, as described above. In September, the Federal Reserve issued the third supervisory guidance related to CECL, SR letter 17-8, "Frequently Asked Questions on the Current Expected Credit Losses Methodology (CECL)," on an interagency basis to further aid institutions in their implementation of CECL.¹⁶

During 2017, the Federal Reserve together with the federal banking agencies issued comment letters on the Public Accounting Oversight Board's proposed amendments to auditing standards for auditor's use of the work of specialists and on proposed auditing standard on auditing accounting estimates were issued during the past year.

Federal Reserve staff continued to participate in meetings of the BCBS Accounting Experts Group and the IAIS Accounting and Auditing Working Group. These groups represent their respective organizations at international meetings on accounting, auditing, and disclosure issues affecting global banking and insurance organizations. Working with international bank supervisors, Federal Reserve staff contributed to the development of publications that were issued by the BCBS, including guidelines on identification and management of step-in risk and frequently asked questions on changes to lease accounting. In collaboration with international insurance supervisors, Federal Reserve staff also made contributions to work related to enhancing IAIS standards on valuation, disclosures, and expectations for external audit-related matters.

Additionally, Federal Reserve staff provided their accounting and business expertise through participation in other supervisory activities during the past year. These activities included supporting Dodd-Frank Act initiatives related to stress testing of banks as well as various regulatory capital-related issues.

Credit-Risk Management

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 management practices; and to ensure that institutions properly identify, measure, and manage credit risk.

Real Estate Appraisals

In May 2017, the federal banking agencies and the NCUA issued joint guidance concerning real estate appraisals in response to concerns raised by institutions in rural areas about appraiser availability. "The Interagency Advisory on the Availability of Appraisers" highlighted two existing options that could help insured depository institutions experiencing appraiser shortages by increasing the universe of individuals eligible to prepare appraisals and facilitating the timely consideration of loan applications. The advisory discusses temporary practice permits, which are issued by state appraiser regulatory agencies and allow states to recognize appraiser credentials issued by another state on a temporary basis for federally related transactions. Institutions may also request temporary waivers, which can set aside certain or all requirements relating to the certification or licensing of individuals to perform appraisals under title XI of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 in states or geographic or political subdivisions where certain conditions are met. The advisory can be found at www.federalreserve.gov/supervisionreg/srletters/sr1704.htm.

Shared National Credit Program

The Shared National Credit (SNC) program is a key supervisory program employed by the Federal Reserve and the other federal banking agencies to ensure the safety and soundness of the financial system. SNC is a long-standing program used to assess credit risk and trends as well as underwriting and risk-management practices associated with the largest and most complex loans shared by multiple regulated financial institutions. The program also provides for uniform treatment and increased efficiency in shared credit risk analysis and classification.

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, which has the following characteristics: an original loan amount that aggregates to $20 million or more¹⁷ 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.

At the 2017 first quarter examination, the SNC portfolio totaled $4.3 trillion, with 11,350 credit facilities to 6,902 borrowers. Summary examination findings showed the percentages of non-pass (aggregate special mention and classified) assets decreased slightly from 2016.¹⁸ Despite the improvement in the percentage of non-pass commitments, the overall level of criticized assets remained elevated and continued to be higher than observed in previous periods of economic expansion, such that losses could rise considerably in the event of an economic downturn. The high level of credit risk in the portfolio stemmed primarily from distressed borrowers in the oil and gas sector and other industry sector borrowers exhibiting excessive leverage. During prior cycles, non-investment-grade borrowers relied more heavily on the high-yield bond market to finance operations. Today, those borrowers, especially when controlled by financial sponsors, tend to favor the syndicated loan market for their financing needs. As a result, the current portfolio reflects a larger volume of riskier paper in aggregate.

Leveraged lending accounts for a substantial portion of the SNC portfolio and remains a key focus in the agencies' broader effort to evaluate overall safety and soundness of bank underwriting and risk-management practices. As observed in the first 2017 examination, agent bank underwriting and risk-management processes to reduce and manage the risk of leveraged lending exposures continued to improve. In particular, most agent banks were better equipped to project future cash flows to assess borrower repayment capacity and enterprise valuations, resulting in better alignment with basic safety and soundness principles. Despite this progress, the frequent use of incremental debt facility provisions in loan agreements, which rarely limit use of proceeds, often resulted in increased credit risk when utilized for non-cash generating purposes such as dividends. Leveraged loan transactions typically exhibited limited financial flexibility due to a combination of elevated financial risk and weak loan structure regardless of risk rating. Any downturn in the economy could result in a significant increase in the already considerable adversely rated leveraged lending exposures.

The severe and prolonged decline in energy prices since 2014 caused financial stress to many energy companies, particularly non-investment-grade and unrated exploration and production (E&P) and energy service companies. Increasing credit risk from reduced revenue was exacerbated by the high leverage of some E&P companies, primarily resulting from debt-funded acquisitions during recent drilling expansion activity, and corresponding reductions in liquidity. Many energy companies responded by taking actions to reduce operating costs and overhead, while preserving liquidity through asset sales, issuance of additional debt and equity instruments, and drawing on remaining senior bank commitments. The U.S. oil and gas industry experienced a slow, albeit volatile, recovery in late 2016 and into the first quarter of 2017. U.S. E&P companies increased capital spending for 2017, a reversal of the production declines in 2016. The industry also reduced operating costs and experienced increased merger and acquisition activity, as companies continued to rationalize and optimize their operations. Risk in the energy portfolio is concentrated in non-investment-grade and unrated E&P and energy service companies and is predominantly held by regulated entities, though banks are primarily in a senior secured position with the lowest risk of loss.

For more information on the 2017 SNC review, visit the Board's website at www.federalreserve.gov/newsevents/pressreleases/bcreg20170802a.htm.

Compliance Risk Management

The Federal Reserve works with international and domestic supervisors to develop guidance that promotes compliance with Bank Secrecy Act and anti-money-laundering compliance (BSA/AML) and counter-terrorism (CFT) laws.

Bank Secrecy Act and Anti-Money-Laundering Compliance

In 2017, the Federal Reserve continued to actively promote the development and maintenance of effective BSA/AML compliance risk-management programs, including developing supervisory strategies and providing guidance to the industry on trends in BSA/AML compliance. For example, the Federal Reserve supervisory staff participated in a number of industry conferences to continue to communicate regulatory expectations and policy interpretations for financial institutions.

The Federal Reserve is a member of the Treasury-led BSA Advisory Group, which includes representatives of regulatory agencies, law enforcement, and the financial services industry and covers all aspects of the BSA. The Federal Reserve also participated in Treasury-led private/public sector dialogues with financial institutions, regulators, and supervisors from Mexico, the United Kingdom, and the People's Republic of China. These dialogues were designed to promote information sharing and understanding of BSA/AML issues between U.S. and country-specific financial sectors. In addition, the Federal Reserve participated in meetings during the year to discuss BSA/AML issues with delegations from Estonia, Singapore, and the Seychelles.

The Federal Reserve also participates in the FFIEC BSA/AML working group, a monthly forum for the discussion of pending BSA policy and regulatory matters. In addition to the FFIEC agencies, the BSA/AML working group includes the Financial Crimes Enforcement Network (FinCEN) and, on a quarterly basis, the SEC, the CFTC, the Internal Revenue Service, and the Office of Foreign Assets Control (OFAC). The FFIEC BSA/AML working group is responsible for updating the FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual. The FFIEC developed this manual as part of its ongoing commitment to provide current and consistent interagency guidance on risk-based policies, procedures, and processes for financial institutions to comply with the BSA and safeguard their operations from money laundering and terrorist financing.

Throughout 2017, the Federal Reserve continued to regularly share examination findings and enforcement proceedings with FinCEN as well as with OFAC under the interagency MOUs finalized in 2004 and 2006.

International Coordination on Sanctions, Anti-Money-Laundering, and Counter-Terrorism Financing

The Federal Reserve participates in a number of international coordination initiatives related to sanctions, money laundering, and terrorism financing. The Federal Reserve has a long-standing role in the U.S. delegation to the intergovernmental Financial Action Task Force (FATF) and its working groups, contributing a banking supervisory perspective to the formulation of international standards. The Federal Reserve participated in the development of FATF Guidance on Private Sector Information Sharing issued in November 2017. In addition, the Federal Reserve participated in the development of FATF Guidance on Customer Due Diligence and Financial Inclusion issued in November 2017, as a supplement to the 2013 FATF Guidance on AML/CFT Measures and Financial Inclusion.

The Federal Reserve also continues to participate in committees and subcommittees through the Bank for International Settlements. Specifically, the Federal Reserve actively participates in the AML Experts Group under the BCBS that focuses on AML and CFT issues, as well as the CPMI. With respect to the AML Experts Group, the Federal Reserve contributed to updating the Correspondent Bankingannex issued in June 2017, which supplements previous guidance on the sound management of risks related to money laundering and financing of terrorism.

Incentive Compensation

To foster improved incentive compensation practices in the financial industry, the Federal Reserve along with the other federal banking agencies adopted interagency guidance oriented to the risk-taking incentives created by incentive compensation arrangements in June 2010. The guidance is based on the principles that incentive compensation arrangements at a banking organization should provide employees incentives that appropriately balance risk and financial results; be compatible with effective controls and risk management; and be supported by strong corporate governance. The guidance recognizes that the methods used to achieve appropriately risk-sensitive compensation arrangements likely will differ significantly across and within firms.

To implement the guidance, the Board developed a robust supervisory program focusing on the largest banking organizations because they are significant users of incentive compensation. Based in part on our supervisory efforts, these institutions have made progress in developing programs and policies and procedures that incorporate these three core principles.

Section 956 of the Dodd-Frank Act requires the Board, OCC, FDIC, SEC, NCUA, and FHFA to jointly develop regulations or guidelines implementing disclosures and prohibitions concerning incentive-based compensation at covered financial institutions with at least $1 billion in assets. The agencies published a revised proposed rule in June 2016. The agencies received over 100 comments on the 2016 proposed rule and are considering the comments.

Other Policymaking Initiatives

• In July, the Board, along with four other financial regulatory agencies, issued a policy statement announcing that they are coordinating their respective reviews of the treatment of certain foreign funds under section 619 of the Dodd-Frank Act, commonly known as the Volcker rule, and the agencies' implementing regulations. These foreign funds are investment funds organized and offered outside of the United States and generally are not subject to the Volcker rule ("foreign excluded funds"). However, complexities in the Volcker rule and the implementing regulations may result in certain foreign excluded funds becoming subject to regulation. The federal banking agencies, which generally oversee foreign banks, would not take action under the Volcker rule for qualifying foreign excluded funds, subject to certain conditions, for a period of one year. The statement is available at www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170721a1.pdf.
• In July, the Board issued SR letter 17-5, "Procedures for a Banking Entity to Request an Extension of the One-Year Seeding Period for a Covered Fund," which provides guidance on how banking entities may seek an extension to conform an investment to the Volcker rule. Under the Volcker rule, a banking entity is permitted to acquire and retain an ownership interest in a covered fund in connection with organizing and offering the covered fund as long as certain requirements are met. The Volcker rule also requires a banking entity to actively seek unaffiliated investors to reduce within one year its investment in the covered fund to an amount that is not more than 3 percent of the total outstanding ownership interests in the fund (referred to as the "per-fund limitation"). A banking entity may request the Board's approval for an extension of time beyond the one-year period, for up to two additional years, to conform an investment to the per-fund limitation. The supervisory guidance is available at www.federalreserve.gov/supervisionreg/srletters/sr1705.htm.
• In August, the Board and the other federal banking agencies issued guidance on the regulatory capital treatment of certain centrally cleared derivative contracts in light of changes to the rulebooks of certain central counterparties. Specifically, the agencies provided guidance on the treatment of cleared settled-to-market contracts under the federal banking agencies' regulatory capital rules. The supervisory guidance is available at www.federalreserve.gov/supervisionreg/srletters/sr1707.htm.
• In September, the Board, along with the other federal banking agencies and the NCUA, issued "Frequently Asked Questions on the Current Expected Credit Loss Methodology (CECL)," which provides guidance to institutions as they implement the new accounting standard for credit losses recently issued by the FASB. These FAQs expand upon the agencies' June 2016 Joint Statement on the New Accounting Standard on Financial Instruments--Credit Losses. The letter also announces that the agencies plan to issue a series of FAQs until the implementation date of the new standard to address questions on the implementation of CECL. The supervisory guidance is available at www.federalreserve.gov/supervisionreg/srletters/sr1708.htm.

Regulatory Reports

The Federal Reserve and the other U.S. federal banking agencies have the authority to require banks and holding companies to submit information, on both a solo and a consolidated basis, on their financial condition, performance, and risks, at regular intervals. The Federal Reserve's data collections, reporting, and governance 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, state supervisors, and, as needed, foreign bank supervisors, to recommend and implement appropriate and timely revisions to the reporting forms and the attendant instructions.

Holding Company Regulatory Reports

The Federal Reserve requires that U.S. holding companies (HCs) periodically submit reports that provide information about their financial condition and structure.¹⁹ This information is essential to formulating and conducting financial institution regulation and supervision. It is also used to respond to information requests by Congress and the public about HCs and their nonbank subsidiaries. Foreign banking organizations also are required to periodically submit reports to the Federal Reserve. For more information on the various reporting forms, see www.federalreserve.gov/apps/reportforms/default.aspx.

During 2017, the following reporting forms were revised:

• FR Y-9C--to implement a number of revisions, which were consistent with changes to the FFIEC Call Reports. The revisions, effective March 2017, included deleting certain existing data items, increasing the existing reporting threshold for time deposits, and clarifying the reporting of certain data items.
• FR Y-9LP--to add a new line item, effective March 2017, for total nonbank assets of a holding company subject to the Federal Reserve Board's capital plan rule for purposes of identifying large and noncomplex firms. This new line item was related to amendments to the capital plan and stress test rules (Regulations Y and YY) published in February 2017.
• FR Y-14--to modify the scope of the global market shock component of the Federal Reserve's stress tests in a manner that would include certain U.S. IHCs of foreign banking organizations, which are subject to the same capital and stress testing standards that apply to domestic BHCs. U.S. IHCs that will become subject to the global market shock in CCAR 2019 as a result of the modified threshold will be subject to an interim market risk component in CCAR 2018. Also, the Federal Reserve modified report forms and instructions to clarify certain data definitions and improve alignment with certain data items reported on other report schedules or reports, and to eliminate two schedules from the FR Y-14A to reduce reporting burden.

FFIEC Regulatory Reports

The law establishing the FFIEC and defining its functions requires the FFIEC to develop uniform reporting systems for federally supervised financial institutions. The Federal Reserve, along with the other member FFIEC agencies, requires financial institutions to submit various uniform regulatory reports. This information is essential to formulating and conducting supervision and regulation and for the ongoing assessment of the overall soundness of the nation's financial system. During 2017, the following FFIEC reporting forms were implemented or revised:

• FFIEC 101--to remove two credit valuation adjustment items.
• FFIEC 031, 041, and 051--to implement a new streamlined version of the Call Report (FFIEC 051) for eligible small institutions and to make certain burden-reducing revisions to the FFIEC 031 and FFIEC 041 Call Reports (filed by larger institutions). See section below on the Call Report Burden Reduction Initiative for more details.

Call Report Burden Reduction Initiative for Community Institutions

In September 2015, the FFIEC announced detailed steps regulators are taking to streamline and simplify regulatory reporting requirements for community banks and reduce their reporting burden. The
objectives of the community bank burden-reduction initiative are consistent with feedback the FFIEC received as part of the regulatory review conducted as required by the EGRPRA of 1996.

Progress made during 2017 by the FFIEC on this multiyear initiative included implementing a new and streamlined Call Report for small financial institutions (FFIEC 051) effective March 2017. Financial institutions with domestic offices only and less than $1 billion in total assets, which represent approximately 90 percent of all institutions required to file Call Reports, qualify for this new report. The streamlined Call Report reduced the existing FFIEC 041 Call Report form from 85 to 61 pages, resulting from the removal of approximately 40 percent of the nearly 2,400 data items in the Call Report. In addition, the frequency of reporting was reduced for over 4 percent of the remaining data items. Table 3 summarizes the overall number of changes finalized and implemented by Call Report form.

Table 3. Data items revised as of March 30, 2018

Other Burden Reduction Initiatives

To reduce burden, the Federal Reserve discontinued the Liquidity Monitoring Report (FR 2052b), with the final data collection as of the September 30, 2017, report date. The FR 2052b report was filed by HCs with total consolidated assets of greater than $10 billion, excluding firms designated as G-SIBs and affiliates of foreign banking organizations with less than $50 billion in total consolidated assets. The report collected quantitative information on selected assets, liabilities, funding activities, and contingent liabilities on a consolidated basis and by material subsidiary entity. This data was used to monitor the overall liquidity profile of certain institutions supervised by the Federal Reserve. In place of the FR 2052b, the Federal Reserve will monitor and assess liquidity risks of previous FR 2052b filers using the recently implemented Liquidity Focus Report (LFR). The LFR provides a consistent method for benchmarking liquidity risk for individual regional banks based on information derived from the Call Report. As mentioned above, there were also burden reducing changes to the FR Y-14 report in 2017.

Supervisory Information Technology

The Federal Reserve's supervisory information technology (SIT) function, under the governance of the Subcommittee for Data and Technology, works to deliver information technology solutions within the supervision and regulation function. Working collaboratively with the Federal Reserve System supervision and regulation business sponsors, SIT provides services to the business lines as well as information technology project management support to several critical national business applications supporting supervision and regulation.

Supervisory and support tools. To support examiners and other supervisory staff, SIT deployed tools to support the collection, use, and storage of supervisory data. SIT integrated supervisory planning and collection tools with a task and resource management program allowing management to better track and align resources. SIT deployed advanced quantitative analysis and data visualization software to allow supervisory analysts to glean insights from supervisory data.

Streamlined data access and improved security. SIT streamlined data access for the supervision function while enhancing overall information security. SIT provides access to data through a central access management tool to support data, applications, and research access-related responsibilities, and establishes effective prevention and detection controls to limit information security threats. In addition to data access provisioning, the tool supports information security measures through routine procedures to verify users' access to data and information to confirm whether there is a continued need for this access.

National Information Center

The National Information Center (NIC) is the Federal Reserve's authoritative source for supervisory, financial, and banking structure data as well as supervisory documents. The NIC includes (1) data on banking structure throughout the United States and foreign banking concerns, (2) national applications supporting the various supervisory programs and the data they capture, (3) data collection processes, and (4) a platform for sharing of the information with external agencies.

Information sharing and external collaboration. The NIC oversees the implementation of approved regulatory interagency information exchanges, including a continually increasing number of new requests. The NIC represents the Federal Reserve on the FFIEC Task Force on Information Sharing, and leads a subgroup, The Path Forward, focusing on improving collaboration, examination file exchange, and big data sharing between the regulatory agencies. Efforts continue to work with the business areas to increase capabilities for collaboration between the agencies.

Document management. A high priority for the NIC was to improve document tracking, storage, and access through the implementation of document management software. The software eliminates point-to-point interfaces between document management systems and systems uploading or referencing documents. The software also moves and tracks documents between management systems as the documents progress through their life cycle.

Data quality and usability. Efforts continue to meet the demands resulting from the increasing amount of data being collected and shared. Much of the data is collected under revised supervisory programs. Similar data between programs cannot always be matched and requires alignment for cross-portfolio purposes. The NIC continues to ensure that the underlying data is consistent, readily available, and easily accessible for authorized use. The NIC also works to ensure that all NIC data is easily understood by the various stakeholders and integrated in a flexible manner.

Data collections. The NIC coordinates budgetary activities and ensures that information technology solutions for data collections meet architectural standards. Increased emphasis on data governance, security, and awareness prompted the build-out of a data collection management system that provides intake on data requests, a playbook for and tracking of the regulatory process, as well as overall status reporting.

Staff Development

The Federal Reserve's staff development program supports the ongoing development of nearly 3,000 professional supervisory staff, ensuring that they have the requisite skills necessary to meet their evolving supervisory responsibilities. The Federal Reserve also provides course offerings to staff at state banking agencies. Training activities in 2017 are summarized in table 4.

Table 4. Training for banking supervision and regulation, 2017

Examiner Commissioning Program

An overview of the Federal Reserve System's Examiner Commissioning Program for assistant examiners is set forth in SR letter 17-6, "Overview of the Federal Reserve's Supervisory Education Programs."²⁰

Examiners choose from one of three specialty tracks: (1) safety and soundness, (2) consumer compliance, or (3) large financial institutions. On average, individuals move through a combination of classroom offerings, self-paced learning, virtual instruction, and on-the-job training over a period of two to three years. Achievement is measured by completing the required course content, demonstrating adequate on-the-job knowledge, and passing a professionally validated proficiency examination. In 2017, 59 examiners passed the proficiency examination (16 in safety and soundness and 43 in consumer compliance).

In 2017, the Board released a new enhanced proficiency examination containing application-based questions designed to measure performance reflecting the level of knowledge and skills needed to effectively perform in an examiner-in-charge role. In addition, further learning units were released for the Large Financial Institutions Examiner Commissioning Program, which will continue to be developed and deployed in 2018.

Continuing Professional Development

Throughout 2017, the Federal Reserve System continued to enhance its continuing professional development program. Learning bundles, which organize various types of learning into a cohesive, easily accessible format that often includes reference materials and application opportunities, were a new product designed to meet the need of training on specific risks or common supervisory topics, such as cybersecurity.

Regulation

The Federal Reserve exercises important regulatory influence over entry into the U.S. banking system structure through its administration of several federal statutes. The Federal Reserve is also responsible for imposing margin requirements on securities transactions. In carrying out its responsibilities, the Federal Reserve coordinates supervisory activities with the other federal banking agencies, state agencies, functional regulators (that is, regulators for insurance, securities, and commodities firms), and foreign bank regulatory agencies.

Regulation of the U.S. Banking Structure

The Federal Reserve administers six federal statutes that apply to BHCs, FHCs, member banks, SLHCs, and foreign banking organizations: the BHC Act, the Bank Merger Act, the Change in Bank Control Act, the Federal Reserve Act, section 10 of the Home Owners' Loan Act (HOLA), and the International Banking Act.

In administering these statutes, the Federal Reserve acts on a variety of applications and notices 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 applications and notices concern BHC and SLHC formations and acquisitions, bank mergers, and other transactions involving banks and savings associations or nonbank firms. In 2017, the Federal Reserve acted on 1,259 applications filed under the six statutes.

In 2017, the Federal Reserve published its Semiannual Report on Banking Applications Activity, which provides aggregate information on proposals filed by banking organizations and reviewed by the Federal Reserve. The report includes statistics on the number of proposals that have been approved, denied, withdrawn, mooted, or returned as well as general information about the length of time taken to process proposals and common reasons for proposals to be withdrawn from consideration. The reports are available at www.federalreserve.gov/bankinforeg/semiannual-reports-banking-applications-activity.htm.

Bank Holding Company Act Applications

Under the BHC 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 BHC Act. Depending on the circumstances, these activities may or may not require Federal Reserve approval in advance of their commencement.²¹

When reviewing a BHC application or notice that requires approval, the Federal Reserve considers the financial and managerial resources of the applicant, the future prospects of both the applicant and the firm to be acquired, financial stability factors, the convenience and needs of the community to be served, the potential public benefits, the competitive effects of the proposal, the applicant's compliance with laws and regulations, and the applicant's ability to make available to the Federal Reserve information deemed necessary to ensure compliance with applicable law. The Federal Reserve also must consider the views of the DOJ regarding the competitive aspects of any proposed BHC acquisition involving unaffiliated insured depository institutions. 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 2017, the Federal Reserve acted on 264 applications and notices filed by BHCs to acquire a bank or a nonbank firm, or to otherwise expand their activities.

A BHC may repurchase its own shares from its shareholders. Certain stock redemptions require prior Federal Reserve approval. 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 2017, the Federal Reserve acted on five stock repurchase applications by BHCs.

The Federal Reserve also reviews elections submitted by BHCs seeking FHC status under the authority granted by the Gramm-Leach-Bliley Act. BHCs seeking FHC status must file a written declaration with the Federal Reserve. In 2017, 36 domestic FHC declarations and one foreign FHC declaration were received.

Bank Merger Act Applications

The Bank Merger Act requires that all applications 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. In acting on a merger application, the Federal Reserve considers the financial and managerial resources of the applicant, the future prospects of the existing and combined organizations, financial stability factors, the convenience and needs of the communities 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 2017, the Federal Reserve approved 63 merger applications under the Bank Merger Act.

Change in Bank Control Act Applications

The Change in Bank Control Act requires individuals and certain other parties that seek control of a U.S. bank, BHC, or SLHC 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, BHCs, and SLHCs. 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, BHC, or SLHC 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 also may contact other regulatory or law enforcement agencies for information about relevant individuals. In 2017, the Federal Reserve approved 134 change in control notices.

Federal Reserve Act Applications

Under the Federal Reserve Act, a bank must seek Federal Reserve approval to become a member bank. 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 applications for membership, the Federal Reserve considers, among other things, the bank's financial condition and its record of compliance with banking laws and regulations. When reviewing applications to establish domestic branches, the Federal Reserve considers, among other things, the scope and nature of the banking activities to be conducted. When reviewing applications for foreign branches, the Federal Reserve considers, among other things, the condition of the bank and the bank's experience in international banking. In 2017, the Federal Reserve acted on 19 membership applications, 686 new and merger-related domestic branch applications, and two foreign branch application.

State member banks also must 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 limited securities-related and insurance agency-related activities. In 2017, no financial subsidiary applications were approved.

Home Owners' Loan Act Applications

Under HOLA, a corporation or similar legal entity must obtain the Federal Reserve's approval before forming an SLHC through the acquisition of one or more savings associations in the United States. Once formed, an SLHC must receive Federal Reserve approval before acquiring or establishing additional savings associations. Also, SLHCs generally may engage in only those nonbanking activities that are specifically enumerated in HOLA or that the Board has previously determined to be closely related to banking under section 4(c)(8) of the BHC Act. Depending on the circumstances, these activities may or may not require Federal Reserve approval in advance of their commencement. In 2017, the Federal Reserve acted on 15 applications filed by SLHCs to acquire a savings association or a nonbank firm, or to otherwise expand their activities.

Under HOLA, a mutual savings association reorganizing to a mutual holding company (MHC) structure must receive Federal Reserve approval prior to its reorganization. In addition, an MHC must receive Federal Reserve approval before converting to stock form, and MHCs must receive Federal Reserve approval before waiving dividends declared by the MHC's subsidiary. In 2017, the Federal Reserve acted on five MHC reorganization applications and eight applications to waive dividends. There were no applications approved for MHCs to convert to stock form.

When reviewing an SLHC application or notice that requires approval, the Federal Reserve considers 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. The Federal Reserve also must consider the views of the DOJ regarding the competitive aspects of any SLHC proposal involving the acquisition or merger of unaffiliated insured depository institutions.

The Federal Reserve also reviews elections submitted by SLHCs seeking status as FHCs under the authority granted by the Dodd-Frank Act. SLHCs seeking FHC status must file a written declaration with the Federal Reserve. In 2017, no SLHC FHC declarations were received.

Overseas Investment Applications by U.S. Banking Organizations

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 2017, the Federal Reserve approved 18 applications and notices for overseas investments by U.S. banking organizations, many of which represented investments through an Edge Act or agreement corporation.

International Banking Act Applications

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 applications, 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 2017, the Federal Reserve approved three applications by foreign banks to establish branches, agencies, or representative offices in the United States.

Public Notice of Federal Reserve Decisions and Filings Received

Certain decisions by the Federal Reserve that involve a BHC, SLHC, 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 are made public immediately and 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.2A release gives the deadline for comments. The Board's website provides information on orders and announcements (www.federalreserve.gov/newsevents/press/orders/2017orders.htm) as well as a guide for U.S. and foreign banking organizations that wish to submit applications (www.federalreserve.gov/bankinforeg/afi/afi.htm).

Enforcement of Other Laws and Regulations

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.

Financial Disclosures by State Member Banks

Under the Securities Exchange Act of 1934 and the Federal Reserve's Regulation H, certain state member banks are required to make financial disclosures to the Federal Reserve using the same reporting forms (such as Form 10K--annual report and Schedule 14A--proxy statement) that are normally used by publicly held entities to submit information to the SEC.²² As most of the publicly held banking organizations are BHCs and the reporting threshold was recently raised, only two state member banks were required to submit data to the Federal Reserve in 2017. The information submitted by these two small state member banks is available to the public upon request and is primarily used for disclosure to the bank's shareholders and public investors.

Assessments for Supervision and Regulation

The Dodd-Frank Act directs the Board to collect assessments, fees, or other charges equal to the total expenses the Board estimates are necessary or appropriate to carry out the supervisory and regulatory responsibilities of the Board for BHCs and SLHCs with total consolidated assets of $50 billion or more and nonbank financial companies designated for Board supervision by the FSOC. As a collecting entity, the Board does not recognize the supervision and regulation assessments as revenue nor does the Board use the collections to fund Board expenses; the funds are transferred to the Treasury. The Board collected and transferred $507,914,174 in 2017 for the 2016 supervision and regulation assessment.

Securities Credit

Under the Securities Exchange Act of 1934, 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, 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.

Footnotes