Supervisory Developments
This section provides an overview of recent supervisory efforts to assess institutions' safety and soundness and compliance with laws and regulations. Supervisory approaches and priorities differ by a financial institution's size and complexity. The subsections below discuss developments separately for large financial institutions with assets of $100 billion or more, and community and regional banking organizations with assets of less than $100 billion.
The Federal Reserve is responsible for overseeing the implementation of certain laws and regulations relating to consumer protection and community reinvestment. The scope of the Federal Reserve's supervisory jurisdiction varies based on the consumer law or regulation and on the asset size of the state member bank. Consumer-focused supervisory work is designed to promote a fair and transparent marketplace for financial services and to ensure supervised institutions comply with applicable federal consumer protection laws and regulations.
More information about the Federal Reserve's consumer-focused supervisory program can be found in the Federal Reserve's 109th Annual Report 2022.21
Federal Reserve Supervision
The Federal Reserve conducts examinations to evaluate a banking organization's activities, risk management, and financial condition.22 Examinations include assessments of capital adequacy, asset quality, earnings strength and quality, liquidity position and funding sources, sensitivity to interest rate risks, and the quality of board and management oversight. The Federal Reserve may also decide whether to further focus examinations on supervised institutions' known and potential risks.
If supervisors find issues with a bank's risk management or financial condition, they provide direction and require the bank to correct its weaknesses.23 This direction takes the form of confidential supervisory findings called "Matters Requiring Attention" (MRAs) and, for more significant issues that must be corrected on a priority basis, "Matters Requiring Immediate Attention" (MRIAs). These findings are communicated to a banking organization's management and board of directors in a written exam or inspection report. If a bank does not address these supervisory findings or if the findings are significant enough to pose a threat to a bank's safety and soundness, supervisors may lower the bank's supervisory ratings or pursue an enforcement action against the bank.
Supervisory ratings, which are confidential, provide an assessment of a bank's risk management and financial condition based on examination results, supervisory findings, and other information gathered throughout the year. These ratings reflect supervisors' overall judgment of a bank's safety and soundness. Supervisory ratings are generally issued once a year for larger banks and every 18 months for smaller banks but may also be issued on an interim basis if circumstances warrant.24
Supervised Institutions
The Federal Reserve supervises bank holding companies, savings and loan holding companies, state member banks, and foreign banking organizations operating in the United States. The Federal Reserve follows a risk-focused approach by scaling supervisory work to the asset size and complexity of an institution:
- The Large Institution Supervision Coordinating Committee (LISCC) program supervises firms that pose elevated risk to U.S. financial stability.
- The Large and Foreign Banking Organization (LFBO) program supervises U.S. firms with total assets of $100 billion or more and all foreign banking organizations operating in the United States regardless of asset size.
- The Regional Banking Organization (RBO) program supervises U.S. firms with total assets between $10 billion and $100 billion.
- The Community Banking Organization (CBO) program supervises U.S. firms with less than $10 billion in total assets.
Table 2 provides an overview of Federal Reserve supervised organizations by portfolio, including the number of institutions and total assets in each portfolio.
Table 2. Summary of organizations supervised by the Federal Reserve (as of 12/31/2023)
| Portfolio | Definition | Number of institutions | Total assets ($ trillions) |
|---|---|---|---|
| Large Institution Supervision Coordinating Committee (LISCC) | Eight U.S. global systemically important banks (G-SIBs) | 8 | 14.9 |
| State member banks (SMBs) | SMBs within LISCC organizations | 4 | 1.2 |
| Large and foreign banking organizations (LFBOs) | Non-LISCC U.S. firms with total assets $100 billion and greater and FBOs | 170 | 10.5 |
| Large banking organizations (LBOs) | Non-LISCC U.S. firms with total assets $100 billion and greater | 18 | 5.1 |
| Large FBOs (with IHC) | FBOs with combined U.S. assets $100 billion and greater | 10 | 2.9 |
| Large FBOs (without IHC) | FBOs with combined U.S. assets $100 billion and greater | 7 | 1.3 |
| Small FBOs (excluding rep offices) | FBOs with combined assets less than $100 billion | 103 | 1.1 |
| Small FBOs (rep offices) | FBO U.S. representative offices | 32 | 0.0 |
| State member banks | SMBs within LFBO organizations | 9 | 1.1 |
| Regional banking organizations (RBOs) | Total assets between $10 billion and $100 billion | 105* | 2.8 |
| State member banks | SMBs within RBO organizations | 39 | 1.0 |
| Community banking organizations (CBOs) | Total assets less than $10 billion | 3,452** | 3.0 |
| State member banks | SMBs within CBO organizations | 654 | 0.7 |
| Insurance and commercial savings and loan holding companies (SLHCs) | SLHCs primarily engaged in insurance or commercial activities | 5 insurance 4 commercial |
0.5 |
* Includes 104 holding companies and 1 state member bank that does not have a holding company.
** Includes 3,401 holding companies and 51 state member banks that do not have holding companies.
Current Supervisory Priorities
In 2023, the Federal Reserve intensified supervisory efforts to assess banks' preparedness for managing liquidity and credit risks. The Federal Reserve initiated continuous monitoring for a small number of firms with risk profiles vulnerable to funding pressures. The monitoring assessed the adequacy of firms' liquidity and interest rate risk management. Banks are expected to have prudent liquidity risk-management practices and to regularly test their ability to access multiple sources of contingent funding.
Given increased delinquencies in certain loan sectors, credit risk continues to be a supervisory priority. Supervisors are closely monitoring underwriting standards and loan quality. In addition, for CRE-concentrated state member banks, supervisors are conducting in-depth examinations to ensure concentrated banks are exercising strong risk-management practices.
Cybersecurity risk remains a priority. Supervisors are conducting examinations to ensure banks have adequate controls and resilience to protect their data and operations against cybersecurity threats.
The Novel Activities Supervision Program
The Novel Activities Supervision Program is continuing its work with existing Federal Reserve supervisory teams to strengthen the oversight of banking organizations engaged in novel activities and to help foster responsible innovation.25 Supervisors are engaging with institutions to assess novel activities, their associated risks, and the effectiveness of controls to manage these risks. Program staff are also monitoring trends in novel activities at banks, the broader crypto-asset and fintech market, and other novel material developments in this space.
Large Financial Institutions
This section of the report discusses the supervisory approach for large financial institutions—namely, U.S. firms with total assets of $100 billion or more, and foreign banking organizations with combined U.S. assets of $100 billion or more. These firms are either within the LISCC portfolio or the LFBO portfolio. Large financial institutions are subject to regulatory requirements that are tiered to the risk profiles of these firms. The appendix provides an overview of key regulatory requirements.
Supervisory efforts for large financial institutions focus on four components:
- Capital planning and positions,
- Liquidity risk management and positions,
- Governance and controls, and
- Recovery and resolution planning.26
The Financial Condition of Large Financial Institutions
Large financial institutions' capital positions remain above minimum regulatory ratios. However, declines in the fair value of securities have weighed on their tangible equity. In 2023, large financial institutions increased capital ratios, primarily through optimizing risk weighted assets and reducing share repurchases. Large financial institutions' aggregate CET1 capital ratio increased to 12.7 percent as of December 31, 2023, from 12.3 percent as of June 30, 2023.
Large financial institutions' profitability, as measured by return on average assets and return on equity, declined in the fourth quarter. The decline was largely driven by the FDIC special assessment and one-time costs incurred in the fourth quarter.27,28 Excluding these costs, profitability was in line with 2022 levels. Net interest margins remained relatively flat.
At year-end 2023, total loan delinquencies increased to near pre-pandemic levels, driven by CRE and credit cards loans. Large financial institutions continued to increase allowances for credit losses primarily due to a weak outlook for the CRE office and credit card portfolios.
Liquidity positions remain substantially above regulatory requirements. These positions have generally declined from their pandemic peaks but stabilized to pre-pandemic levels.
Trends in Supervisory Ratings and Findings
Federal Reserve supervisors summarize their assessments of large financial institutions using the LFI rating system.29 The LFI rating system evaluates whether a firm possesses sufficient financial and operational strength and resilience to maintain safe-and-sound operations and comply with laws and regulations, including those related to consumer protection, through a range of conditions. It includes three components: (1) capital planning and positions; (2) liquidity risk management and positions; and (3) governance and controls. Each component is rated based on a four-point non-numeric scale: Broadly Meets Expectations, Conditionally Meets Expectations, Deficient-1, and Deficient-2. A firm is considered to be in satisfactory condition if all of its component ratings are "Broadly Meets Expectations" or "Conditionally Meets Expectations."
As of December 31, 2023, two-thirds of large financial institutions were meeting supervisory expectations with respect to the (1) capital positions and planning or (2) liquidity risk management and positions components. However, supervisors have found weaknesses in interest rate risk and liquidity risk-management practices at several large financial institutions. Some large financial institutions continued to show weaknesses in governance and controls related to operational resilience, cybersecurity, and BSA/AML compliance. As a result, only about one-third of the large financial institutions had satisfactory ratings across all three LFI rating components (figure 11).
Figure 11. Ratings for large financial institutions
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Note: Large financial institutions are rated according to three components: Capital Planning and Positions; Liquidity Risk Management and Positions; and Governance and Controls. Bars show the percentage of satisfactory and less-than-satisfactory ratings across all components. The 2023 value is as of the end of 2023:Q4. Key identifies bars in order from top to bottom.
Source: Internal Federal Reserve supervisory databases.
Outstanding supervisory findings at large financial institutions have increased in the second half of 2023, which contributes to the higher percentage of firms being rated less than satisfactory (figure 12). Supervisory findings related to weaknesses in liquidity and interest rate risk-management practices increased. Governance and controls findings represent approximately two-thirds of outstanding issues (figure 13).
Figure 12. Outstanding number of supervisory findings, large financial institutions
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Note: Values are as of year-end. The findings count data are subject to revisions as issues are reviewed, updated, and finalized; this could result in minor historical count fluctuations.
Source: Internal Federal Reserve supervisory databases.
Figure 13. Outstanding supervisory findings by category, large financial institutions
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Note: As of 2023:Q4, total supervisory findings, by portfolio, were: LISCC—280; LBO—345; and FBO > $100B—392. Key shows bars in order from top to bottom.
Source: Internal Federal Reserve supervisory databases.
Supervisory Focus
Supervisors conduct firm-specific examinations and horizontal reviews to assess large financial institutions' resilience and risk-management practices. Horizontal review allows supervisors to compare risk-management practices, identify gaps in practices, and promote sound practices across firms.
Throughout 2023, the Federal Reserve conducted examinations and closely monitored liquidity positions and risk management at large financial institutions. This included reviewing recent deposit trends, deposit and liability management strategies, liquidity risk-management practices, access to secured funding, liquidity stress test projections related to deposits, and liquidity buffer composition.
Supervisors completed examinations to assess interest rate risk-management practices across several large financial institutions. The exams assessed the adequacy of firms' risk-management processes to identify, measure, monitor, and, as needed, mitigate interest rate and related liquidity risks.
Supervisors conducted examinations to monitor and assess credit risk, as asset quality has deteriorated for some loan types. Some large financial institutions reported higher loan losses for CRE and credit card loans and have generally increased provisions for credit losses. Recent examinations reviewed loan quality, firms' internal risk reporting, loss forecasting, risk management, and reserves for credit loss adequacy. In addition, supervisors have assessed the level and quality of loans to nonbank financial institutions, given a substantial increase in lending to this sector in recent years.
Supervisors examined cybersecurity practices across large financial institutions as cyber threats persisted. The examinations assessed firms' capabilities to identify, measure, monitor, and protect against cybersecurity risk.
See below for additional detail on large financial institutions' supervisory priorities for the coming months.
Large Financial Institution Supervisory Priorities
Capital
- interest rate risk
- market and counterparty risk
- consumer and commercial credit, including commercial real estate
- firm remediation efforts on previous supervisory findings
Liquidity
-
internal liquidity stress tests, including
- changes to deposit stress testing segmentation and runoff rate assumptions
- highly liquid asset composition frameworks and monetization assumptions
- firm remediation efforts on previous supervisory findings
- intraday liquidity monitoring and risk-management practices
Governance and Controls
- operational resilience including cybersecurity
- novel banking and information technology risks
- third-party vendor management
- firm remediation efforts on previous supervisory findings
Recovery and Resolution Planning
- recovery and resolution planning, including biannual resolution plan review for the G-SIBS
- remediation and follow-up on resolution plan shortcomings and exam findings, as necessary
- international coordination among global supervisors
Community and Regional Banking Organizations
This section of the report discusses the financial condition and supervisory approach for banking organizations with assets of less than $100 billion, including community banking organizations (CBOs), which have less than $10 billion in total assets, and regional banking organizations (RBOs), which have total assets between $10 billion and $100 billion.
The Financial Condition of CBOs and RBOs
CBOs and RBOs generally remain in sound financial condition, with most banks continuing to report strong capital positions. The aggregate tier 1 leverage ratio increased in 2023, as capital growth outpaced asset growth. The aggregate TCE ratio also increased slightly year-over-year, as the fair value of securities held by banks increased.
Earnings of CBOs and RBOs declined in 2023. Higher funding costs and weaker loan growth compressed net interest margins. For RBOs, higher provisions and noninterest expense, partially attributed to the FDIC special assessment, also contributed to the decline in earnings.
Asset quality generally remains sound. Problem loan levels remain low overall. The total loan delinquency rate increased slightly in 2023. Some banks reported deteriorating CRE loan performance.
Liquidity positions for most CBOs and RBOs are satisfactory. The share of uninsured deposits declined to a level more comparable to pre-pandemic levels. However, challenges remain for some banks. The aggregate ratio of wholesale funding to total assets increased in 2023. Some banks continue to rely heavily on wholesale funding sources that are often more costly and less stable than deposits. Federal Reserve supervisors are closely monitoring liquidity trends and adequate access to contingency funding.
Trends in Supervisory Ratings and Findings
The Federal Reserve and the other federal and state banking agencies utilize the Uniform Financial Institution Rating System (referred to as "CAMELS") to present the supervisor's conclusions regarding the overall condition of the bank. The CAMELS composite rating represents an overall appraisal of six key assessment components covered under the CAMELS rating system: Capital adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk.
For the inspection of a holding company with less than $100 billion in total consolidated assets, the Federal Reserve utilizes the RFI rating system to present the supervisor's conclusions regarding the overall condition of these holding companies. The RFI composite rating represents an overall assessment of three components covered under the RFI rating system: Risk Management, Financial Condition, and Impact of the non-depository entities on the subsidiary depository institutions.
The CAMELS and RFI rating systems are assigned based on a "1 to 5" numeric scale. A "1" numeric rating indicates the highest rating, strongest performance and practices, and least degree of supervisory concern. A "5" numeric rating indicates the lowest rating, weakest performance, and highest degree of supervisory concern. Banks and holding companies that are rated "1" or "2" are generally in satisfactory condition, while banks that are rated "3," "4," or "5" are in less-than-satisfactory condition.
The majority of CBOs and RBOs remain in satisfactory condition with effective risk-management practices (figure 14).30 However, supervisory ratings downgrades have increased due in part to weaknesses in interest rate and liquidity risk-management practices.
Figure 14. Top tier ratings for CBO and RBO firms
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Note: Includes composite ratings for consolidated top-tier holding companies and SMBs without HCs for CBO and RBO firms. The 2023 value is as of the end of 2023:Q4. Key identifies bars in order from top to bottom.
Source: Internal Federal Reserve supervisory databases.
The number of outstanding supervisory findings has increased in 2023 (figure 15). For CBOs, the most cited supervisory issues relate to IT/operational risk, management/risk-management weaknesses, and credit risk (figure 16). For RBOs, the most cited supervisory findings relate to IT/operational risk, management/risk management, and market/liquidity risk (figure 17).
Figure 15. Outstanding supervisory findings, CBO and RBO firms
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Note: Values are as of year-end. The findings count data are subject to revisions as issues are reviewed, updated, and finalized; this could result in minor historical count fluctuations.
Source: Internal Federal Reserve supervisory databases.
Figure 16. Outstanding supervisory findings by category, CBO firms
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Note: As of 2023:Q4, there were 1,340 total supervisory findings for CBO firms.
Source: Internal Federal Reserve supervisory databases.
Figure 17. Outstanding supervisory findings by category, RBO firms
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Note: As of 2023:Q4, there were 262 total supervisory findings for RBO firms.
Source: Internal Federal Reserve supervisory databases.
Supervisory Focus
During 2023, the Federal Reserve intensified monitoring of CBOs and RBOs that appeared most vulnerable to funding pressures. Where appropriate, Federal Reserve supervisors required bank management to improve access to contingency funding, increase liquid asset buffers, and reassess deposit outflow assumptions in contingency funding plans. For certain banks, Federal Reserve supervisors assessed their ability to mitigate risk from deposit concentrations and high levels of uninsured deposits. Supervisors also worked to ensure that those banks update their contingency funding plans as needed.
Federal Reserve supervisors are closely monitoring CRE market developments and credit risks at banks with large CRE credit concentrations. Supervisors expect banks with larger CRE credit concentrations to have robust risk-management practices and to quantify the impact of changing economic conditions on their earnings, asset quality, and capital. In 2023 at certain RBOs, Federal Reserve supervisors conducted supervisory work to assess risk-management processes and stress test individual loans and loan portfolios.
See below for additional detail on CBO and RBO supervisory priorities for the coming months.
CBO and RBO Supervisory Priorities
Credit Risk
- high-risk loan portfolios, credit risk management, and debt service coverage capacity in a changing interest rate environment
- credit concentrations, particularly in CRE loan portfolios
- impact of rising capitalization (cap) rates and real estate valuation uncertainty
- adequacy of an institution's allowance and provisioning methodology
Liquidity Risk
- contingency funding plans
- liquidity coverage of uninsured deposits
Other Financial Risks
- capital adequacy, and the potential impact of deteriorating credit quality metrics of certain loan sectors on earnings and capital
- interest rate risk and sensitivity risk
- declines in the fair value of securities and low tangible common equity levels
Operational Risk
- information technology and cybersecurity preparedness
- fintech and banking-as-a-service activities
- third-party risk management
References
21. See Board of Governors of the Federal Reserve System, 109th Annual Report of the Board of Governors of the Federal Reserve System (Washington: Board of Governors, July 2023), https://www.federalreserve.gov/publications/files/2022-annual-report.pdf. Return to text
22. See "Understanding Federal Reserve Supervision," https://www.federalreserve.gov/supervisionreg/how-federal-reserve-supervisors-do-their-jobs.htm. Return to text
23. Supervisors includes both commissioned examiners (Federal Reserve staff who have been commissioned as an examiner) and subject matter experts that provide support during examinations and off-site monitoring. Return to text
24. See Board of Governors of the Federal Reserve System, "Supervisory Ratings for State Member Banks, Bank Holding Companies and Foreign Banking Organizations, and Related Requirements for the National Examination Data System," SR letter 99-17 (June 24, 1999), https://www.federalreserve.gov/boarddocs/srletters/1999/SR9917.HTM. Return to text
25. Board of Governors of the Federal Reserve System, "Creation of Novel Activities Supervision Program," SR letter 23-7 (August 8, 2023), https://www.federalreserve.gov/supervisionreg/srletters/SR2307.htm. Return to text
26. For more information regarding the framework for supervision of large financial institutions, see Board of Governors of the Federal Reserve System, "Consolidated Supervision Framework for Large Financial Institutions," SR letter 12-17/CA letter 12-14 (December 17, 2012), https://www.federalreserve.gov/supervisionreg/srletters/sr1217.htm and box 4 in the Board of Governors of the Federal Reserve System, Supervision and Regulation Report 2018 (Washington: Board of Governors, 2018), https://www.federalreserve.gov/publications/files/201811-supervision-and-regulation-report.pdf. Return to text
27. See Federal Deposit Insurance Company, "Special Assessment Pursuant to Systemic Risk Determination," (Washington, December 2023), https://www.fdic.gov/deposit/insurance/assessments/specialassessment-psrd.html. Return to text
28. One-time charges included goodwill impairments, Bloomberg Short-term Bank Yield Index cessation charges, Foreign Exchange devaluations, and severance costs. Return to text
29. See Board of Governors of the Federal Reserve System, "Large Financial Institution (LFI) Rating System," SR letter 19-3/CA letter 19-2, (February 26, 2019), https://www.federalreserve.gov/supervisionreg/srletters/sr1903.htm. Return to text
30. For details on the supervisory ratings framework, see Board of Governors of the Federal Reserve System, "Large Financial Institution (LFI) Rating System," SR letter 19-3/CA letter 19-2 (February 26, 2019), https://www.federalreserve.gov/supervisionreg/srletters/sr1903.htm and "Uniform Financial Institutions Rating System," SR letter 96-38 (December 27, 1996), https://www.federalreserve.gov/boarddocs/srletters/1996/sr9638.htm. Return to text