Board of Governors of the Federal Reserve System

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 (SMB). 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 110th Annual Report 2023.¹²

Federal Reserve Supervision

The Federal Reserve conducts examinations to evaluate a banking organization's activities, risk management, and financial condition.¹³ 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 a bank's known and potential risks.

If supervisors find a bank's risk management or financial condition to be deficient, they provide direction and require the bank to correct its weaknesses.¹⁴ This direction takes the form of confidential supervisory findings called "Matters Requiring Attention" and, for more significant issues that must be corrected on a priority basis, "Matters Requiring Immediate Attention." These findings are communicated to a banking organization's management and board of directors in a written 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 rating 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 every 12 to 18 months for banks that remain in satisfactory condition but may also be issued on an interim basis if circumstances warrant.¹⁵

Supervised Institutions

The Federal Reserve supervises bank holding companies (BHCs), savings and loan holding companies (SLHCs), SMBs, and foreign banking organizations (FBOs) 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 non-LISCC U.S. firms with total assets of $100 billion or more and all non-LISCC FBOs 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 6/30/2024)

Current Supervisory Priorities

Credit risk remains a supervisory priority for the Federal Reserve. Supervisors are closely monitoring CRE and certain consumer loan sectors, which have shown signs of weakness in credit quality. Supervisors are closely monitoring underwriting standards, loan quality, and credit loss reserves levels.

The Federal Reserve continues to focus its supervisory efforts on assessing banks' preparedness for managing liquidity risk. Banks are expected to have prudent liquidity risk-management practices and to regularly test their ability to access multiple sources of contingent funding. Supervisors are closely monitoring a limited number of firms with risk profiles vulnerable to funding pressures.

Cybersecurity risk continues to be a supervisory priority. Supervisors are assessing whether banks have adequate risk management, governance, and controls to protect their data and operations against cybersecurity threats. Supervisors are also examining and monitoring, pursuant to the Board's authority under the Bank Service Company Act, certain services performed on behalf of financial institutions by their service providers.¹⁶ The Federal Reserve's supervisory activities in this area promote financial institutions' ability to protect against cyber incidents, safeguard critical infrastructure, and address emerging technology risks. More information about the Federal Reserve's supervisory activities to address cybersecurity risks can be found in the Federal Reserve's Cybersecurity and Financial System Resilience Report.¹⁷

Large Financial Institutions

This section of the report discusses the supervisory approach and outcomes for large financial institutions—namely, U.S. firms with total assets of $100 billion or more and FBOs 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.¹⁸

Supervisory efforts for large financial institutions focus on four components:¹⁹

1. capital planning and positions
2. liquidity risk management and positions
3. governance and controls
4. recovery and resolution planning

Trends in Supervisory Ratings and Findings

Federal Reserve supervisors summarize their assessments of large financial institutions using the large financial institution rating system, also known as the LFI rating system.²⁰ 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.

In the first half of 2024, about one-third of large financial institutions maintained satisfactory ratings across all three LFI rating components. The remaining large financial institutions were rated less-than-satisfactory in at least one component (figure 12). Most large financial institutions met supervisory expectations with respect to capital planning and liquidity risk management. However, supervisors identified continued weaknesses in risk-management practices for interest rate risk and liquidity risk. Supervisors also identified weaknesses related to governance and controls, in areas such as operational resilience, cybersecurity, and Bank Secrecy Act (BSA) and anti-money laundering (AML) compliance.

The total number of outstanding supervisory findings at large financial institutions was stable over the first half of 2024 (figure 13). The distribution of supervisory findings by category also remained stable during this period, with two-thirds of outstanding issues related to firms' governance and controls (figure 14).

Supervisory Focus

Supervisors remain focused on credit risk-management practices at large firms, particularly with respect to credit card and CRE lending. Supervisors are assessing how firms actively manage the risk in their loan portfolios and the adequacy of credit loss reserves. In addition, supervisors continue to evaluate the quality of large firms' counterparty credit risk-management practices, given weaknesses have been identified in some firms' practices.

Supervisors conduct horizontal reviews, which are a series of examinations across multiple firms, to assess risk-management practices, identify gaps in practices, and promote sound practices across large firms. During the first half of 2024, the Federal Reserve conducted horizontal reviews of liquidity and capital planning. Capital planning and risk management examinations included assessments of firms' capital stress testing, pre-provision net revenue, secured funding transactions, and contingent capital planning.²¹ Liquidity examinations focused on firms' recent deposit trends, funding strategies, liquidity risk-management practices, liquidity stress testing, and liquidity buffer composition.

Supervisors view cybersecurity as a high priority given the increasing and evolving nature of cybersecurity threats. Supervisors are reviewing and monitoring large firms' cybersecurity risk management and information technology (IT) programs through joint examinations or coordinated reviews with the Office of the Comptroller of the Currency and the FDIC and through horizontal reviews.

Supervisors also completed joint examinations with the FDIC to review LISCC firms' resolution plans. During these examinations, supervisors reviewed the firms' corporate structure, ability to forecast financial obligations, and oversight of resolution planning.

See below for additional detail on large financial institutions' supervisory priorities for the coming months.

Large Financial Institution Supervisory Priorities

Capital Planning and Positions

• interest rate risk
• market and counterparty risk
• consumer and commercial credit, including CRE
• firm remediation efforts on previous supervisory findings

Liquidity Risk Management and Positions

• internal liquidity stress tests, including changes to deposit runoff and other key assumptions
• firm remediation efforts on previous supervisory findings
• risk-management practices and governance, including senior management oversight

Governance and Controls

• IT risk and operational resilience, including cybersecurity
• third-party vendor management
• firm remediation efforts on previous supervisory findings

Recovery and Resolution Planning

• recovery and resolution planning for LISCC firms
• international coordination among global supervisors
• firm remediation efforts on previous supervisory findings

Community and Regional Banking Organizations

This section of the report discusses the supervisory conditions and approach for banking organizations with assets of less than $100 billion, including CBOs, which have less than $10 billion in total assets, and RBOs, which have total assets between $10 billion and $100 billion.

Trends in Supervisory Ratings and Findings

Federal Reserve supervisors use the RFI rating system to summarize their assessments of holdings companies with consolidated assets less than $100 billion.²² In addition, the Federal Reserve and the other federal and state bank regulatory agencies utilize the Uniform Financial Institution Rating system, also known as the CAMELS rating system, to summarize supervisors' assessments of banks.²³

Most CBOs and RBOs remain in satisfactory condition with effective risk-management practices (figure 15). However, some banks were downgraded in 2024 because of weaknesses in their financial performance or risk-management practices.

The number of outstanding supervisory findings at CBOs and RBOs increased in the first half of 2024 (figure 16). For CBOs, IT/operational risk findings were the most cited category of outstanding issues. Management/risk management and credit risk findings increased notably over this period (figure 17). The increase in credit risk and management/risk management findings was mostly due to concerns in credit administration practices, asset concentration levels, and credit loss reserves adequacy. For RBOs, management/risk management findings were the most cited category of outstanding issues. IT/operational risk findings remained elevated (figure 18).

Supervisory Focus

Federal Reserve supervisors are closely monitoring credit conditions at CBOs and RBOs. While the credit quality of loans held by CBOs and RBOs are generally sound, some banks have experienced an increase in classified loans, which are loans that exhibit well-defined weaknesses and a distinct possibility of loss.²⁴ In addition, supervisors remain focused on CBOs and RBOs that are concentrated in office and multifamily lending. Higher interest rates and lower property values may affect borrowers' ability to refinance or pay off these loans. Federal Reserve supervisors are closely reviewing CBOs' and RBOs' credit loss reserves levels.

Federal Reserve supervisors continue to maintain a heightened focus on CBOs and RBOs that may be particularly vulnerable to funding pressures based on their risk profiles. Supervisors are assessing banks' ability to manage their liquidity positions.

Federal Reserve supervisors remain focused on IT, cybersecurity, and operational risks at CBOs and RBOs. Reliance on third-party service providers and other technology solutions can pose operational risks, especially for smaller banks. While supervisors have found that banks have taken steps to strengthen their operations and IT systems, vulnerabilities still exist. Federal Reserve supervisors are assessing banks' policies and preparedness for operational issues and cybersecurity threats.

See below for additional detail on CBO and RBO supervisory priorities for the coming months.

CBO and RBO Supervisory Priorities

Credit Risk

• high-risk credit concentrations and credit risk management
• refinancing risk for certain CRE loan segments
• credit loss reserves levels

Liquidity Risk

• contingency funding plans
• replacing maturing funding sources
• liquidity coverage of uninsured deposits

Other Financial Risks

• capital adequacy
• interest rate risk and sensitivity risk
• declines in the fair value of securities and low TCE levels

Operational risk

• IT and cybersecurity preparedness
• fintech and banking-as-a-service activities
• third-party risk management

 

References

 

 12. See Board of Governors of the Federal Reserve System, 110th Annual Report of the Board of Governors of the Federal Reserve System (Washington: Board of Governors, July 2024), https://www.federalreserve.gov/publications/files/2023-annual-report.pdf. Return to text

 13. See "Understanding Federal Reserve Supervision," https://www.federalreserve.gov/supervisionreg/how-federal-reserve-supervisors-do-their-jobs.htm. Return to text

 14. Supervisors include 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

 15. 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

 16. 12 U.S.C. §§ 1861-67. Return to text

 17. See the "Supervisory Activities" section of the July 2024 Cybersecurity and Financial System Resilience Report for additional discussion. Board of Governors of the Federal Reserve System, Cybersecurity and Financial System Resilience Report (Washington: Board of Governors, July 2024), https://www.federalreserve.gov/publications/files/cybersecurity-report-202407.pdf. Return to text

 18. See the appendix for additional information on tiering of regulation. Return to text

 19. 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

 20. 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

 21. Pre-provision net revenue is net interest income plus noninterest income minus noninterest expenses. Return to text

 22. See Board of Governors of the Federal Reserve System, "Supervisory Rating System for Holding Companies with Total Consolidated Assets Less Than $100 billion," SR letter 19-4/CA letter 19-3 (February 26, 2019), https://www.federalreserve.gov/supervisionreg/srletters/sr1904.htm. Return to text

 23. See the appendix for additional information on the RFI and CAMELS rating systems. Return to text

 24. See the Commercial Bank Examination Manual, section 2008.1, "Classification of Credits" at https://www.federalreserve.gov/publications/files/cbem.pdf for additional information on classified loans. Return to text