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 stable 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;
• 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.

2012 Developments

During 2012, the U.S. banking system and financial markets continued to improve, at a slow pace, following their recovery from the financial crisis that started in mid-2007.

Performance of bank holding companies. While an improvement in bank holding companies' (BHCs) performance was evident during 2012, performance remains weak by historical standards. U.S. BHCs, in aggregate, reported earnings of $137 billion for 2012, up from $108 billion for the year ending December 31, 2011. The proportion of unprofitable BHCs, although down from 18 percent in 2011, remains elevated at 10 percent; unprofitable BHCs encompass roughly 5 percent of banking industry assets. Nonperforming assets continue to be a challenge to industry recovery, with the nonperforming asset ratio remaining elevated at 3.4 percent of loans and foreclosed assets, an improvement from 4.1 percent at year-end 2011. Weaknesses were broad based, encompassing residential mortgages (first-lien), commercial real estate--especially non-owner nonfarm nonresidential and construction other than single-family--commercial and industrial (C&I) loans, and construction and land development loans. (Also see "Bank Holding Companies".)

Performance of state member banks. The performance at state member banks in 2012 improved compared to the last few years. As a group, state member banks reported a profit of $17.8 billion for 2012, up from $11.5 billion for 2011 but still slightly below pre-crisis levels. Provisions (as a percent of revenue) have continued to decrease and are now 5.0 percent, down from a crisis high of 32.4 percent at year-end 2009. Further, 6.4 percent of all state member banks continued to report losses, down from 11 percent for year-end 2011. Mirroring trends at BHCs, the nonperforming assets ratio remained elevated at 2.1 percent of loans and foreclosed assets, reflecting both contracting loan balances and ongoing weaknesses in asset quality. Growth in problem loans continued to slow during 2012; however, weakness encompassed nonfarm nonresidential lending, residential mortgages, and C&I loans. The risk-based capital ratios for state member banks were basically unchanged compared to the prior year in the aggregate, and the percent of state member banks deemed well capitalized under prompt corrective action standards remained high at 99 percent. In 2012, four state member banks with $1.3 billion in assets failed. (Also see "State Member Banks".)

Consolidated supervision framework for large financial institutions. In December, the Board issued a new framework for consolidated supervision of large financial institutions. Building on lessons from the recent financial crisis, 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 consolidated supervision framework for large financial institutions is being implemented in a multi-stage approach. Additional supervisory and operational guidance will be developed to support implementation of the framework and to assess the progress of firms in meeting expectations. (See box 1 for more details.)

Enhanced prudential standards and early remediation requirements for foreign banking organizations. In December, the Board issued a notice of proposed rulemaking (NPR) to strengthen the oversight of U.S. operations of foreign banks. (See box 2 for details.)

Proposed Basel III capital rules. In June, the federal banking agencies jointly issued three NPRs to help ensure banks maintain strong capital positions, enabling them to continue lending to creditworthy households and businesses even after unforeseen losses and during severe economic downturns. (See box 3 for details.)

Capital planning and stress testing.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 Comprehensive Capital Analysis and Review (CCAR) and the Dodd-Frank Act stress tests. (See box 4 for details.)

Recovery and resolution planning. The Federal Reserve continues to work with other regulatory agencies to reduce the probability of failure of the largest, most complex financial firms and to minimize the losses to the financial system and the economy if such a firm should fail. In 2012, 11 financial institutions submitted their first plans for a rapid and orderly resolution under the Bankruptcy Code in the event of their material financial distress or failure, in fulfillment of a Dodd-Frank Act requirement. The public section of these plans, which are posted on the Federal Reserve's and FDIC's public websites, provides a high-level description of the financial institution's resolution strategy, core business lines and material entities, corporate governance structure and processes related to resolution planning, derivative activities and hedging activities, and financial information.¹ During 2013, the Federal Reserve and FDIC will provide guidance to the remaining firms that must file initial plans this year under the resolution plan requirement. Additionally, for the upcoming 2013 submissions, the Federal Reserve and FDIC have publicly released the detailed guidance provided to the covered companies that submitted initial resolution plans in 2012.²

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Supervision

The Federal Reserve is the federal supervisor and regulator of all U.S. BHCs, including financial holding companies, 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 as systemically important. In addition, the Dodd-Frank Act transferred authority for consolidated supervision of more than 400 savings and loan holding companies (SLHCs) and their non-depository subsidiaries from the Office of Thrift Supervision (OTS) to the Federal Reserve.

In overseeing the institutions under its authority, the Federal Reserve seeks primarily to promote safety and soundness, 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 operations entails

• an evaluation of the adequacy of governance provided by the board and senior management, including an assessment of internal policies, procedures, controls, and operations;
• an assessment of the quality of the risk-management and internal control processes in place to identify, measure, monitor, and control risks;
• an assessment 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.

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 the broader economy.³

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 any one of the legal entity subsidiaries within the overall organization. A new framework for the consolidated supervision of all large financial institutions was issued in December 2012 (see box 1).

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) to oversee the supervision and evaluate conditions of supervised firms. The committee also develops cross-firm perspectives and monitors interconnectedness and common practices that could lead to systemic risk.

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. The Federal Reserve recognizes the priority of these reviews through the dedication of experienced staff with multidisciplinary skills. Examples include analysis of capital adequacy and planning through the Comprehensive Capital Analysis and Review (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, and preparation of examination reports tailored to the scope and findings of the examination.

State Member Banks

At the end of 2012, 2,075 banks (excluding nondepository trust companies and private banks) were members of the Federal Reserve System, of which 843 were state chartered. Federal Reserve System member banks operated 58,714 branches, and accounted for 34 percent of all commercial banks in the United States and for 71 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 14 percent of all insured U.S. commercial banks and held approximately 15 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 although certain well-capitalized, well-managed organizations with total assets of less than $500 million may be examined once every 18 months.⁵ The Federal Reserve conducted 487 exams of state member banks in 2012.

Bank Holding Companies

At year-end 2012, a total of 5,210 U.S. BHCs were in operation, of which 4,632 were top-tier BHCs. These organizations controlled 5,088 insured commercial banks and held approximately 99 percent of all insured commercial bank assets in the United States.

Federal Reserve guidelines call for annual inspections of large BHCs and complex smaller companies. In judging the financial condition of the subsidiary banks owned by holding companies, Federal Reserve examiners consult examination reports prepared by the federal and state banking authorities that have primary responsibility for the supervision of those banks, thereby minimizing duplication of effort and reducing the supervisory burden on banking organizations.

Inspections of BHCs, including financial holding companies, 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 In 2012, the Federal Reserve conducted 691 inspections of large BHCs and 3,150 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 financial holding companies and thereby engage in a wider range of financial activities, including full-scope securities underwriting, merchant banking, and insurance underwriting and sales. As of year-end 2012, 408 domestic BHCs and 38 foreign banking organizations had financial holding company status. Of the domestic financial holding companies, 38 had consolidated assets of $15 billion or more; 118, between $1 billion and $15 billion; 63, between $500 million and $1 billion; and 189, less than $500 million.

Savings and Loan Holding Companies

On July 21, 2011, responsibility for supervision and regulation of SLHCs transferred from the OTS to the Federal Reserve, pursuant to the Dodd-Frank Act. At year-end 2012, a total of 689 SLHCs were in operation, of which 371 were top-tier SLHCs. These SLHCs controlled 326 thrift institutions and included 40 companies engaged primarily in nonbanking activities, such as insurance underwriting (21 SLHCs), securities brokerage (10 SLHCs), and commercial activities (9 SLHCs). The 25 largest SLHCs accounted for more than $2.7 trillion of total combined assets. The savings association subsidiaries of all top-tier SLHCs accounted for just $680 billion (approximately 22 percent) of total assets. Seven institutions in the top 25 and approximately 90 percent of all SLHCs are engaged primarily in depository activities. These firms hold approximately 13 percent ($397 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.

Board staff continues to work on operational, technical, and practical transition issues while engaging the industry, Reserve Banks, and other financial regulatory agencies. Board staff has also issued internal policies and procedures, presented training sessions, conducted bi-weekly conference calls, and developed job aids to enhance the understanding of the SLHC population and to ensure consistent supervisory treatment of these institutions throughout the Federal Reserve System.

Although significant milestones have been achieved, several complex policy issues still need to be addressed by the Board, including those related to consolidated capital requirements, intermediate holding companies, application of a formal rating system, and the determination of the applicability of enhanced prudential standards to the SLHC population.

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 cooperates with other federal banking supervisors to supervise FMUs organized as bank service providers under the Bank Service Company Act.

In July 2012, the Financial Stability Oversight Council voted to designate eight FMUs as systemically important under title VIII of the Dodd-Frank Act. As a result of these designations, the Federal Reserve assumed an expanded set of responsibilities related to these FMUs that include promoting uniform risk-management standards, playing an enhanced role in the supervision of FMUs, reducing systemic risk, and supporting the stability of the broader financial system. To ensure appropriate supervision of these FMUs, the Federal Reserve established risk-management standards and expectations that are articulated in Board Regulation HH (effective September 2012). In addition to setting minimum risk-management standards, Regulation HH also establishes requirements for the advance notice of proposed material changes to the rules, procedures, or operations of a designated FMU for which the Federal Reserve is the supervisory agency under title VIII of the Dodd-Frank Act.

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 large financial institutions' roles in FMUs; the payment, clearing, and settlement activities of large financial institutions; and the FMU activities and implications for large financial institutions.

In an effort to promote greater financial market stability and mitigate systemic risk, the Board also is working with the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission, both of which also have supervisory authority for certain FMUs. The Federal Reserve's work with these agencies, including the sharing of appropriate information and participation in certain FMU examinations, aims to improve consistency in FMU supervision, promote robust FMU risk management, and improve the regulators' ability to monitor and mitigate systemic risk.

International Activities

The Federal Reserve supervises the foreign branches and overseas investments of 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 2012, 45 member banks were operating 525 branches in foreign countries and overseas areas of the United States; 25 national banks were operating 469 of these branches, and 20 state member banks were operating the remaining 56. In addition, 16 nonmember banks were operating 24 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 2012, 50 banking organizations, operating 8 branches, were chartered as Edge Act or agreement corporations. 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 fourth quarter 2012, 168 foreign banks from 53 countries operated 195 state-licensed branches and agencies, of which 6 were insured by the FDIC, and 48 OCC-licensed branches and agencies, of which 4 were insured by the FDIC. These foreign banks also owned 10 Edge Act and agreement corporations and 1 commercial lending company. In addition, they held a controlling interest in 49 U.S. commercial banks. Altogether, the U.S. offices of these foreign banks controlled approximately 21 percent of U.S. commercial banking assets. These 168 foreign banks also operated 88 representative offices; an additional 40 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.⁸ 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 447 examinations in 2012.

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 Banking Supervision and Regulation, but consumer compliance supervision is conducted under the oversight of the Division of Consumer and Community Affairs. The two divisions coordinate their efforts with each other and also with the Board's Legal Division to ensure consistent and comprehensive Federal Reserve supervision for compliance with legal requirements.

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) Bank Secrecy Act/Anti-Money Laundering Examination Manual.⁹

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

In recognition of the importance of information technology to safe and sound operations in the financial industry, the Federal Reserve reviews the information technology activities of supervised financial institutions, as well as certain independent data centers that provide information technology services to these organizations. All safety-and-soundness examinations include a risk-focused review of information technology risk-management activities. During 2012, the Federal Reserve continued as the lead supervisory agency for four of the 16 large, multiregional data processing servicers recognized on an interagency basis and assumed leadership of three more of the large servicers.

Fiduciary Activities

The Federal Reserve has supervisory responsibility for state member banks and state member nondepository trust companies, which reported $53.9 trillion and $39.5 trillion of assets, respectively, as of year-end 2012. These assets were held 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 reputational risk exposures; and audit and control procedures. In 2012, Federal Reserve examiners conducted 113 on-site 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 2012, the Federal Reserve conducted on-site transfer agent examinations at 11 of the 30 state member banks and BHCs 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 2012, the Federal Reserve conducted seven 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. Eight of the 12 entities supervised by the Federal Reserve that dealt in municipal securities were examined during 2012.

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 Board Regulation U (Credit by Banks and Persons other than Brokers or Dealers for the Purpose of Purchasing or Carrying Margin Stock). In addition, the Federal Reserve maintains a registry of persons other than banks, brokers, and dealers who extend credit subject to Regulation U. The Federal Reserve may conduct specialized examinations of these lenders if they are not already subject to supervision by the Farm Credit Administration or the National Credit Union Administration (NCUA).

At the end of 2012, 451 lenders other than banks, brokers, or dealers were registered with the Federal Reserve. Other federal regulators supervised 116 of these lenders, and the remaining 335 were subject to limited Federal Reserve supervision. The Federal Reserve exempted 139 lenders from its on-site inspection program on the basis of their regulatory status and annual reports. Forty-two inspections were conducted during the year.

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 2012, the Federal Reserve completed 74 formal enforcement actions. Civil money penalties totaling $1,043,700,000 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/).

In 2012, the Reserve Banks completed 198 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 model (SR-SABR). Drawing mainly on the financial data that banks report on their Reports of Condition and Income (Call Reports), SR-SABR uses econometric techniques to identify banks that report financial characteristics weaker than those of other banks assigned similar supervisory ratings. To supplement the SR-SABR screening, the Federal Reserve also monitors various market data, including equity prices, debt spreads, agency ratings, and measures of expected default frequency, to gauge market perceptions of the risk in banking organizations. In addition, the Federal Reserve prepares quarterly Bank Holding Company Performance Reports (BHCPRs) for use in monitoring and inspecting supervised banking organizations. The BHCPRs, which are compiled from data provided by large BHCs in quarterly regulatory reports (FR Y-9C and FR Y-9LP), contain, for individual companies, financial statistics and comparisons with peer companies. BHCPRs are made available to the public on the National Information Center (NIC) website, which can be accessed at www.ffiec.gov.

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 2012, two major upgrades to the web-based PRISM application were completed.

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 and de novo depository institutions.

International Training and Technical Assistance

In 2012, the Federal Reserve continued to provide technical assistance on bank supervisory matters to foreign central banks and supervisory authorities. Technical assistance involves visits by Federal Reserve staff members to foreign authorities as well as consultations with foreign supervisors who visit the Board or the Reserve Banks. The Federal Reserve, along with the OCC, the FDIC, and the Treasury, was an active participant in the Middle East and North Africa Financial Regulators' Training Initiative, which is part of the U.S. government's Middle East Partnership Initiative. The Federal Reserve also contributes to the regional training provision under the Asia Pacific Economic Cooperation Financial Regulators' Training Initiative.

In 2012, the Federal Reserve offered a number of training courses exclusively for foreign supervisory authorities, both in the United States and in a number of foreign jurisdictions. Federal Reserve staff also took part in technical assistance and training missions led by the International Monetary Fund, the World Bank, the Asian Development Bank, the Basel Committee on Banking Supervision, and the Financial Stability Institute.

The Federal Reserve is also an associate member of the Association of Supervisors of Banks of the Americas (ASBA), an umbrella group of bank supervisors from countries in the Western Hemisphere. The group, headquartered in Mexico,

• promotes communication and cooperation among bank supervisors in the region;
• coordinates training programs throughout the region with the help of national banking supervisors and international agencies; and
• aims to help members develop banking laws, regulations, and supervisory practices that conform to international best practices.

The Federal Reserve contributes significantly to ASBA's organizational management and to its training and technical assistance activities.

Initiatives for Minority-Owned and De Novo 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-owned institutions (MOIs) by facilitating activities designed to strengthen their business strategies, maximize their resources, and increase their awareness and understanding of regulatory topics. In addition, the Federal Reserve continues to maintain the PFP website, which supports MOIs by providing them with technical information and links to useful resources (www.fedpartnership.gov). Representatives from each of the 12 Reserve Bank districts, along with staff from the Board of Governors, continue to offer personalized technical assistance to MOIs by providing targeted supervisory guidance, identifying additional resources, and fostering mutually beneficial partnerships between MOIs and community organizations. Currently, 16 state member banks and 120 BHCs supervised by the Federal Reserve are MOIs.

During 2012, the Federal Reserve System undertook several specific actions to strengthen its MOI support efforts. For example, the Federal Reserve

• revised its processing procedures to implement prescreening of MOI applications, resulting in early identification and resolution of factors that may cause processing delays;
• increased staff resources for MOI oversight;
• partnered with the National Bankers Association, the National Urban League, and the Minority Council of the Independent Community Bankers Association in outreach events;
• in conjunction with the Division of Consumer and Community Affairs, conducted several joint outreach efforts to educate MOIs on supervisory topics;
• conducted training at a National Bankers Association convention to respond to concerns about the potential effect of Basel III capital proposals on community banks, including MOIs;
• educated potential investors in MOIs about benefits under Board Regulation BB (Community Reinvestment, section 228.21(f)); and
• participated in an interagency taskforce to consider and address supervisory challenges facing MOIs.

During 2012, PFP representatives hosted and participated in numerous banking workshops and seminars aimed at promoting and preserving MOIs, including the National Bankers Association's Legislative and Regulatory Conference and the Interagency Minority Depository Institutions National Conference. Further, program representatives collaborated with community leaders, trade groups, the Small Business Administration, and other organizations to seek support for MOIs.

Business Continuity

In 2012, the Federal Reserve continued its efforts to strengthen the resilience of the U.S. financial system in the event of unexpected disruptions, including focused supervisory efforts to evaluate the resiliency of the banking institutions under its jurisdiction. The Mid-Atlantic derecho windstorm in June, Hurricane Sandy in October, and the distributed denial of service attacks against U.S. financial institutions during the second half of the year presented major challenges to the financial system. The resiliency of the financial system in the aftermath of these events, however, proved to be effective in protecting the safety and soundness of critical systems and customer information. The Federal Reserve, together with other federal and state financial regulators, is a member of the Financial and Banking Information Infrastructure Committee (FBIIC), which was formed to improve coordination and communication among financial regulators, enhance the resiliency of the financial sector, and promote the public/private partnership. The FBIIC has established emergency protocols to maintain effective communication among member agencies and convenes by conference call no later than 90 minutes following the first public report of an event to share situational and operational status reports. During aforementioned events of 2012, the Federal Reserve participated in the FBIIC, the FFIEC, and internal communications to promote the resiliency of the financial sector.

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 other federal banking agencies) issues rulemakings, public SR letters, and other policy statements and guidance in order to carry out its supervisory policy function. 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, the Financial Stability Board, and the Joint Forum.

Capital Adequacy Standards

In 2012, the Board issued several rulemakings and guidance documents related to capital adequacy standards, including joint proposed rulemakings with the other federal banking agencies that would implement certain revisions to the Basel capital framework and that address certain provisions of the Dodd-Frank Act.

• The federal banking agencies published a final rule in June that amended the market risk capital rule to implement certain revisions made by the Basel Committee on Banking Supervision to its market risk framework between 2005 and 2010. The revisions will increase capital requirements for market risk by better capturing positions for which the market risk capital rule is appropriate, reducing pro-cyclicality in market risk capital requirements, enhancing sensitivity to risks that were not adequately captured by the previous regulatory methodologies, and increasing transparency through enhanced disclosures. Consistent with section 939A of the Dodd-Frank Act, the final rule does not include those aspects of the Basel Committee's market risk framework that rely on credit ratings. Instead, the final rule includes alternative standards of creditworthiness for determining specific risk capital requirements for certain debt and securitization positions. The rule is available at www.gpo.gov/fdsys/pkg/FR-2012-08-30/pdf/2012-16759.pdf.
• In June, the federal banking agencies issued for comment three notices of proposed rulemaking (NPRs) to amend the regulatory capital rules. Taken together, the proposals would establish an integrated regulatory capital framework that addresses shortcomings in regulatory capital requirements that became apparent during the recent financial crisis. For internationally active banking organizations, the proposed rule would implement in the United States the Basel III regulatory capital reforms adopted by the Basel Committee on Banking Supervision. The proposed rule would also make changes required by the Dodd-Frank Act, including removal of references to and reliance on credit ratings. The NPRs are available at
  • www.gpo.gov/fdsys/pkg/FR-2012-08-30/pdf/2012-16757.pdf (Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective Action, "Basel III NPR");
  • www.gpo.gov/fdsys/pkg/FR-2012-08-30/pdf/2012-17010.pdf (Regulatory Capital Rules: Standardized Approach for Risk-weighted Assets; Market Discipline and Disclosure Requirements, "Standardized Approach NPR"); and
  • www.gpo.gov/fdsys/pkg/FR-2012-08-30/pdf/2012-16761.pdf (Regulatory Capital Rules: Advanced Approaches Risk-based Capital Rule; Market Risk Capital Rule, "Advanced Approaches and Market Risk NPR"). (Also see box 3.)
• In September, the federal banking agencies announced the availability of a regulatory capital estimation tool to help community banking organizations and other interested parties evaluate the regulatory capital proposals issued in June. The tool was developed to assist these organizations in estimating the potential effects on their capital ratios of the agencies' Basel III and Standardized Approach NPRs. The announcement and the capital estimation tool are available at www.federalreserve.gov/newsevents/press/bcreg/20120924a.htm.

In 2012, Board and Reserve Bank staff conducted in-depth supervisory analyses of a number of complex capital issuances and private capital investments to evaluate their qualification for inclusion in regulatory capital. For certain transactions, banking organizations were required to make changes necessary for instruments to satisfy regulatory capital criteria, whereas other instruments were disallowed from inclusion in a banking organization's regulatory capital.

International Coordination on Supervisory Policies

As a member of the Basel Committee on Banking Supervision, the Federal Reserve actively participates in efforts to advance sound supervisory policies for internationally active banking organizations and enhance the strength and stability of the international banking system.

Basel Committee

During 2012, the Federal Reserve participated in ongoing international initiatives to track the progress of implementation of the Basel framework in member countries. Participation in this assessment not only included examining the progress made by other countries, but also an assessment of progress made by the United States. The preliminary report on the United States' progress is available at www.bis.org/bcbs/implementation/l2_us.pdf  .

The Federal Reserve contributed to supervisory policy recommendations, reports, and papers issued for consultative purposes or finalized by the Basel Committee that were designed to improve the supervision of banking organizations' practices and to address specific issues that emerged during the financial crisis. The listing below includes key final and consultative papers from 2012.

Final papers:

• Composition of capital disclosure requirements (issued in June and available at www.bis.org/publ/bcbs221.htm  ).
• Capital requirements for bank exposures to central counterparties (issued in July and available at www.bis.org/publ/bcbs227.htm  ).
• Core principles for effective banking supervision (issued in September and available at www.bis.org/publ/bcbs230.htm  ).
• A framework for dealing with domestic systemically important banks (issued in October and available at www.bis.org/publ/bcbs233.htm  ).

Consultative papers:

• Fundamental review of the trading book (issued in May and available at www.bis.org/publ/bcbs219.htm  ).
• Margin requirements for non-centrally-cleared derivatives (issued jointly with the Board of the International Organization of Securities Commissions in July and available at www.bis.org/publ/bcbs226.htm  ).
• Supervisory guidance for managing risks associated with the settlement of foreign exchange transactions (issued in August and available at www.bis.org/publ/bcbs229.htm  ).
• Revisions to the Basel Securitisation Framework (issued in December and available at www.bis.org/press/p121218.htm  ).

Joint Forum

In 2012, the Federal Reserve continued its participation in the Joint Forum--an international group of supervisors of the banking, securities, and insurance industries established to address various cross-sector issues, including the regulation of financial conglomerates. The Joint Forum operates under the aegis of the Basel Committee, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors.

In September, the Joint Forum issued Principles for the supervision of financial conglomerates, which supersedes similar principles developed by the Joint Forum in 1999. The principles include guidance for policymakers on the powers and authority necessary for the supervision of financial conglomerates. The document is available at www.bis.org/publ/joint29.htm  .

Financial Stability Board

In 2012, the Federal Reserve continued its active participation in the Financial Stability Board (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. Through the FSB Standing Committee on Supervisory and Regulatory Cooperation, the FSB is engaged in several issues, including the regulation of shadow banking, the regulation and supervision of globally systemically important financial institutions, and the development of effective resolution regimes for large financial institutions. Consultative papers issued by the FSB in 2012 can be found at www.financialstabilityboard.org/list/fsb_publications/tid_150/index.htm  .

Accounting Policy

The Federal Reserve strongly endorses sound corporate governance and effective accounting and auditing practices for all regulated financial institutions. Accordingly, the Federal Reserve's supervisory policy function is responsible for monitoring major domestic and international proposals, standards, and other developments affecting the banking industry in the areas of accounting, auditing, internal controls over financial reporting, financial disclosure, and supervisory financial reporting.

During 2012, Federal Reserve staff addressed numerous issues related to financial sector accounting and reporting, including loan accounting, troubled debt restructurings, deferred taxes, other real estate accounting, insurance accounting, business combinations, securitizations, fair value accounting, financial instrument accounting and reporting, balance sheet offsetting, securities financing transactions, consolidation of structured entities, and external and internal audit processes.

To address these and other issues, Federal Reserve staff consulted with key constituents in the accounting and auditing professions, including standard-setters, accounting firms, accounting and financial sector trade groups, and other financial sector regulators. The Federal Reserve also participated in meetings of the Basel Committee's Accounting Task Force, which represents the Basel Committee at international meetings on accounting, auditing, and disclosure issues affecting global banking organizations. These efforts helped inform our understanding of domestic and international practices--as well as proposed accounting, auditing, and regulatory standards--and helped in our formulation of policy positions using insight obtained through these forums.

During 2012, the Federal Reserve shared its views with accounting and auditing standard-setters through informal discussions and public comment letters. Comment letters on the following proposals were issued during the past year:

• Financial Accounting Standards Board's proposals related to disclosures about liquidity risk and interest rate risk, revenue recognition, and principal versus agent analysis in consolidation guidance.
• Financial Accounting Foundation's proposal to establish the Private Company Standards Improvement Council to address the needs of private companies in the standard-setting process.

Working with international bank supervisors, Federal Reserve staff contributed to the development of numerous other comment letters related to accounting and auditing matters that were submitted to standard setters through the Basel Committee.

Federal Reserve staff also participated in other supervisory activities to assess interactions between accounting standards and regulatory reform efforts. These activities included supporting Dodd-Frank Act initiatives related to stress testing of banks and credit-risk retention requirements for securitizations, as well as various Basel III activities.

The Federal Reserve issued supervisory guidance to financial institutions and supervisory staff on accounting matters, as appropriate, and participated in a number of supervisory-related activities. For example, Federal Reserve staff

• issued guidance to address allowance estimation practices related to junior lien loans and lines of credit;
• developed and participated in a number of domestic and international supervisory training programs and external education sessions to educate supervisors and bankers about new and emerging accounting and reporting topics affecting financial institutions; and
• supported the efforts of the Reserve Banks in financial institution supervisory activities related to financial accounting, auditing, reporting, and disclosure.

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

Guidance on Credit Risk

In 2012, the Federal Reserve issued final guidance to banks on Allowance for Loan Loss Estimation Practices for Junior Lien Loans and Lines of Credit, on rental of Residential Other Real Estate Owned (OREO) properties, and on stress testing for banks with greater than $10 billion in assets.¹⁰ It also issued for public comment guidance relating to Leveraged Lending practices.¹¹

Shared National Credit Program

In August, the Federal Reserve and the other banking agencies released summary results of the 2012 annual review of the Shared National Credit (SNC) Program. The agencies established the program in 1977 to promote an efficient and consistent review and classification of shared national credits. A SNC is any loan or formal loan commitment--and any asset, such as other real estate, stocks, notes, bonds, and debentures taken as debts previously contracted--extended to borrowers by a supervised institution, its subsidiaries, and affiliates. A SNC must have an original loan amount that aggregates to $20 million or more and either (1) is shared by three or more unaffiliated supervised institutions under a formal lending agreement or (2) a portion of which is sold to two or more unaffiliated supervised institutions, with the purchasing institutions assuming their pro rata share of the credit risk.

The 2012 SNC review was based on analyses prepared in the second quarter of 2012 using credit-related data provided by federally supervised institutions as of December 31, 2011, and March 31, 2012. The 2012 SNC portfolio totaled $2.79 trillion, with roughly 8,700 credit facilities to approximately 5,600 borrowers. From the previous period, the dollar volume of the portfolio commitment amount rose by $268 billion or 10.6 percent, and the number of credits increased by over 660, or 8.2 percent.

The number of SNCs originated in 2011 rose by 61 percent compared to 2010 loan originations, and equaled approximately 114 percent of the large volume of credits originated in 2007. While the overall quality of underwriting in 2011 was significantly better than in 2007, some easing of standards was noted, specifically in leveraged finance credits, compared with the relatively tighter standards present in 2009 and the latter half of 2008. The primary underwriting deficiencies identified during the 2012 SNC Review were minimal or no loan covenants, liberal repayment terms, repayment dependent on refinancing, and inadequate collateral valuations. The easing in standards may be due to aggressive competition and market liquidity and was more pronounced in leveraged finance transactions.

Refinancing risk has declined in the SNC portfolio as only 37.1 percent of SNCs will mature over the next three years compared with 63.4 percent for the same time frame in the 2011 SNC Review. Poorly underwritten credits originated in 2006 and 2007 continued to adversely affect the SNC portfolio. During 2011 and into 2012, syndications continued to modify loan agreements to extend maturities. These transactions had the effect of relieving near-term refinancing risk, but may not improve borrowers' ability to repay their debts in the longer term.

For more information on the 2012 SNC review, visit the Board's website at www.federalreserve.gov/newsevents/press/bcreg/20120827a.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 laws.

Bank Secrecy Act and Anti-Money-Laundering Compliance

In 2012, the Federal Reserve continued to actively promote the development and maintenance of effective BSA/AML compliance risk-management programs. For example, the Federal Reserve offered an "Ask the Fed" session in November 2012 devoted entirely to BSA/AML.¹² Supervisory trends such as examination findings, bulk currency transactions, outsourcing of BSA/AML responsibilities, and third-party payment processors were discussed, along with updates on customer due diligence, electronic filing of reports, Iranian sanctions, and other international concerns. Also, Federal Reserve supervisory staff participated in a number of industry conferences to continue to communicate regulatory expectations.

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. In addition, the Federal Reserve also participated in several Treasury-led private/public sector dialogues with Latin American and Mexican financial institutions, regulators, and supervisors. The objective of these dialogues is to optimize correspondent relations between U.S. and country-specific financial sectors. 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 U.S. Securities and Exchange Commission, the Commodity Futures Trading Commission, 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 2012, the Federal Reserve and other federal banking agencies continued to regularly share examination findings and enforcement proceedings with FinCEN under the interagency MOU that was finalized in 2004.

In 2012, the Federal Reserve continued to regularly share examination findings and enforcement proceedings with OFAC under the 2006 interagency MOU. The Federal Reserve also provided a speaker for and participated in OFAC's day-long Financial Institution Symposium.

In 2012, the Federal Reserve joined the U.S. Treasury's Interagency Task Force on Strengthening and Clarifying the BSA/AML Framework (Task Force), which includes representatives from the Department of Justice, OFAC, FinCEN, the federal banking agencies, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. The primary focus of the Task Force is to review the BSA, its implementation, and its enforcement with respect to U.S. financial institutions that are subject to these requirements, and to develop recommendations for ensuring the continued effectiveness of the BSA and efficiency in agency efforts to monitor compliance.

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. For example, 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 formulation of international standards. In addition, the Federal Reserve has provided input and review of ongoing work to revise the FATF Recommendations to ensure that they continue to provide a comprehensive and current framework for combating money laundering and terrorist financing. Finally, the Federal Reserve continues to participate in a subcommittee of the Basel Committee that focuses on AML/counter-terrorism financing issues.

Other Policymaking Initiatives

• In May, the federal banking agencies issued final supervisory guidance regarding stress-testing practices at banking organizations with total consolidated assets of more than $10 billion. The guidance highlights the importance of stress testing at banking organizations as an ongoing risk-management practice that supports a banking organization's forward-looking assessment of its risks and better equips it to address a range of adverse outcomes. This guidance builds upon previously issued supervisory guidance and outlines general principles for a satisfactory stress testing framework and describes various stress testing approaches and how stress testing should be used at various levels within an organization. The guidance also discusses the importance of stress testing in capital and liquidity planning and the importance of strong internal governance and controls as part of an effective stress-testing framework. The guidance is available at www.gpo.gov/fdsys/pkg/FR-2012-05-17/pdf/2012-11989.pdf. (Also see box 4.)
• In May, the Board announced the approval of a final rule outlining the procedures for securities holding companies (SHCs) to elect to be supervised by the Federal Reserve. An SHC is a nonbank company that owns at least one registered broker or dealer. The rule specifies the information that an SHC will need to provide to the Board as part of registration for supervision, including information related to organizational structure, capital, and financial condition. In addition, the rule provides that upon an effective registration, an SHC would be supervised and regulated as if it were a bank holding company with the exception that the restrictions on nonbanking activities in the Bank Holding Company Act would not apply to a supervised SHC. The rule is available at www.gpo.gov/fdsys/pkg/FR-2012-06-04/pdf/2012-13311.pdf.

Regulatory Reports

The Federal Reserve's supervisory policy function is also responsible for developing, coordinating, and implementing regulatory reporting requirements for various financial reporting forms filed by domestic and foreign financial institutions subject to Federal Reserve supervision. Federal Reserve staff members interact with other federal agencies and relevant state supervisors, including foreign bank supervisors as needed, to recommend and implement appropriate and timely revisions to the reporting forms and the attendant instructions.

Bank Holding Company Regulatory Reports

The Federal Reserve requires that U.S. BHCs periodically submit reports that provide information about their financial condition and structure. This information is essential to formulating and conducting bank regulation and supervision. It is also used in responding to requests by Congress and the public for information about BHCs and their nonbank subsidiaries. Foreign banking organizations also are required to periodically submit reports to the Federal Reserve.

• FR Y-9 series reports--the FR Y-9C, FR Y-9LP, FR Y-9SP and FR Y-9ES--provide standardized financial statements for BHCs on both a consolidated and a parent-only basis. The reports are used to detect emerging financial problems, to review performance and conduct pre-inspection analysis, to monitor and evaluate risk profiles and capital adequacy, to evaluate proposals for BHC mergers and acquisitions, and to analyze a holding company's overall financial condition.
• Nonbank subsidiary reports--the FR Y-11, FR 2314, FR Y-7N, and FR 2886b--help the Federal Reserve determine the condition of BHCs that are engaged in nonbank activities and also aid in monitoring the number, nature, and condition of the companies' nonbank subsidiaries.
• The FR Y-8 report provides information on transactions between an insured depository institution and its affiliates that are subject to section 23A of the Federal Reserve Act; it is used to monitor bank exposures to affiliates and to ensure banks' compliance with section 23A of the Federal Reserve Act.
• The FR Y-10 report provides data on changes in organization structure at domestic and foreign banking organizations.
• The FR Y-6 and FR Y-7 reports gather additional information on organization structure and shareholders from domestic banking organizations and foreign banking organizations, respectively; the information is used to monitor structure so as to determine compliance with provisions of the Bank Holding Company Act (BHC Act) and Regulation Y and to assess the ability of a foreign banking organization to continue as a source of strength to its U.S. operations.

During 2012, the Federal Reserve implemented the following revisions to the FR Y-9C to better understand BHCs' risk exposures and to collect certain information prescribed by changes in accounting standards: (1) added two data items to Schedule HC-P, 1-4 Family Residential Mortgage Banking Activities, to collect the amount of representation and warranty reserves for one- to four-family residential mortgage loans sold; (2) added a data item to Schedule HC-N, Past Due and Nonaccrual Loans, Leases, and Other Assets, to collect the outstanding balance of purchased credit impaired loans by past due and nonaccrual status; and (3) modified the reporting instructions to clarify the reporting and accounting treatment of specific valuation allowances.

Savings and Loan Holding Company Regulatory Reports

During 2012, the first phase of Federal Reserve reporting began for the non-exempt SLHCs. These SLHCs began reporting the FR Y-9 series of reports and the FR Y-6 or FR Y-7. The exempt SLHCs also began filing the FR Y-6 and FR Y-7 reports.¹³ Several training sessions on the various Federal Reserve reports were provided to the SLHCs.

On June 11, 2012, the Board issued a proposal to expand the entities that must file the FR Y-10 report to include SLHCs and security holding companies, effective December 1, 2012. In addition, a one-time verification of an SLHC's organization structure was proposed. After consideration of the comments received on the proposal, the Board issued in the Federal Register on September 14, 2012, (77 Fed. Reg. 86842) the final requirements with modifications. The requirement that the FR Y-10 be filed by all SLHCs, including their savings associations and branches, as of December 1, 2012, was retained; however, the one-time verification was scaled back to include only select information on nonbanks that would be required to file financial reports (FR Y-11 or FR 2314) beginning in March 31, 2013. Additionally, a phased-in approach for reporting nonbank subsidiaries on the FR Y-10 based on the frequency of financial reporting by the nonbank subsidiaries was approved.

Commercial Bank Regulatory Reports

As the federal supervisor of state member banks, the Federal Reserve, along with the other banking agencies (through the FFIEC), requires banks to submit quarterly Call Reports. Call Reports are the primary source of data for the supervision and regulation of banks and the ongoing assessment of the overall soundness of the nation's banking system. Call Report data provide the most current statistical data available for evaluating institutions' corporate applications, for identifying areas of focus for both on-site and off-site examinations, and for considering monetary and other public policy issues. Call Report data, which also serve as benchmarks for the financial information required by many other Federal Reserve regulatory financial reports, are widely used by state and local governments, state banking supervisors, the banking industry, securities analysts, and the academic community.

During 2012, the FFIEC implemented the following revisions to the Call Report to better understand banks' risk exposures and to collect certain information prescribed by changes in accounting standards: (1) added new Schedule RI-C -Disaggregated Data on the Allowance for Loan and Lease Losses to collect information on the allowance for loan and lease losses by major loan category (effective March 2013); (2) added two data items to Schedule RC-P, 1-4 Family Residential Mortgage Banking Activities, to collect the amount of representation and warranty reserves for one- to four-family residential mortgage loans sold; (3) added a data item to Schedule RC-N, Past Due and Nonaccrual Loans, Leases, and Other Assets, to collect the outstanding balance of purchased credit impaired loans by past due and nonaccrual status; (4) added new items in Schedule RC-M, Memoranda, in which savings associations and certain state savings and cooperative banks would report on the tests they use to determine compliance with the Qualified Thrift Lender requirement and whether they have remained in compliance with this requirement; (5) revised two existing items in Schedule RC-R, Regulatory Capital, used to calculate the leverage ratio denominator to accommodate certain differences between the regulatory capital standards that apply to the leverage capital ratios of banks versus savings associations; and (6) modified the reporting instructions to clarify the reporting and accounting treatment of specific valuation allowances.

Supervisory Information Technology

The Federal Reserve's supervisory information technology function, carried out by the Board's Division of Banking Supervision and Regulation and the Reserve Banks under the guidance of the Subcommittee on Supervisory Administration and Technology, works to identify and set priorities for information technology initiatives within the supervision and regulation business line.

In 2012, the supervisory information technology function focused on

• Large Bank Supervision. Improved the supervision of large and regional financial institutions with new processes and linked workflows to enable continuous updates of information provided through examinations and ongoing monitoring activities.
• Community and Regional Bank Supervision. Worked with community and regional bank examiners and other regulators to implement enhanced tools to support community and regional bank examinations.
• Collaboration. (1) Enhanced information sharing among staff at the Board and Reserve Banks through new and enhanced collaboration tools; (2) implemented an electronic solution to support exam teams' ability to share documents, and (3) leveraged an Interagency Steering Group to improve methods for sharing work among state and federal regulators.
• Modernization. Acquired products to modernize business capabilities in the areas of document management, resource prioritization, and scheduling.
• Information Security. Commenced several initiatives to improve overall information security and the efficiency of our information security practices.

National Information Center

The National Information Center (NIC) is the Federal Reserve's comprehensive repository for supervisory, financial, and banking structure data. It is also the main repository for many supervisory documents. The NIC includes (1) data on banking structure throughout the United States as well as foreign banking concerns; (2) the National Examination Data (NED), an application that enables supervisory personnel as well as federal and state banking authorities to access NIC data; (3) the Banking Organization National Desktop, an application that facilitates secure, real-time electronic information sharing and collaboration among federal and state banking regulators for the supervision of banking organizations; and (4) the Central Document and Text Repository (CDTR), an application that contains documents supporting the supervisory processes.

Within the NIC, the supporting systems continue to be modified over time to extend their usefulness and improve business workflow efficiency, especially for the sourcing transactional data systems. Throughout 2012, the NIC supervisory and structure databases continued to be modified to support Dodd-Frank Act changes and to facilitate the supervision of SLHCs. Business changes were implemented to the NED application for inspections of SLHCs and CFPB-led examinations. A significant amount of progress occurred to successfully capture and integrate the former OTS data and documents into several NIC databases, making substantially more SLHC examination and enforcement action data available. Also, SLHCs were added to the reporting panel for the structure reporting forms, with an emphasis on the Report of Changes in Organizational Structure (FR Y-10), and data changes to the structure reporting forms resulted in additional modifications to the NIC structure databases. Other significant database enhancements included a geocoding web service and a new Legal Entity Identifier field, being developed for use by the international community.

The NIC also supports the interagency Shared National Credit (SNC) Program and the SNC Modernization initiative (SNCMod). The SNC Program is the annual review of large syndicated loans while the SNCMod initiative is a multiyear, interagency information technology development effort to improve the efficiency and effectiveness of the systems that support the SNC Program. SNCMod focuses on a complete redesign of the current legacy systems to take advantage of modern technology to enhance and extend the system's capabilities, including automating tasks and providing tools for the examination and analysis of loan data for the agencies' staff. During 2012, the agencies finalized requirements for automating the appeals process, loan matching, and concordance, and for creating additional analytical and reporting capabilities with the SNC data.

In 2012, the NIC team continued to implement changes to the NIC public website in response to the Dodd-Frank Act. These changes included adding the Quarterly Savings and Loan Holding Company Report (FR 2320) data to the website and adding SLHCs to the listing of holding companies (based on consolidated assets). The NIC team also worked extensively toward adding the Risk-Based Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 101) data to the website; this is expected to be placed into production by mid-year 2013.

In mid-2012, the NIC staff, in partnership with System and other supervisory staff, issued internal guidance to System staff regarding the acquisition and use of purchased data across the System to achieve cost effectiveness, reduce duplicative purchases, and achieve greater coordination of contract services.

Begun in 2011, the Supervision and Regulation National Data Inventory Project, a Federal Reserve System strategic initiative, is being implemented in two phases over several years. Overall, this initiative focuses on providing transparency and awareness of data collections that support broad risk monitoring and emerging macro-prudential supervision analysis in LISCC and other supervisory business portfolios. Phase I, which produced a data inventory proof of concept, brought visibility to supervision and regulation ad hoc data collections for large complex banking organizations and was placed into production in November 2011. Development for Phase II was completed in December 2012 and is expected to be placed into production in March 2013. Once in production the Phase II changes, which built upon the Phase I proof of concept, would allow other business lines to utilize various functionalities, such as automated feeds from other data inventories, extensibility and segregation of the inventory and institutions by business lines, reporting services, and enhanced workflows.

Throughout 2012, in an effort to best serve supervisory business sponsors, NIC staff provided project management for the maturation of the CCAR, Capital Plan Review, and Dodd-Frank Act Stress Testing program initiatives and for the automation of the Capital Assessment and Stress Testing information collection (FR Y-14). The NIC staff also managed the third-party data aggregator contractual relationships for the FR Y-14 monthly credit card and mortgage data collections.

Finally, supervisory staff participated in a number of interagency technology-related initiatives as part of FFIEC task forces and interagency committees. These efforts support standardized data collections and cross-agency information sharing. Work in this area will continue to be important as the agencies work through the implementation of the remaining Dodd-Frank Act initiatives. One such technology-related initiative required Board staff to collaborate with the FDIC and OCC to develop and release a Request for Proposal for the Central Data Repository, the data collection and validation system for the FFIEC commercial bank Consolidated Reports of Condition and Income (Call Reports: FFIEC 031 and FFIEC 041) and the Uniform Bank Performance Report. Another technology-related initiative, started in 2012, required Board staff to collaborate with the CFPB on a document exchange initiative that would require implementing changes to the CDTR in 2013.

Staff Development

The Federal Reserve's staff development program has oversight of the ongoing development of about 3,100 professional supervisory staff to ensure that they have the skills necessary to meet their evolving supervisory responsibilities. The Federal Reserve also provides course offerings to staff at state banking agencies. Training activities in 2012 are summarized in table 2.

Examiner Commissioning Program

The Examiner Commissioning Program (ECP) involves approximately 22 weeks of instruction. Individuals move through a combination of classroom offerings, self-paced assignments, and on-the-job training over a period of two to four years. Achievement is measured by two professionally validated proficiency examinations: the first exam is required of all ECP participants, and the second exam is offered in two specialty areas--(1) safety and soundness and (2) consumer compliance. A third specialty, information technology, requires that individuals earn the Certified Information Systems Auditor certification offered by the Information Systems Audit Control Association. In 2012, 291 examiners passed the first proficiency exam and 135 passed the second proficiency exam (106 in safety and soundness and 29 in consumer compliance).

Continuing Professional Development

Other formal and informal learning opportunities are available to examiners, including other schools and programs offered within the System and FFIEC-sponsored schools. System programs are also available to state and federal banking agency personnel. The Rapid Response® program, introduced in 2008, offers System and state personnel 60-90 minute teleconference presentations on emerging issues or urgent training needs associated with implementation or issuance of new laws, regulations, or guidance.

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Regulation

The Federal Reserve exercises important regulatory influence over entry into the U.S. banking system and the 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, financial holding companies, 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 (applies to SLHCs)), and the International Banking Act.

In administering these statutes, the Federal Reserve acts on a variety of applications 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 concern BHC and SLHC formations and acquisitions, bank mergers, and other transactions involving banks and savings associations or nonbank firms. In 2012, the Federal Reserve acted on 1,029 applications filed under the six statutes. Many of these applications involved target banking organizations in less than satisfactory financial condition.

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.¹⁴ Depending on the circumstances, these activities may or may not require Federal Reserve approval in advance of their commencement.

When reviewing a BHC application or notice that requires prior approval, the Federal Reserve may consider the financial and managerial resources of the applicant, the future prospects of both the applicant and the firm to be acquired, financial stability factors, the convenience and needs of the community to be served, the potential public benefits, the competitive effects of the application, and the applicant's ability to make available to the Federal Reserve information deemed necessary to ensure compliance with applicable law. In the case of a foreign banking organization seeking to acquire control of a U.S. bank, the Federal Reserve also considers whether the foreign bank is subject to comprehensive supervision or regulation on a consolidated basis by its home-country supervisor. In 2012, the Federal Reserve acted on 288 applications and notices filed by BHCs to acquire a bank or a nonbank firm, or to otherwise expand their activities, including applications involving private equity firms.

A BHC may repurchase its own shares from its shareholders. When the company borrows money to buy the shares, the transaction increases the company's debt and decreases its equity. The Federal Reserve may object to stock repurchases by holding companies that fail to meet certain standards, including the Board's capital adequacy guidelines. In 2012, the Federal Reserve acted on six stock repurchase applications by BHCs.

The Federal Reserve also reviews elections submitted by BHCs seeking financial holding company status under the authority granted by the Gramm-Leach-Bliley Act. BHCs seeking financial holding company status must file a written declaration with the Federal Reserve. In 2012, 32 domestic financial holding company declarations were approved.

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. Before 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, 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 2012, the Federal Reserve approved 60 merger applications under the 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 may contact other regulatory or law enforcement agencies for information about relevant individuals. In 2012, the Federal Reserve approved 140 change in control notices related to state member banks, BHCs, and SLHCs, including applications involving private equity firms.

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 2012, the Federal Reserve acted on membership applications for 48 banks, and new and merger-related branch applications for 382 domestic branches and two foreign branches.

State member banks must also obtain Federal Reserve approval to establish financial subsidiaries. These subsidiaries may engage in activities that are financial in nature or incidental to financial activities, including securities-related and insurance agency-related activities. In 2012, no financial subsidiary applications were submitted.

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 which 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 2012, the Federal Reserve acted on 17 applications and notices filed by SLHCs to acquire a bank or a nonbank firm, or to otherwise expand their activities.

Under HOLA, a 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 2012, the Federal Reserve acted on no applications for MHC reorganizations. In 2012, the Federal Reserve acted on eight applications filed by MHCs to convert to stock form, and nine applications to waive dividends.

When reviewing an SLHC application or notice that requires prior approval, the Federal Reserve may consider the financial and managerial resources of the applicant, the future prospects of both the applicant and the firm to be acquired, the convenience and needs of the community to be served, the potential public benefits, the competitive effects of the application, 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 reviews elections submitted by SLHCs seeking treatment as financial holding companies under the authority granted by the Dodd-Frank Act. SLHCs seeking financial holding company treatment must file a written declaration with the Federal Reserve. In 2012, four SLHC financial holding company declarations were approved.

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 2012, the Federal Reserve approved 31 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 2012, the Federal Reserve approved two applications by foreign banks to establish branches, agencies, or representative offices in the United States.

Public Notice of Federal Reserve Decisions

Certain decisions by the Federal Reserve that involve an acquisition by a BHC, a bank merger, a change in control, or the establishment of a new U.S. banking presence by a foreign bank are made known to the public by an order or an announcement. Orders state the decision, the essential facts of the application or notice, and the basis for the decision; announcements state only the decision. All orders and announcements are made public immediately; they are subsequently reported in the Board's weekly H.2 statistical release. The H.2 release also contains announcements of applications and notices received by the Federal Reserve upon which action has not yet been taken. For each pending application and notice, the related H.2A release gives the deadline for comments. The Board's website provides information on orders and announcements (www.federalreserve.gov/newsevents/press/orders/2013orders.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

State member banks that issue securities registered under the Securities Exchange Act of 1934 must disclose certain information of interest to investors, including annual and quarterly financial reports and proxy statements. By statute, the Board's financial disclosure rules must be substantially similar to those of the SEC. The enactment of the Jumpstart Our Business Startups Act (JOBS Act) in April 2012 changed the registration threshold under the Securities Exchange Act and resulted in a significant decline in the number of state member banks required to register with the Board. At the end of 2012, four state member banks were registered with the Board under the Securities Exchange Act.

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 Farm Credit Administration and the NCUA examine lenders under their respective jurisdictions; and the Federal Reserve examines other Regulation U lenders.

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