Annual Report 2013
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.
2013 Developments
During 2013, the U.S. banking system and financial markets continued to improve following their recovery from the financial crisis that started in mid-2007.
Performance of bank holding companies. An improvement in bank holding companies' (BHCs) performance was evident during 2013. U.S. BHCs, in aggregate, reported earnings approaching an all-time high--$139 billion for 2013, up from $117 billion for the year ending December 31, 2012. The proportion of unprofitable BHCs continues to decline, reaching 6 percent, down from 11 percent in 2012, but remains elevated compared to historical rates; unprofitable BHCs encompass roughly 1 percent of banking industry assets, in line with historical norms. Nonperforming assets continue to be a challenge to industry recovery, with the nonperforming asset ratio remaining elevated at 2.5 percent of loans and foreclosed assets, an improvement from 3.4 percent at year-end 2012. (Also see "Bank Holding Companies" later in this section.)
Performance of state member banks. The performance at state member banks in 2013 improved modestly compared to 2012. As a group, state member banks reported a profit of $18.2 billion for 2013, up from $17.8 billion for 2012 and near pre-crisis levels. However, profitability from a return on average assets (ROA) and return on equity (ROE) perspective still lags pre-crisis levels by nearly a quarter and one-third, respectively. Provisions (as a percent of revenue) have continued to decrease and are now 3.1 percent, down from a crisis high of 32.4 percent at year-end 2009. Further, 4.1 percent of all state member banks continued to report losses, down from 6.5 percent for year-end 2012. The nonperforming assets ratio remained elevated at 1.4 percent of loans and foreclosed assets, reflecting ongoing weaknesses in asset quality. Growth in problem loans continued to slow during 2013; however, loan types with the largest dollar weakness included nonresidential lending and residential mortgages. 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 2013, one state member bank with $45 million in assets failed. (Also see "State Member Banks" later in this section.)
Revised regulatory capital framework. In July 2013, the federal banking agencies issued rules that restructure the agencies' current regulatory capital rules. The capital requirements in the revised framework serve as the foundation for other key initiatives designed to strengthen financial stability, including the Board's capital plan rule, Dodd-Frank Act stress testing, and capital surcharges for systemically important financial institutions (SIFIs). (See box 1 for details.)
Proposed liquidity coverage ratio. In October 2013, the federal banking agencies jointly published a notice of proposed rulemaking (NPR) to implement, for the first time, quantitative liquidity requirements for internationally active U.S. banking organizations. (See box 2 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. (Also see "Capital Adequacy Standards" later in this section.)
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. (See box 3 for details.)
Easing regulatory burden on community banking organizations. The Subcommittee on Smaller Regional and Community Banking was established to ensure that the development of supervisory guidance is informed by an understanding of the unique characteristics of community and regional banks and consideration of the potential for excessive burden and adverse effects on lending. Since its establishment, the subcommittee has led a number of initiatives focused on reducing regulatory burden on community-banking organizations and gaining additional perspective on community bank concerns. (See box 4 for details.)
Box 1. Revised Regulatory Capital Framework
In July 2013, the federal banking agencies issued rules that restructure the agencies' current regulatory capital rules into a harmonized, comprehensive framework that addresses shortcomings in regulatory capital requirements that became apparent during the recent financial crisis. The capital requirements in the revised framework serve as the foundation for other key initiatives designed to strengthen financial stability, including the Board's capital plan rule, Dodd-Frank Act stress testing, and capital surcharges for systemically important financial institutions.
The revised framework applies to all banks, savings associations, bank holding companies that are not subject to the Board's small bank holding company policy statement, and certain savings and loan holding companies. The framework implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. More specifically, the new capital framework:
- Increases the quantity and quality of capital banking organizations must hold. To help ensure that banking organizations maintain strong capital positions, the revised framework incorporates the Basel III definition of capital, new minimum ratios, and a capital conservation buffer. The framework emphasizes common equity tier 1 capital as the highest quality, most loss-absorbing form of capital. High amounts of loss-absorbing capital allow banking organizations to remain viable and continue lending to creditworthy borrowers in times of financial stress. The capital conservation buffer limits a banking organization's capital distributions and certain discretionary bonus payments if the organization does not hold a specified amount of common equity tier 1 capital in addition to the amount necessary to meet the minimum risk-based capital requirements. This buffer is designed to provide incentives for banking organizations to conserve capital during benign economic periods, so that they are prepared to withstand severe stress events and still remain above the minimum capital levels.
- Improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. The rule includes revisions to the methodologies for determining risk-weighted assets, such as for securitization exposures, past-due loans, and counterparty credit risk. In addition, the rule modifies the recognition of credit risk mitigation to include greater recognition of financial collateral and a wider range of eligible guarantors. The rule also eliminates references to and reliance on credit ratings in the calculation of risk-weighted assets, consistent with the requirements of the Dodd-Frank Act.
- Applies additional requirements to large, internationally active banking organizations to address the systemic risk these organizations may pose. To address certain shortcomings identified during the financial crisis, the rule requires that large, internationally active banking organizations maintain higher levels of capital for exposures to large and unregulated financial institutions. The rule also includes higher counterparty credit risk capital requirements for over-the-counter derivatives and introduces a countercyclical capital buffer that allows regulators to expand the capital conservation buffer of these firms during periods of excessive credit growth. In addition, these firms are subject to a new minimum supplementary leverage ratio that takes into account off-balance sheet exposures.
Transition Arrangements
Banking organizations have a significant transition period to meet the new requirements. The phase-in period for smaller, less complex banking organizations will not begin until January 2015 while the phase-in period for larger institutions subject to the advanced approaches rule begins in January 2014. In addition, savings and loan holding companies with significant commercial or insurance underwriting activities will not be subject to the rule at this time. The Federal Reserve will take additional time to evaluate the appropriate regulatory capital framework for these entities.
The revised regulatory capital framework is available at www.gpo.gov/fdsys/pkg/FR-2013-10-11/pdf/2013-21653.pdf.
Return to textBox 2. Proposed Liquidity Coverage Ratio
In October 2013, the federal banking agencies jointly published an NPR to implement, for the first time, quantitative liquidity requirements for internationally active U.S. banking organizations. At the same time, the Federal Reserve also proposed a modified version of these requirements applicable to certain large, non-internationally active holding companies. The NPR would establish a liquidity coverage ratio based on the Basel Committee on Banking Supervision (BCBS)'s standard for internationally active firms. The proposed introduction of a quantitative minimum threshold for liquidity complements the more qualitative prudential liquidity standards that the Federal Reserve proposed in January and December 2012 under section 165 of the Dodd-Frank Act.
International Coordination
The recent financial crisis demonstrated significant weaknesses in both the liquidity positions and the liquidity risk-management practices of banking organizations. In response, the Federal Reserve worked with regulators around the globe to establish international liquidity standards. These standards include both principles for sound liquidity risk management and also quantitative standards for liquidity. The BCBS published two liquidity measures in December 2010 applicable to internationally active banking organizations: a liquidity coverage ratio (LCR) and a net stable funding ratio (NSFR). In January 2013, the BCBS updated key components of the LCR and has continued work on the development of the NSFR standard.
The U.S. LCR and Modified LCR
Under the proposed U.S. LCR framework, internationally active banking organizations would be required to hold an amount of unencumbered high-quality liquid assets (HQLA) to meet their obligations and other liquidity needs during a standardized 30-day stress scenario. Expressed as a coverage ratio:
For large, non-internationally active firms, the Federal Reserve proposed a modified version of the LCR that incorporates a shorter, 21-day stress scenario. These firms are generally smaller in size, less complex in structure, and less reliant on riskier forms of market funding when compared to internationally active firms. They are also less likely to have as great a systemic impact in a stress event.
High Quality Liquid Assets
To ensure that the HQLA can generate the required liquidity in a period of stress, only assets that are highly liquid are eligible for the LCR numerator. Furthermore, the mix of the eligible assets is constrained by composition limits to ensure that the majority of the HQLA is of the very highest quality. For example, some eligible assets, such as U.S. Treasuries, may be included without any haircut being applied to their market value and can comprise any amount of the total HQLA. In contrast, the value of other eligible assets are subject to a haircut and they may only constitute a limited proportion of the total HQLA.
Net Cash Outflow Categories
The NPR sets forth various categories of cash outflows and eligible inflows that would be used in calculating the ratio denominator. Each category pertaining to a firm's balance sheet and off-balance sheet exposures would be prescribed an outflow rate, designed to reflect the 30-day stress scenario. These rates would be multiplied by the outstanding exposure for each category to arrive at the outflow amount. The outflow rates are reflective of the liquidity characteristics of the category. For example, stable, fully insured retail deposits would receive a relatively low outflow rate of 3 percent. By contrast, balances of certain unsecured wholesale deposits that are uninsured and provided by a financial entity would receive a 100 percent outflow rate. The proposal recognizes that certain types of wholesale deposits are placed at firms for operational purposes, and the outflow rates for operational deposits reflect their implied stability.
Highest Cumulative Net Cash Outflow
Total stressed net cash outflows would be calculated for each of the 30-days following the LCR calculation date. The LCR denominator for internationally active banking organizations would be the amount on the day within the 30-day stress period that has the highest cumulative net outflow.
Transition Arrangements
The NPR would require covered companies to comply with a minimum LCR of 80 percent beginning on January 1, 2015, increasing to 90 percent beginning on January 1, 2016, and then to 100 percent beginning on January 1, 2017. For more information see the Board's press release at www.federalreserve.gov/newsevents/press/bcreg/20131024a.htm.
Return to textBox 3. Recovery and Resolution Planning
The Federal Reserve, in collaboration with other U.S. agencies, has continued to work with large financial institutions to develop a range of recovery and resolution strategies in the event of their distress or failure.
Recovery Planning
The Federal Reserve has required that the largest and most globally active U.S. financial institutions develop recovery plans that describe a number of options and actions to be taken by management to maintain the financial institution as a going concern during instances of extreme stress. Eight domestic bank holding companies and two non-bank financial institutions that may pose elevated risk to U.S. financial stability currently submit recovery plans to the Federal Reserve.
Resolution Planning
Covered financial institutions are required by the Dodd-Frank Act to submit annual resolution plans for their orderly resolution under the Bankruptcy Code in the event of their material financial distress or failure. In 2011, the Federal Reserve and FDIC jointly issued rules implementing the resolution plan requirement for financial institutions that are subject to higher prudential standards. The final resolution plan rule is available at www.gpo.gov/fdsys/pkg/FR-2011-11-01/html/2011-27377.htm.
In a phased approach based on nonbank asset size, the first group of 11 financial institutions, including four foreign banking organizations with operations in the United States, submitted resolution plans on July 1, 2012, and again on October 1, 2013. The second group of four financial institutions submitted their first plans on July 1, 2013; the third group of 116 financial institutions submitted their first plans on December 31, 2013; and three non-bank financial firms will submit their first plans on July 1, 2014. The initial plan submissions identified and described the firms' critical operations, core business lines, material legal entities, interconnections and interdependencies, corporate governance structure and processes related to resolution, and impediments to resolution and the actions the financial institution will take to facilitate its orderly resolution. The second iteration plans submitted by the first group of firms addressed supplemental guidance from the Federal Reserve and FDIC.
- Guidance for 2013 §165(d) Annual Resolution Plan Submissions by Domestic and Foreign-Based Covered Companies: To further assist the Federal Reserve and FDIC in their review of annual resolution plans, the agencies provided additional guidance, clarification, and direction for the institutions required to submit their second iteration resolution plan on October 1, 2013. The guidance included additional clarity around certain assumptions and requested more-detailed information on, and analysis of, the firm's ability to overcome certain obstacles to rapid and orderly resolution under the Bankruptcy Code identified by the Federal Reserve and FDIC, including obstacles related to operational and global interconnectedness, access to financial market utilities, derivatives close-out, collateral management practices, and funding and liquidity. The guidance is available at www.federalreserve.gov/newsevents/press/bcreg/20130415c.htm.
Resolution plan submissions must include both a confidential and public portion. The public portion of each resolution plan is available on the Federal Reserve's website (www.federalreserve.gov/bankinforeg/resolution-plans.htm). The Federal Reserve and the FDIC may determine that a resolution plan is not credible or would not facilitate an orderly resolution of the institution under the Bankruptcy Code. The agencies continue to review and work with firms to develop their resolution plans.
In accordance with principles promulgated by the Financial Stability Board, the Federal Reserve participates with other U.S. and international supervisors in crisis management group meetings to enhance preparedness for the cross-border management and resolution of a failed global systemically important financial institution.
Return to textBox 4. Easing Regulatory Burden on Community Banking Organizations
A subcommittee of Board members was established in 2011 with a primary goal to ensure that the development of supervisory guidance is informed by an understanding of the unique characteristics of community and regional banks and consideration of the potential for excessive burden and adverse effects on lending. Since its establishment, the subcommittee has led a number of initiatives focused on reducing regulatory burden on community banking organizations and gaining additional perspective on community bank concerns. Key aspects of these initiatives include the following:
- Considering the impact of new and existing regulations on community banking organizations. The subcommittee convenes regularly to review regulatory proposals, supervisory guidance, and examination practices to evaluate the effects of these components on community banks. The primary goal of these reviews is to ensure that regulatory directives relevant to community banking organizations remain commensurate with the size and complexity of these institutions.
- Enhancing communication with the community bank industry. The Federal Reserve remains committed to fostering enhanced communication between banking supervisors and community bankers. Primary efforts to support this objective include the following:
- Establishing the Community Depository Institutions Advisory Council. Established in 2010, this Council, comprised of individuals representing community banks, thrifts, and credit unions from each of the 12 Federal Reserve Districts, provides the Board of Governors with industry input on the economy, lending conditions, and other topics of interest to community banking organizations. The Council continues to meet with Board officials twice a year to communicate their views on both the banking industry and pertinent regulatory matters.
- Clarifying new regulations or proposals to help community banking organizations understand and identify items applicable to their organizations. To support this objective, the subcommittee set forth a requirement that all new supervisory proposals and rules include a clear statement of applicability to community banking institutions. This requirement is intended to help community banks more readily identify aspects of supervisory directives applicable to their organizations. As an example, in July 2013, after the final Basel III capital rules were adopted, the Federal Reserve, in collaboration with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency, issued a comprehensive guide to help community banking organizations understand the sections of the rule that were relevant to their operations (www.federalreserve.gov/bankinforeg/basel/files/capital_rule_community_bank_guide_20130709.pdf).
- Disseminating supervisory publications with a focus on community banking organizations. The Federal Reserve uses the following System publications to communicate with community banking organizations on emerging risks and important supervisory matters:
- Community Banking Connections®--Throughout 2013, the publication continued to offer a number of articles focused on timely regulatory topics, including interest rate risk management, cyber security, and capital planning (http://communitybankingconnectionsqa.phil.frb.org/archives.cfm
).
- FedLinks™--Articles published throughout 2013 covered topics outlining supervisory expectations for a number of banking functions, including the internal control function, the allowance for loan and lease losses, and appraisal and evaluation programs (http://communitybankingconnectionsqa.phil.frb.org/fedlinks.cfm
).
- Community Banking Connections®--Throughout 2013, the publication continued to offer a number of articles focused on timely regulatory topics, including interest rate risk management, cyber security, and capital planning (http://communitybankingconnectionsqa.phil.frb.org/archives.cfm
Supervision
In this Section:
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 (FSOC) 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.
Entity/item | 2013 | 2012 | 2011 | 2010 | 2009 |
---|---|---|---|---|---|
State member banks | |||||
Total number | 850 | 843 | 828 | 829 | 845 |
Total assets (billions of dollars) | 2,060 | 2,005 | 1,891 | 1,697 | 1,690 |
Number of examinations | 745 | 769 | 809 | 912 | 850 |
By Federal Reserve System | 459 | 487 | 507 | 722 | 655 |
By state banking agency | 286 | 282 | 302 | 190 | 195 |
Top-tier bank holding companies | |||||
Large (assets of more than $1 billion) | |||||
Total number | 505 | 508 | 491 | 482 | 488 |
Total assets (billions of dollars) | 16,269 | 16,112 | 16,443 | 15,986 | 15,744 |
Number of inspections | 716 | 712 | 672 | 677 | 658 |
By Federal Reserve System 1 | 695 | 691 | 642 | 654 | 640 |
On site | 509 | 514 | 461 | 491 | 501 |
Off site | 186 | 177 | 181 | 163 | 139 |
By state banking agency | 21 | 21 | 30 | 23 | 18 |
Small (assets of $1 billion or less) | |||||
Total number | 4,036 | 4,124 | 4,251 | 4,362 | 4,486 |
Total assets (billions of dollars) | 953 | 983 | 982 | 991 | 1,018 |
Number of inspections | 3,131 | 3,329 | 3,306 | 3,340 | 3,264 |
By Federal Reserve System | 2,962 | 3,150 | 3,160 | 3,199 | 3,109 |
On site | 148 | 200 | 163 | 167 | 169 |
Off site | 2,814 | 2,950 | 2,997 | 3,032 | 2,940 |
By state banking agency | 169 | 179 | 146 | 141 | 155 |
Financial holding companies | |||||
Domestic | 420 | 408 | 417 | 430 | 479 |
Foreign | 39 | 38 | 40 | 43 | 46 |
1. For large bank holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews. Return to table
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.1
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.
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.
A new framework for the consolidated supervision of LISCC firms and other large financial institutions was issued in December 2012.2 This framework strengthened traditional microprudential supervision and regulation to enhance the safety and soundness of individual firms and incorporates macroprudential considerations to reduce potential threats to the stability of the financial system. The framework has two primary objectives:
- Enhancing resiliency of a firm to lower the probability of its failure or inability to serve as a financial intermediary. Each firm is expected to ensure that the consolidated organization (or the combined U.S. operations in the case of foreign banking organizations) and its core business lines can survive under a broad range of internal or external stresses. This requires financial resilience by maintaining sufficient capital and liquidity, and operational resilience by maintaining effective corporate governance, risk management, and recovery planning.
- Reducing the impact on the financial system and the broader economy in the event of a firm's failure or material weakness. Each firm is expected to ensure the sustainability of its critical operations and banking offices under a broad range of internal or external stresses. This requires, among other things, effective resolution planning that addresses the complexity and the interconnectivity of the firm's operations.
The framework is designed to support a tailored supervisory approach that accounts for the unique risk characteristics of each firm, including the nature and degree of potential systemic risk inherent in a firm's activities and operations, and is being implemented in a multi-stage approach.
The Federal Reserve uses a range of supervisory activities to maintain a comprehensive understanding and assessment of each large financial institution:
- Coordinated horizontal reviews. These reviews involve examining several institutions simultaneously and encompass firm-specific supervision and the development of cross-firm perspectives. 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 2013, 2,003 banks (excluding nondepository trust companies and private banks) were members of the Federal Reserve System, of which 850 were state chartered. Federal Reserve System member banks operated 58,074 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, 3 although certain well-capitalized, well-managed organizations with total assets of less than $500 million may be examined once every 18 months.4 The Federal Reserve conducted 459 exams of state member banks in 2013.
Bank Holding Companies
At year-end 2013, a total of 5,095 U.S. BHCs were in operation, of which 4,541 were top-tier BHCs. These organizations controlled 4,930 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 early January of 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.5 Noncomplex BHCs with consolidated assets of $1 billion or less are subject to a special supervisory program that permits a more flexible approach.6 In 2013, the Federal Reserve conducted 695 inspections of large BHCs and 2,962 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 2013, 420 domestic BHCs and 39 foreign banking organizations had financial holding company status. Of the domestic financial holding companies, 23 had consolidated assets of $50 billion or more; 29, between $10 billion and $50 billion; 113, between $1 billion and $10 billion; and 255, less than $1 billion.
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 2013, a total of 607 SLHCs were in operation, of which 331 were top tier SLHCs. These SLHCs control 344 thrift institutions and include 30 companies engaged primarily in nonbanking activities, such as insurance underwriting (15 SLHCs), securities brokerage (8 SLHCs), and commercial activities (7 SLHCs). Excluding SIFI SLHCs, the 25 largest SLHCs accounted for more than $1.3 trillion of total combined assets. Ten institutions in the top 25 and approximately 90 percent of all SLHCs engage primarily in depository activities. These firms hold approximately 13 percent ($364 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 supervisory transition issues while engaging the industry, Reserve Banks, and other financial regulatory agencies. Approximately 95 percent of the SLHCs are now filing all required Federal Reserve regulatory reports. Other significant milestones have been achieved; however, several complex policy issues continue to be addressed by the Board, including those related to consolidated capital requirements, intermediate holding companies, adoption and application of a formal rating system, and the applicability of OTS policies and procedures to SLHCs.
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 considered bank service providers under the Bank Service Company Act.
In July 2012, the FSOC voted to designate eight FMUs as systemically important under title VIII of the Dodd-Frank Act. As a result of these designations, the Federal Reserve assumed an expanded set of responsibilities related to these designated FMUs that include promoting uniform risk-management standards, playing an enhanced role in the supervision of designated FMUs, reducing systemic risk, and supporting the stability of the broader financial system. For designated FMUs subject to the Federal Reserve's supervision, the Board established risk-management standards and expectations that are articulated in Board Regulation HH (effective September 2012). Proposed revisions to these standards to take into account new international standards have been issued by the Board for public comment through March 2014. 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. Section 234.6 of Regulation HH (effective February 2014) establishes terms and conditions under which the Board may authorize a designated FMU access to Reserve Bank accounts and services.
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 works closely with the U.S. Securities and Exchange Commission (SEC) 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 under title VIII, including the sharing of appropriate information and participation in designated FMU examinations, aims to improve consistency in FMU supervision, promote robust FMU risk management, and improve the regulators' ability to monitor and mitigate systemic risk.
Designated Nonfinancial Companies
In 2013, the FSOC designated three nonbank financial companies for supervision by the Board: American International Group, Inc. (AIG); General Electric Capital Corporation, Inc. (GECC); and Prudential Financial, Inc. (Prudential). The Federal Reserve's supervisory approach for these firms as designated companies is consistent with the approach used for the largest financial holding companies but tailored to account for different material characteristics of each firm. The Dodd-Frank Act requires the Board to apply enhanced prudential standards and early remediation requirements to BHCs with at least $50 billion in consolidated assets and to the nonbank financial companies designated by the FSOC for supervision by the Board. The act authorizes the Board to tailor the application of these standards and requirements to different companies on an individual basis or by category.
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 2013, 41 member banks were operating 488 branches in foreign countries and overseas areas of the United States; 24 national banks were operating 414 of these branches, and 17 state member banks were operating the remaining 54. In addition, 13 nonmember banks were operating 20 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 2013, out of 48 banking organizations chartered as Edge Act or agreement corporations, 3 operated 7 Edge Act and agreement branches. These corporations are examined annually.
U.S. activities of foreign banks. Foreign banks continue to be significant participants in the U.S. banking system. As of fourth quarter 2013, 166 foreign banks from 50 countries operated 188 state-licensed branches and agencies, of which 6 were insured by the Federal Deposit Insurance Corporation (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 50 U.S. commercial banks. Altogether, the U.S. offices of these foreign banks controlled approximately 20 percent of U.S. commercial banking assets. These 166 foreign banks also operated 87 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.7 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 411 examinations in 2013.
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.8
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 2013, the Federal Reserve continued as the lead supervisory agency for eight of the 15 large, multiregional data processing servicers recognized on an interagency basis and assumed leadership of two more of the large servicers.
Fiduciary Activities
The Federal Reserve has supervisory responsibility for state member banks and state member nondepository trust companies, which hold assets in various fiduciary and custodial capacities. On-site examinations of fiduciary and custodial activities are risk-focused and entail the review of an organization's compliance with laws, regulations, and general fiduciary principles, including effective management of conflicts of interest; management of legal, operational, and reputational risk exposures; and audit and control procedures. In 2013, Federal Reserve examiners conducted 107 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 2013, the Federal Reserve conducted on-site transfer agent examinations at 14 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 2013, the Federal Reserve conducted six 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. Four of the 12 entities supervised by the Federal Reserve that dealt in municipal securities were examined during 2013.
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). 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).
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 2013, the Federal Reserve completed 50 formal enforcement actions. Civil money penalties totaling $250,030,130 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 2013, the Reserve Banks completed 161 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 2013, two major and two minor 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 depository institutions.
International Training and Technical Assistance
In 2013, 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 2013, 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.
Efforts to Support Minority-Owned Depository Institutions
The Federal Reserve System implements its responsibilities under section 367 of the Dodd-Frank Act primarily through its Partnership for Progress (PFP) program. Established in 2008, this program promotes the viability of minority-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 technical assistance tailored to MOIs by providing targeted supervisory guidance, identifying additional resources, and fostering mutually beneficial partnerships between MOIs and community organizations. As of year-end 2013, the Federal Reserve's MOI portfolio included 17 state member banks.
Throughout 2013, the Federal Reserve System continued to support MOIs through the following activities:
- issuing SR letter 13-15 "Federal Reserve Resources for Minority Depository Institutions" to reaffirm the Federal Reserve System's commitment to support minority depositories
- in collaboration with the FDIC and the Comptroller of the Currency, participating in a biannual interagency conference to help promote and preserve MOIs
- participating in the 86th National Bankers Association (NBA) Convention, with senior Board officials attending this event to explain the impact of Basel III capital rules on community banking organizations
- providing technical assistance to MOIs on a wide variety of topics, including topics focused on improving regulatory ratings, navigating the regulatory applications process, and refining capital-planning practices
- continuing to offer prescreening of MOI applications, to support early identification and resolution of factors that may cause processing delays
- partnering with the NBA, 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, conducting several joint outreach efforts to educate MOIs on supervisory topics
- participating in an interagency taskforce to consider and address supervisory challenges facing MOIs
Throughout 2013, PFP representatives hosted and participated in numerous banking workshops and seminars aimed at promoting and preserving MOIs, including the NBA's Legislative and Regulatory Conference and the National Urban League Convention. Further, program representatives continued to collaborate with community leaders, trade groups, the Small Business Administration, and other organizations to seek support for MOIs.
Business Continuity
In 2013, 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 and their technology services providers. As a result of several events that presented major challenges to the financial system, including the continuing distributed denial of service (DDoS) attacks against U.S. financial institutions, in 2013 the Federal Reserve, in conjunction with the other FFIEC agencies, took steps to promote the continued resilience of the financial system. First, the FFIEC agencies reviewed supervisory lessons learned from Superstorm Sandy and developed specific action steps for addressing these supervisory concerns. Second, the FFIEC agencies created the Cybersecurity and Critical Infrastructure Working Group to assess the risks to banks and credit unions from the evolving cyber threat landscape. In addition, as a result of the lessons learned from Superstorm Sandy, the DDoS attacks, and other cyber security threats, the Federal Reserve led an FFIEC agency review of business resiliency for technology service providers. Finally, the Federal Reserve, together with other federal and state financial regulators, continued to participate in the Financial and Banking Information Infrastructure Committee, which supports improved coordination and communication among financial regulators, promotes the resiliency of the financial sector, and promotes public/private partnership.
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 policies. Federal Reserve staff also take part in supervisory and regulatory forums, provide support for the work of the FFIEC, and participate in international policymaking forums, including the Basel Committee on Banking Supervision, the Financial Stability Board, and the Joint Forum.
Capital Adequacy Standards
In 2013, the Board issued several rulemakings and guidance documents related to capital adequacy standards, including joint 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.
- In March, the Federal Reserve issued guidance to explain the availability on the Board's public website of examination guidance relating to implementation of the advanced approaches risk-based capital rule. A series of bulletins will be used to address technical and other matters on the implementation of the advanced approaches rule. This guidance only applies to a few large, internationally active banking organizations. Seven bulletins were published in 2013 and are available, with the associated guidance, at www.federalreserve.gov/bankinforeg/basel/basel-coordination-committee-bulletins.htm.
- In July, the Federal Reserve and the OCC published a final rule to amend the regulatory capital rules. The FDIC published an interim final rule that is consistent with the final rule adopted by the Board and the OCC. The final rule establishes 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 final rule implements in the United States the Basel III regulatory capital reforms adopted by the Basel Committee on Banking Supervision. The final rule also makes changes required by the Dodd-Frank Act, including removal of references to and reliance on credit ratings. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2013-10-11/pdf/2013-21653.pdf.
- In July, the federal banking agencies issued a proposed rule to strengthen the leverage ratio standards for the largest, most systemically significant U.S. banking organizations. Under the proposed rule, U.S. top tier BHCs with more than $700 billion in consolidated total assets or $10 trillion in assets under custody (covered BHCs) would be required to maintain a tier 1 capital leverage buffer of more than 2 percent above the minimum supplementary leverage ratio requirement of 3 percent to avoid limitations on distributions and discretionary bonus payments. The subsidiary insured depository institutions of covered BHCs would be required to meet a 6 percent supplementary leverage ratio to be considered "well capitalized" for prompt corrective action purposes. The proposed rule would apply to the eight largest, most systemically significant U.S. banking organizations and would strengthen the leverage requirements for these firms in proportion to the stronger risk-based capital requirements in effect under the revised capital framework in order to maintain an effective complementary relationship between the two types of requirements. The proposed rule is available at www.gpo.gov/fdsys/pkg/FR-2013-08-20/pdf/2013-20143.pdf.
- In August, the Federal Reserve issued a paper, Capital Planning at Large Bank Holding Companies: Supervisory Expectations and Range of Current Practice. The paper is intended to promote better capital planning at BHCs generally, and to provide greater clarity on the standards against which those practices are evaluated as part of the CCAR exercise. In particular, the Federal Reserve emphasized that BHCs, when considering their capital needs, should focus on the specific risks they could face under potentially stressful conditions. The paper is available at www.federalreserve.gov/bankinforeg/bcreg20130819a1.pdf.
- In September, the Federal Reserve issued two interim final rules that clarify how companies should incorporate the revised regulatory capital framework, implementing the Basel III regulatory capital reforms, into their capital and business projections during the cycle of capital plan submissions and stress tests that began October 1, 2013 (current cycle). The interim final rule applicable to BHCs with $50 billion or more in total consolidated assets clarifies that these companies must incorporate the revised capital framework into their capital planning projections and into the required stress tests. The other interim final rule provides a one-year transition period for most banking organizations with between $10 billion and $50 billion in total consolidated assets. These companies will be required to calculate their stress test projections using the Board's current regulatory capital rules during the current cycle in order to allow time to adjust their internal systems to the revised capital framework. The interim final rules are available at www.gpo.gov/fdsys/pkg/FR-2013-09-30/pdf/2013-23618.pdf and www.gpo.gov/fdsys/pkg/FR-2013-09-30/pdf/2013-23619.pdf.
- In November, the federal banking agencies announced the availability of a revised regulatory capital estimation tool to help community banks and other interested parties evaluate the revised regulatory capital framework issued in July. The tool was developed to assist these banks in estimating the potential effects on their capital ratios of the agencies' recently revised regulatory capital framework. The announcement and the capital estimation tool are available at www.federalreserve.gov/newsevents/press/bcreg/20131119a.htm.
- In December, the Federal Reserve published a final rule that makes technical changes to the market risk capital rule to align it with the Basel III revised capital framework adopted by the agencies earlier this year. The market risk capital rule is used by banking organizations with significant trading activities to calculate regulatory capital requirements for market risk. The rule is available at www.federalreserve.gov/newsevents/press/bcreg/20131206a.htm.
- In December, the Federal Reserve issued guidance to large financial institutions that provides clarification on supervisory expectations when assessing a firm's capital adequacy in certain circumstances when the risk-based capital framework may not fully capture the residual risks of a transaction. For such transactions, a financial institution should be able to demonstrate that it reflects the residual risk in its internal assessment of capital adequacy and maintains sufficient capital to address such risk. The letter is available at www.federalreserve.gov/bankinforeg/srletters/sr1323.pdf.
In 2013, 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 2013, the Federal Reserve participated in ongoing international initiatives to track the progress of implementation of the Basel framework in member countries.
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 2013.
Final papers:
- Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools(issued in January and available at www.bis.org/publ/bcbs238.pdf
).
- Monitoring tools for intraday liquidity management(issued in April and available at www.bis.org/publ/bcbs248.pdf
).
- Global systemically important banks: updated assessment methodology and the higher loss absorbency requirement(issued in July and available at www.bis.org/publ/bcbs255.pdf
).
- Margin requirements for non-centrally cleared derivatives (issued in September and available at www.bis.org/publ/bcbs261.pdf
).
- Capital requirements for banks' equity investments in funds (issued in December and available at www.bis.org/publ/bcbs266.pdf
).
Consultative papers:
- Supervisory framework for measuring and controlling large exposures (issued in March and available at www.bis.org/publ/bcbs246.pdf
).
- Revised Basel III leverage ratio framework and disclosure requirements (issued in June and available at www.bis.org/publ/bcbs251.pdf
).
- Capital treatment of bank exposures to central counterparties (issued in June and available at www.bis.org/publ/bcbs253.pdf
).
- The non-internal model method for capitalising counterparty credit risk exposures (issued in June and available at www.bis.org/publ/bcbs254.pdf
).
- Capital requirements for banks' equity investments in funds (issued in July and available at www.bis.org/publ/bcbs257.pdf
).
- Liquidity coverage ratio disclosure standards (issued in July and available at www.bis.org/publ/bcbs259.pdf
).
- Fundamental review of the trading book: A revised market risk framework (issued in October and available at www.bis.org/publ/bcbs265.pdf
).
- Revisions to the securitisation framework (issued in December and available at www.bis.org/publ/bcbs269.pdf
).
Joint Forum
In 2013, 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. The Federal Reserve is also currently participating in a new initiative that will analyze how increased requirements for collateral have impacted firm behavior in the banking, securities, and insurance sectors. Final and consultative papers issued by the Joint Forum in 2013 include:
- Mortgage insurance: market structure, underwriting cycle and policy implications (issued in February and available at www.bis.org/publ/joint30.pdf
).
- Longevity risk transfer markets: market structure, growth drivers and impediments, and potential risks (issued in December and available at www.bis.org/publ/joint34.pdf
).
Financial Stability Board
In 2013, 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 shadow banking, supervision of globally systemically important financial institutions, and the development of effective resolution regimes for large financial institutions. Guidance and consultative papers issued by the FSB in 2013 include:
- Principles for an Effective Risk Appetite Framework (issued in July and available at www.financialstabilityboard.org/publications/r_130717.pdf
).
- Information sharing for resolution purposes (issued in August and available at www.financialstabilityboard.org/publications/r_130812b.pdf
).
- Application of the Key Attributes of Effective Resolution Regimes to Non-Bank Financial Institutions (issued in August and available at www.financialstabilityboard.org/publications/r_130812a.pdf
).
- Assessment Methodology for the Key Attributes of Effective Resolution Regimes for Financial Institutions (issued in August and available at www.financialstabilityboard.org/publications/r_130828.pdf
).
- Strengthening Oversight and Regulation of Shadow Banking - An Overview of Policy Recommendations (issued in August and available at www.financialstabilityboard.org/publications/r_130829a.pdf
).
- Strengthening Oversight and Regulation of Shadow Banking - Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos (issued in August and available at www.financialstabilityboard.org/publications/r_130829b.pdf
).
- Strengthening Oversight and Regulation of Shadow Banking - Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities (issued in August and available at www.financialstabilityboard.org/publications/r_130829c.pdf
).
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 accounting policy function is responsible for providing expertise in policy development and implementation efforts, both within and outside the Federal Reserve System, on issues affecting the banking industry in the areas of accounting, auditing, internal controls over financial reporting, financial disclosure, and supervisory financial reporting.
Federal Reserve staff regularly consult with key constituents in the accounting and auditing professions, including domestic and international standard-setters, accounting firms, accounting and financial sector trade groups, and other financial sector regulators to facilitate the Board's understanding of domestic and international practices; proposed accounting, auditing, and regulatory standards; and the interactions between accounting standards and regulatory reform efforts. The Federal Reserve also participates in various accounting, auditing, and regulatory forums in order to both formulate and communicate its views.
During 2013, Federal Reserve staff addressed numerous issues including loan accounting, troubled debt restructurings, other real estate accounting, accounting for credit losses, financial instrument accounting and reporting, securities financing transactions, deferred taxes, insurance contracts accounting, and external and internal audit processes.
The Federal Reserve shared its views with accounting and auditing standard-setters through informal discussions and public comment letters. Comment letters on Financial Accounting Standards Board proposals related to accounting for credit losses, recognition and measurement of financial assets and financial liabilities, accounting for leases, and accounting for insurance contracts were issued during the past year.
The Federal Reserve staff also participated in meetings of the Basel Committee's Accounting Experts Group (formerly known as the Accounting Task Force), which represents the Basel Committee at international meetings on accounting, auditing, and disclosure issues affecting global banking organizations. Working with international bank supervisors, Federal Reserve staff contributed to the development of numerous other comment letters that were submitted to standard setters through the Basel Committee. The issues addressed in the comment letters during 2013 included accounting for credit losses, classification and measurement of financial instruments, and auditor's reporting model.
In 2013, 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 on the internal audit function, troubled debt restructurings, and secured consumer debt discharged in Chapter 7 bankruptcy; 9
- developed and participated in a number of domestic and international supervisory training programs and 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, through participation in examinations and provision of expert guidance on specific queries related to financial accounting, auditing, reporting, and disclosures.
The Federal Reserve System staff also provided their accounting and business expertise through participation in other supervisory activities during the past year. These activities included supporting Dodd-Frank Act initiatives related to stress testing of banks and resolution planning by banks, as well as, various Basel III issues.
Credit-Risk Management
The Federal Reserve works with the other federal banking agencies to develop guidance on the management of credit risk; to coordinate the assessment of regulated institutions' credit risk; and to ensure that institutions properly identify, measure, and manage credit risk.
Shared National Credit Program
In September, the Federal Reserve and the other banking agencies released summary results of the 2013 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 2013 SNC review was based on analyses prepared in the second quarter of 2013 using credit-related data provided by federally supervised institutions as of December 31, 2012, and March 31, 2013. The 2013 SNC portfolio totaled $3.01 trillion, with roughly 9,300 credit facilities to approximately 5,800 borrowers. From the previous period, the dollar volume of the portfolio commitment amount rose by $219 billion or 7.8 percent, and the number of credits increased by 590, or 6.8 percent.
The quality of 2012 originations slightly improved from 2011 originations as more transactions were reported as investment grade. However, the SNC examination noted weak underwriting standards in 24 percent of the loan transactions sampled. This percentage compares unfavorably to 2011, 2010, and 2009 percentages of 19 percent, 16 percent and 13 percent, respectively. Leveraged lending transactions are the primary driver of this deterioration. The most frequently cited underwriting deficiencies identified during the 2013 SNC Review were minimal or no loan covenants, liberal repayment terms, repayment dependent on refinancing, and inadequate collateral valuations. The weak underwriting structures are in part attributable to aggressive competition and market liquidity.
In conjunction with the March 21, 2013, issuance of the Interagency Guidance on Leveraged Lending, the 2013 SNC review included a review of 496 leveraged obligors, with $429 billion in commitments (approximately 53.6 percent of reviewed SNC commitments). The review identified a high level of risk associated with this subset of the portfolio. The leveraged loan criticized rate, at 42 percent, was substantially higher than that of non-leveraged loans, which carried a criticized rate of 3.1 percent.
Refinancing risk has declined in the SNC portfolio as only 15 percent of SNCs will mature over the next two years compared with 23 percent for the same time frame in the 2012 SNC Review. Poorly underwritten credits originated in 2006 and 2007 continued to adversely affect the SNC portfolio. During 2012 and into 2013, 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 2013 SNC review, visit the Board's website at www.federalreserve.gov/newsevents/press/bcreg/20131010a.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 2013, the Federal Reserve continued to actively promote the development and maintenance of effective BSA/AML compliance risk-management programs, including developing supervisory strategies and providing guidance to the industry on trends in BSA/AML compliance. For example, the Federal Reserve supervisory staff participated in a number of industry conferences to continue to communicate regulatory expectations and policy interpretations for financial institutions.
The Federal Reserve is a member of the Treasury-led BSA Advisory Group, which includes representatives of regulatory agencies, law enforcement, and the financial services industry and covers all aspects of the BSA. The Federal Reserve also participated in 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. In addition, the Federal Reserve participated in meetings during the year to discuss BSA/AML issues with delegations from Japan, Columbia, and Hong Kong regarding managing and reporting on AML risk, customer due diligence, and emerging payments. The Federal Reserve also participates in the FFIEC BSA/AML working group, a monthly forum for the discussion of pending BSA policy and regulatory matters. In addition to the FFIEC agencies, the BSA/AML working group includes the Financial Crimes Enforcement Network (FinCEN) and, on a quarterly basis, the SEC, the 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 2013, the Federal Reserve and other federal banking agencies continued to regularly share examination findings and enforcement proceedings with FinCEN as well as with OFAC under the interagency MOUs finalized in 2004 and 2006. The Federal Reserve also provided a speaker for and participated in OFAC's day-long Financial Institution Symposium.
In 2013, the Federal Reserve continued to participate in the U.S. Treasury's Interagency Task Force on Strengthening and Clarifying the BSA/AML Framework (Task Force), created in 2012, which includes representatives from the Department of Justice, OFAC, FinCEN, the federal banking agencies, the SEC, 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. The Federal Reserve participated in developing the FATF guidance for the banking sector on identifying, assessing, and monitoring money laundering and the financing of terrorism on a risk-assessed basis. The Federal Reserve also participated in efforts by FATF to more fully understand effective AML supervision and enforcement. 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. With respect to that subcommittee, the Federal Reserve actively contributed to the development of a consultative paper on the sound management of risks related to money laundering and the financing of terrorism.
Incentive Compensation
To foster improved incentive compensation practices in the financial industry, the Federal Reserve along with the other federal banking agencies adopted interagency guidance oriented to the risk-taking incentives created by incentive compensation arrangements.10 The guidance is principles-based, recognizing that the methods used to achieve appropriately risk-sensitive compensation arrangements likely will differ significantly across and within firms. The three principles at the core of the guidance are:
- Incentive compensation arrangements should balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risks.
- A banking organization's risk-management processes and internal controls should reinforce and support the development and maintenance of balanced incentive compensation arrangements, and incentive compensation should not hinder risk management and controls.
- Banking organizations should have strong and effective corporate governance of incentive compensation.
These principles and the guidance more generally are consistent with the Principles for Sound Compensation Practices issued in April 2009 by the Financial Stability Board and associated implementation
standards.11
Through two Board-led horizontal reviews and with ongoing engagement with the largest firms and our supervisory teams, we have improved practice and design of incentive compensation arrangements at firms with greater than $50 billion in U.S. assets. This horizontal review was designed to assess the potential for incentive compensation arrangements to encourage imprudent risk-taking; the actions the large banking organizations have taken to correct deficiencies in incentive compensation design; and the adequacy of the firms' compensation-related risk management, controls, and corporate governance.12
The Dodd-Frank Act requires the reporting to regulators of incentive compensation arrangements and prohibits incentive compensation arrangements that provide excessive compensation or that could expose the firm to inappropriate risks. Banking organizations, broker-dealers, investment advisers, and certain other firms are covered under the act if they have $1 billion or more in total consolidated assets. To implement the act, seven financial regulatory agencies (Federal Reserve, OCC, FDIC, OTS, NCUA, SEC, FHFA) issued a joint proposed rule in April 2011. At the heart of the proposed rule are the three principles in the banking agencies' guidance. A very large number of comments were received from the public and these comments are being carefully considered in the drafting of the final rule.
Other Policymaking Initiatives
- In March, the Federal Reserve and the other federal banking agencies issued updated guidance on leveraged lending. The guidance outlines high-level principles related to safe-and-sound leveraged lending activities. It addresses pertinent risk-management issues surrounding leveraged loans that came to the forefront prior to and during the recent financial crisis and encourages companies to develop and maintain a definition of leveraged lending that can be applied across business lines. The guidance highlights the importance of developing and maintaining a sound leveraged lending policy and extending prudent risk-management practices equally to loans originated to hold and to those originated to distribute. The guidance is available at www.federalreserve.gov/bankinforeg/srletters/sr1303.htm.
- In August, the Board issued a final rule (Regulation TT, 12 CFR 246 et seq.) establishing an annual assessment for its supervision and regulation of large financial companies pursuant to section 318 of the Dodd-Frank Act, which directs the Board to collect assessments equal to the expenses it estimates are necessary or appropriate to supervise and regulate BHCs and SLHCs with $50 billion or more in total consolidated assets and nonbank financial companies designated by the FSOC for supervision by the Federal Reserve. The final rule became effective on October 25, 2013, and is available at www.gpo.gov/fdsys/pkg/FR-2013-08-23/pdf/2013-20306.pdf. The final rule provides that each calendar year is an assessment period and outlines how the Board determines which companies are charged, estimates the applicable expenses, determines each company's assessment, and bills for and collects the assessment. In 2013, the Board billed 72 companies for the 2012 assessment period. In accordance with Regulation TT and as required by law, the Board collected and transferred a total of $433,483,299 to the U.S. Treasury. As such, the Board does not recognize the assessments as revenue nor does the Board use the collections to fund Board expenses.
- In August, six federal agencies (the Federal Reserve, Department of Housing and Urban Development, the FDIC, the Federal Housing Finance Agency, the OCC, and the SEC) issued a revised proposed rule requiring sponsors of securitization transactions to retain risk in those transactions. The new proposal revises a proposed rule the agencies issued in 2011 to implement the risk retention requirement in the Dodd-Frank Act. The rule would provide asset-backed securities sponsors with several options to satisfy the risk retention requirements. The proposed rule is available at www.gpo.gov/fdsys/pkg/FR-2013-09-20/pdf/2013-21677.pdf.
- In October, the federal banking agencies issued securities classification guidance. The guidance outlines principles related to the proper classification of securities without relying on ratings issued by nationally recognized statistical rating organizations (external credit ratings). Section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires each federal agency to remove references to, and requirements of reliance on, external credit ratings in any regulation issued by the agency that requires the assessment of the creditworthiness of a security or money market instrument. This guidance clarifies the classification standards for securities held by an institution and provides examples that demonstrate when a security is investment grade and when it is not investment grade. The guidance is available at www.federalreserve.gov/bankinforeg/srletters/sr1318.htm.
- In December, the Federal Reserve issued guidance on managing outsourcing risk. The guidance expands upon the existing interagency guidance on outsourcing of information technology services that was issued by the FFIEC in 2004. Specifically, it applies to service provider relationships where business functions or activities are outsourced. The guidance highlights potential risks arising from the use of service providers and describes elements of an appropriate service provider risk-management program. The guidance is available at www.federalreserve.gov/bankinforeg/srletters/sr1319.htm.
- In December, the Federal Reserve and the other federal financial institutions regulatory agencies issued a statement to clarify safety-and-soundness expectations and Community Reinvestment Act considerations for regulated mortgage lenders in light of the Consumer Financial Protection Bureau's Ability-to-Repay and Qualified Mortgage Standards Rule. The statement was intended to guide institutions as they assessed the implementation of the Bureau's Ability-to-Repay Rule. From a safety-and-soundness perspective, the Federal Reserve and the other agencies emphasized that an institution may originate both qualified and non-qualified residential mortgage loans (QM and non-QM, respectively) based on its business strategy and risk appetite. The agencies will not subject a residential mortgage loan to safety-and-soundness criticism solely because of the loan's status as a QM or non-QM loan. The statement also emphasized that, from a consumer protection perspective, the agencies do not anticipate that an institution's decision to originate only QMs, absent other factors, would adversely affect its CRA evaluations. The letter and guidance are available at www.federalreserve.gov/bankinforeg/srletters/SR1320.htm.
- In December, the Federal Reserve issued guidance to clarify that financial institutions with significant foreign exchange operations in the United States should apply the principles of the Supervisory Guidance for Managing Risks Associated with the Settlement of Foreign Exchange Transactions, which was published in February by the Basel Committee on Banking Supervision. The Basel Committee's guidance discusses the importance of strong governance over foreign exchange settlement risks and calls for the use of payment versus payment settlement systems and bilateral netting when possible, along with the exchange of variation margin on transactions with financial institutions. The letter and guidance are available at www.federalreserve.gov/bankinforeg/srletters/sr1324.htm.
- In December, the Federal Reserve, the other federal banking agencies, and the SEC issued a statement regarding the treatment of certain collateralized debt obligations backed by trust preferred securities under the investment prohibitions of section 619 of the Dodd-Frank Act, otherwise known as the "Volcker rule." The letter and guidance are available at www.federalreserve.gov/bankinforeg/srletters/sr1325.htm.
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. holding companies (HCs) periodically submit reports that provide information about their financial condition and structure.13 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 HCs 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 HCs 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 HC 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 HCs 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 the Home Owners Loan Act (HOLA) and Regulation LL and to assess the ability of a foreign banking organization to continue as a source of strength to its U.S. operations.
- The FFIEC 101 report collects information about the components of reporting entities' regulatory capital, risk-weighted assets by type of credit-risk exposure under the Advanced Internal Ratings-Based Approach, and risk-weighted assets and operational losses under the Advanced Measurement Approach. The report is used to assess and monitor the levels and components of each reporting entity's risk-based capital requirements and the adequacy of the entity's capital under the Advanced Capital Adequacy Framework.
- The FFIEC 009 report collects detailed information on the distribution, by country, of claims on foreigners held by the reporting institution. The report is used to determine the degree of risk in the reporting institution's portfolios and the effect adverse developments in particular countries may have on the U.S. banking system.
During 2013, the Federal Reserve proposed to revise the FR Y-9C, FR Y-9SP and the FFIEC 101 reports to implement the revised regulatory capital framework. The Federal Reserve would modify the FR Y-9C to split the current Schedule HC-R, Regulatory Capital, into two parts: Part I, which would collect information on regulatory capital components and ratios, and Part II, which would collect information on risk-weighted assets. The Federal Reserve would modify the FR Y-9SP to add a new Schedule SC-R, Regulatory Capital, to begin collecting information on regulatory capital components and ratios and risk-weighted assets from small covered SLHCs. The Federal Reserve (with the other FFIEC member banking agencies) would modify FFIEC 101 Schedule A, Advanced Risk-Based Capital, and nine other schedules to implement the revised advanced approaches capital rules.
Effective in December 2013, the FFIEC 009 report was revised to (1) increase the number of counterparty categories; (2) add additional information on the type of claim being reported; (3) provide details on a limited number of risk mitigants to help provide perspective to currently reported gross exposure numbers; (4) add more detailed reporting of credit derivatives; (5) add the United States as a country row to facilitate the analysis of domestic and foreign exposures and comply with enhancements to International Banking Statistics proposed by the Bank for International Settlements; and (6) effective March 2014, expand the entities that must report to include SLHCs.
Also effective in December 2013, the Federal Reserve reduced reporting burden by increasing the asset size thresholds for filing the annual FR Y-11/S, FR 2314/S, and FR Y-7N/S. In addition, the Federal Reserve eliminated the FR Y-11S and FR 2314S threshold requirement based on the percentage of consolidated assets of the top-tier organization.
Savings and Loan Holding Company Regulatory Reports
The majority of SLHCs became compliant with Federal Reserve regulatory reporting by the end of 2013. At this time, approximately 20 commercial and insurance SLHCs remain exempt from filing consolidated regulatory reports.
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 the Consolidated Reports of Condition and Income (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 2013, the FFIEC proposed to revise the Call Report to implement the banking agencies' revised regulatory capital framework. The FFIEC would modify the Call Report to split the current Schedule RC-R, Regulatory Capital, into two parts: Part I, which would collect information on regulatory capital components and ratios, and Part II, which would collect information on risk-weighted assets. Also during 2013, the FFIEC proposed revisions to the following types of information on the Call Report: effective March 2014 (1) information about international remittance transfers; (2) information on trade names (other than an institution's legal title) used to identify physical offices and the addresses of any public-facing Internet websites (other than the institution's primary Internet website address) at which the institution accepts or solicits deposits from the public; (3) responses to a yes-no question asking whether the reporting institution offers any deposit account products (other than time deposits) primarily intended for consumers; (4) for institutions with $1 billion or more in total assets that offer one or more deposit account products (other than time deposits) primarily intended for consumers, information on the total balances of these consumer deposit account products; and effective March 2015 (5) for institutions with $1 billion or more in total assets that offer one or more deposit account products (other than time deposits) primarily intended for consumers, information on the amount of income earned from each of three categories of service charges on their consumer deposit account products.
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 2013, 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.
- Data management and analysis. Implemented a Data Management Office to strengthen capabilities in the areas of data collection and data stewardship. Implemented new tools for the analysis of large volumes of data, especially in support of stress testing and risk analysis.
- 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. Implemented products to modernize business capabilities in the areas of loan review, examiner credentialing, 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 2013, the NIC supervisory and structure databases continued to be modified to support Dodd-Frank Act changes and to facilitate the supervision of SLHCs. The capture and integration of the former OTS data and documents into several NIC databases were completed this year, which resulted in substantially more SLHC examination and enforcement action data being available. Additionally, SLHCs were added to the reporting panel for the Report of Changes in Organizational Structure (FR Y-10).
NIC staff are engaged with the Board's new Office of the Chief Data Officer established in 2013 to continue improving data management and data governance practices for the Board and FRS enterprise information. During 2013, a number of FRS management groups were modified to align with the Board's strategic planning initiatives.
Changes to the NIC public website continued to be implemented in response to the Dodd-Frank Act, including implementation of changes to allow access to the Banking Organization Systemic Risk Report (FR Y-15). Similarly the website was enhanced to provide access to the Risk-Based Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 101). The data for these two series will be available in 2014.
Also in 2013, enhancements were made to the CDTR, which included the expansion of the application to accommodate additional text associated with new supervisory data collections and modifications to facilitate the sharing of information between the Federal Reserve System and the Consumer Financial Protection Bureau.
The NIC 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 review proposals on and award a contract for the enhancements to and the operations and maintenance of the FFIEC Central Data Repository (CDR), 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.
The NIC also supports the interagency Shared National Credit (SNC) Program, the annual review of large syndicated loans. During 2013, the agencies continued to review and implement remaining business requirements to complete the SNC automation build out. This automation is focused on improving the efficiency of the annual SNC examination process and enhancing the supervisory insight derived from these exams.
Additionally, throughout 2013, NIC staff provided project management support for the maturation of data management practices associated with the CCAR, Capital Plan Review, and DFAST program initiatives and for the automation of the Capital Assessment and Stress Testing (FR Y-14) information collection.
Staff Development
The Federal Reserve's staff development program supports the ongoing development of about 3,200 professional supervisory staff, ensuring 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 2013 are summarized in table 2.
Examiner Commissioning Program
The Federal Reserve System's commissioning program for assistant examiners is set forth in the Examiner Commissioning Program (SR letter 98-02).14 Examiners choose from one of three specialty tracks--(1) safety and soundness, (2) consumer compliance, or (3) information technology. On average, individuals move through a combination of classroom offerings, self-paced learning, and on-the-job training over a period of three years. Achievement is measured by completing the required course content, demonstrating adequate on-the-job knowledge, and passing a professionally validated proficiency examination.
In 2013, 157 examiners passed the first proficiency exam and 142 passed the second proficiency exam (103 in safety and soundness and 39 in consumer compliance).
Currently, the Federal Reserve is undertaking a major initiative to modernize its Examiner Commissioning Program. As a result, the curriculum for examiners involved in community banking supervision and consumer compliance has been revised or is currently being revised.
Course sponsor or type | Number of enrollments | Instructional time (approximate training days) 1 | Number of course offerings | |
---|---|---|---|---|
Federal Reserve personnel | State and federal banking agency personnel | |||
Federal Reserve System | 2,313 | 489 | 560 | 112 |
FFIEC | 725 | 318 | 432 | 108 |
The Options Institute 2 | 9 | 2 | 3 | 1 |
Rapid ResponseTM | 20,595 | 3,368 | 13 | 106 |
1. Training days are approximate. System courses were calculated using five days as an average, with FFIEC courses calculated using four days as an average. Return to table
2. The Options Institute, an educational arm of the Chicago Board Options Exchange, provides a three-day seminar on the use of options in risk management. Return to table
Continuing Professional Development
Other formal and informal learning opportunities are available to examiners in the form of self-study materials, online learning, and classroom instruction. Schools, conferences, and programs covering a variety of regulatory topics are offered within the System, Board, and FFIEC. System programs are also available to state and federal banking agency personnel.
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 2013, the Federal Reserve acted on 994 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.15 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 2013, the Federal Reserve acted on 242 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 2013, the Federal Reserve acted on 13 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 2013, 26 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 2013, the Federal Reserve approved 41 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 2013, the Federal Reserve approved 153 change in control notices and denied one notice.
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 2013, the Federal Reserve acted on membership applications for 39 banks, and new and merger-related branch applications for 420 domestic branches and three 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 2013, 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 2013, the Federal Reserve acted on 15 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 2013, the Federal Reserve acted on no applications for MHC reorganizations. In 2013, the Federal Reserve acted on six applications filed by MHCs to convert to stock form, and six 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 status as financial holding companies under the authority granted by the Dodd-Frank Act. SLHCs seeking financial holding company status must file a written declaration with the Federal Reserve. In 2013, no 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 2013, the Federal Reserve approved 23 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 2013, the Federal Reserve approved seven 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
Under the Securities Exchange Act of 1934 and Federal Reserve's Regulation H, certain state member banks are required to make financial disclosures to the Federal Reserve using the same reporting forms (such as Form 10K- annual report and Schedule 14A -proxy statement) that are normally used by publicly held entities to submit information to the Securities Exchange Commission.16 As most of the publicly held banking organizations are BHCs and the reporting threshold was recently raised, only three state member banks were required to submit data to the Federal Reserve in 2013. The information submitted by these three small state member banks is available to the public upon request and is primarily used for disclosure to the bank's shareholders and public investors.
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.
References
1. "Banking offices" are defined as U.S. depository institution subsidiaries, as well as the U.S. branches and agencies of foreign banking organizations. Return to text
2. For more information about the supervisory framework, see the Board's press release and SR letter 12-17/CA 12-14 at www.federalreserve.gov/newsevents/press/bcreg/20121217a.htm. Return to text
3. The Office of the Comptroller of the Currency examines nationally chartered banks, and the Federal Deposit Insurance Corporation examines state-chartered banks that are not members of the Federal Reserve. Return to text
4. The Financial Services Regulatory Relief Act of 2006, which became effective in October 2006, authorized the federal banking agencies to raise the threshold from $250 million to $500 million, and final rules incorporating the change into existing regulations were issued on September 21, 2007. Return to text
5. Each of the first two components has four subcomponents:
Risk Management--(1) Board and Senior Management Oversight; (2) Policies, Procedures, and Limits; (3) Risk Monitoring and Management Information Systems; and (4) Internal Controls. Financial Condition--(1) Capital, (2) Asset Quality, (3) Earnings, and (4) Liquidity. Return to text
6. The special supervisory program was implemented in 1997, most recently modified in 2013. See SR letter 13-21 for a discussion of the factors considered in determining whether a BHC is complex or noncomplex. (www.federalreserve.gov/bankinforeg/srletters/sr1321.htm). Return to text
7. The OCC examines federally licensed branches and agencies, and the FDIC examines state-licensed FDIC-insured branches in coordination with the appropriate state regulatory authority. Return to text
8. The FFIEC is an interagency body of financial regulatory agencies established to prescribe uniform principles, standards, and report forms and to promote uniformity in the supervision of financial institutions. The Council has six voting members: the Board of Governors of the Federal Reserve System, the FDIC, the National Credit Union Administration, the OCC, the Consumer Financial Protection Bureau, and the chair of the State Liaison Committee. Return to text
9. Final guidance documents are available at www.federalreserve.gov/bankinforeg/srletters/sr1301.pdf; www.federalreserve.gov/bankinforeg/srletters/sr1324.pdf; www.federalreserve.gov/bankinforeg/srletters/sr1317.pdf; and www.federalreserve.gov/reportforms/supplemental/SI_FRY9_201306.pdf. Return to text
10. See "Guidance on Sound Incentive Compensation Policies," vol. 75 Federal Register, pp. 36395-36414, June 25, 2010. Return to text
11. In July 2011, the Basel Committee on Banking Supervision published its Pillar 3 Disclosure Requirements for Remuneration. These disclosure requirements are designed to support effective market discipline with the goal of providing access to the quality of the compensation practices and the quality of support for a firm's strategy and risk posture. The Board plans to issue a notice of proposed rulemaking to implement the key elements of the Basel Committee's issuance. Return to text
12. See "Incentive Compensation Practices: A Report on the Horizontal Review of Practices at Large Banking Organizations," published in October 2011 by the Board of Governors of the Federal Reserve System. Return to text
13. HCs are defined as bank holding companies, savings and loan holding companies, and securities holding companies. Return to text
14. SR letter 98-02 is available at www.federalreserve.gov/boarddocs/srletters/1998/sr9802.htm. Return to text
15. Since 1996, the act has provided an expedited prior notice procedure for certain permissible nonbank activities and for acquisitions of small banks and nonbank entities. Since that time, the act has also permitted well-run BHCs that satisfy certain criteria to commence certain other nonbank activities on a de novo basis without first obtaining Federal Reserve approval. Return to text
16. Under Section 12(g) of the Securities Exchange Act, certain companies that have issued securities are subject to SEC registration and filing requirements that are similar to those imposed on public companies. Per Section 12(i) of the Securities Exchange Act, the powers of the SEC over banking entities that fall under Section 12(g) are vested with the appropriate banking regulator. Specifically, state member banks with 2,000 or more shareholders and more than $10 million in total assets are required to register with, and submit data to, the Federal Reserve. These thresholds reflect the recent amendments by the Jumpstart Our Business Startups Act (JOBS Act). Return to text