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

2014 Developments

During 2014, 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 2014. U.S. BHCs, in aggregate, reported earnings approaching an all-time high--$139 billion for 2014, up from $138 billion for the year ending December 31, 2013. The proportion of unprofitable BHCs continues to decline, reaching 4 percent, down from 6 percent in 2013, but remains elevated compared to historical rates; unprofitable BHCs now encompass less than 1 percent of banking industry assets, in line with historical norms. Net interest margin continues to decline, reaching 2.2 percent, the lowest level in over 20 years. Provisions were flat at 0.19 percent of average assets, in line with historical lows. Nonperforming assets continue to be a challenge to industry recovery, with the nonperforming asset ratio remaining elevated at 1.9 percent of loans and foreclosed assets, an improvement from 2.5 percent at year-end 2013. (Also see "Bank Holding Companies" later in this section.)

Performance of state member banks. The performance at state member banks in 2014 improved from 2013. As a group, state member banks reported a profit of $18.9 billion for 2014, up from $18.2 billion for 2013 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 2.2 percent, down from a crisis high of 32.4 percent at year-end 2009. Further, 3.6 percent of all state member banks continued to report losses, down from 4.1 percent for year-end 2013. The nonperforming assets ratio remained elevated at 1.0 percent of loans and foreclosed assets, reflecting ongoing weaknesses in asset quality since the crisis. Problem loans continued to decline during 2014; however, nonaccruals in Commercial & Industrial and Credit Cards increased from the prior year. 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 2014, one state member bank, with $155 million in assets, failed. (Also see "State Member Banks" later in this section.)

Enhanced prudential standards. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) directs the Board, in part, to establish prudential standards in order to prevent or mitigate risks to U.S. financial stability that could arise from the material financial distress or failure, or ongoing activities of, large, interconnected financial institutions. In 2014, the Board established or proposed to establish a variety of enhanced prudential standards. (See "Enhanced Prudential Standards" later in this section for details.)

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. (See box 1 for details.)

Community bank focus. In 2014, the Board renewed its focus on supervision and regulation of community banks (defined as a state member bank and/or holding company with $10 billion or less in total consolidated assets), with an emphasis on weighing the costs of regulatory proposals, supervisory guidance, and examination practices on these institutions against safety-and-soundness benefits. (See box 2 for details.)

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Supervision

The Federal Reserve is the federal supervisor and regulator of all U.S. BHCs, including financial holding companies, and state-chartered commercial banks that are members of the Federal Reserve System. The Federal Reserve also has responsibility for supervising the operations of all Edge Act and agreement corporations, the international operations of state member banks and U.S. BHCs, and the U.S. operations of foreign banking organizations. Furthermore, through the Dodd-Frank Act, the Federal Reserve has been assigned responsibilities for nonbank financial firms and financial market utilities (FMUs) designated by the Financial Stability Oversight Council (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 former 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.

Table 1. State member banks and bank holding companies, 2010-14

Entity/item	2014	2013	2012	2011	2010
State member banks
Total number	858	850	843	828	829
Total assets (billions of dollars)	2,233	2,060	2,005	1,891	1,697
Number of examinations	723	745	769	809	912
By Federal Reserve System	438	459	487	507	722
By state banking agency	285	286	282	302	190
Top-tier bank holding companies
Large (assets of more than $1 billion)
Total number	522	505	508	491	482
Total assets (billions of dollars)	16,642	16,269	16,112	16,443	15,986
Number of inspections	738	716	712	672	677
By Federal Reserve System 1	706	695	691	642	654
On site	501	509	514	461	491
Off site	205	186	177	181	163
By state banking agency	32	21	21	30	23
Small (assets of $1 billion or less)
Total number	3,902	4,036	4,124	4,251	4,362
Total assets (billions of dollars)	953	953	983	982	991
Number of inspections	2,824	3,131	3,329	3,306	3,340
By Federal Reserve System	2,737	2,962	3,150	3,160	3,199
On site	142	148	200	163	167
Off site	2,595	2,814	2,950	2,997	3,032
By state banking agency	87	169	179	146	141
Financial holding companies
Domestic	426	420	408	417	430
Foreign	40	39	38	40	43

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.²

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

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

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

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

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

• Coordinated horizontal reviews. These reviews involve examining several institutions simultaneously and encompass firm-specific supervision and the development of cross-firm perspectives. In addition, the Federal Reserve uses a multidisciplinary approach to draw on a wide range of perspectives, including those from supervisors, examiners, economists, financial experts, payments systems analysts, and other specialists. Examples include analysis of capital adequacy and planning through 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.

Capital Planning and Stress Tests

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

CCAR is a horizontal exercise to evaluate capital adequacy, internal capital adequacy assessment processes, and planned capital distributions at large BHCs. In CCAR, the Federal Reserve assesses whether these BHCs have sufficient capital to withstand highly stressful operating environments and be able to continue operations, maintain ready access to funding, meet obligations to creditors and counterparties, and serve as credit intermediaries. Capital is central to a BHC's ability to absorb losses and continue to lend to creditworthy businesses and consumers. Through CCAR, a BHC's capital adequacy is evaluated on a forward-looking, post-stress basis as the BHCs are required to demonstrate in their capital plans how they will maintain, throughout a very stressful period, capital above a tier 1 common ratio of 5 percent and above minimum regulatory capital requirements. From a microprudential perspective, the CCAR provides a structured means for supervisors to assess not only whether these BHCs hold enough capital, but also whether they are able to rapidly and accurately determine their risk exposures, an essential element of effective risk management. From a macroprudential perspective, the use of a common scenario allows us to learn how a particular risk or combination of risks might affect the banking system as a whole--not just individual institutions.

In 2014, CCAR incorporated the transition arrangements and minimum capital requirements from the revised regulatory capital framework implementing the Basel III regulatory capital reforms the Board finalized in July 2013. The 2014 CCAR results are available at www.federalreserve.gov/newsevents/press/bcreg/ccar_20140326.pdf.

DFAST is a supervisory stress test conducted by the Federal Reserve to evaluate whether large BHCs and all nonbank financial companies designated by the FSOC have sufficient capital to absorb losses resulting from stressful economic and financial market conditions. The Dodd-Frank Act also requires BHCs and other financial companies supervised by the Federal Reserve to conduct their own stress tests. Together, the Dodd-Frank Act supervisory stress tests and the company-run stress tests are intended to provide company management and boards of directors, the public, and supervisors with forward-looking information to help gauge the potential effect of stressful conditions on the capital adequacy of these large banking organizations. The 2014 DFAST results are available at www.federalreserve.gov/newsevents/press/bcreg/bcreg20140320a1.pdf.

State Member Banks

At the end of 2014, 1,923 banks (excluding nondepository trust companies and private banks) were members of the Federal Reserve System, of which 858 were state chartered. Federal Reserve System member banks operated 57,265 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 15 percent of all insured U.S. commercial banks and held approximately 15 percent of all insured commercial bank assets in the United States.

Under section 10 of the Federal Deposit Insurance Act, as amended by section 111 of the Federal Deposit Insurance Corporation Improvement Act of 1991 and by the Riegle Community Development and Regulatory Improvement Act of 1994, the Federal Reserve must conduct a full-scope, on-site examination of state member banks at least once a year,⁴ although certain well-capitalized, well-managed organizations with total assets of less than $500 million may be examined once every 18 months.⁵ The Federal Reserve conducted 438 exams of state member banks in 2014.

Bank Holding Companies

At year-end 2014, a total of 4,922 U.S. BHCs were in operation, of which 4,424 were top-tier BHCs. These organizations controlled 4,755 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.⁶ Noncomplex BHCs with consolidated assets of $1 billion or less are subject to a special supervisory program that permits a more flexible approach.⁷ In 2014, the Federal Reserve conducted 695 inspections of large BHCs and 2,737 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 2014, 426 domestic BHCs and 40 foreign banking organizations had financial holding company status. Of the domestic financial holding companies, 23 had consolidated assets of $50 billion or more; 32, between $10 billion and $50 billion; 122, between $1 billion and $10 billion; and 249, less than $1 billion.

Savings and Loan Holding Companies

The Dodd-Frank Act transferred responsibility for supervision and regulation of SLHCs from the OTS to the Federal Reserve in July 2011. At year-end 2014, a total of 542 SLHCs were in operation, of which 297 were top tier SLHCs. These SLHCs control 305 thrift institutions and include 27 companies engaged primarily in nonbanking activities, such as insurance underwriting (15 SLHCs), securities brokerage (6 SLHCs), and commercial activities (6 SLHCs). Excluding nonbank SIFI SLHCs, the 25 largest SLHCs accounted for more than $1.3 trillion of total combined assets. Approximately 90 percent of SLHCs engage primarily in depository activities. These firms hold approximately 20.8 percent ($321 billion) of the total combined assets of all SLHCs. The Office of the Comptroller of the Currency (OCC) is the primary regulator for most of the subsidiary savings associations of the firms engaged primarily in depository activities. Table 2 provides information on examinations of SLHCs for the past three years.

Board staff continues to work on operational, policy, and supervisory issues while engaging the industry, Reserve Banks, and other regulatory agencies. Nearly all of the SLHCs are now filing all required Federal Reserve regulatory reports. Significant milestones achieved include the formal incorporation of Federal Reserve policies into the SLHC supervision program. Several complex policy issues continue to be addressed by the Board, including those related to consolidated capital requirements for insurance SLHCs, intermediate holding companies, and the adoption of formal rating systems.

Table 2. Savings and loan holding companies, 2011-14

Entity/item	2014	2013	2012	2011 1
Top-tier savings and loan holding companies
Large 2
Total number	76	81	94	n/a
Total assets	$1,492,964,310	$1,500,412,835	$1,715,259,113	n/a
Number of examinations
By Federal Reserve System
On site	45	58	53	n/a
Off site	37	13	27	n/a
By states' Department of Insurance	1	1	2	n/a
Small
Total number	221	251	272	n/a
Total assets (billions of dollars)	$64,813,982	$75,952,384	$81,558,809	n/a
Number of examinations
By Federal Reserve System
On site	10	21	46	n/a
Off site	202	237	183	n/a

1. Responsibility for SLHCs was transferred to the Board in 2011. Asset data are not available for year-end 2011 due to transition. Return to table

2. Excludes SIFI SLHCs (AIG and GE). Return to table

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). The Board subsequently revised these standards to take into account new international standards (effective December 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 Securities and Exchange Commission (SEC) and the 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.; General Electric Capital Corporation, Inc. (GECC); and Prudential Financial, Inc. In late 2014, the FSOC designated a fourth nonbank financial company, Metlife, Inc. The Federal Reserve's supervisory approach for these firms as designated companies is consistent with the approach used for the largest financial holding companies, 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. As discussed in "Enhanced Prudential Standards" later in this section, in November the Board invited public comment on enhanced prudential standards for the regulation and supervision of GECC.

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 2014, 39 member banks were operating 444 branches in foreign countries and overseas areas of the United States; 22 national banks were operating 391 of these branches, and 17 state member banks were operating the remaining 53. In addition, 11 nonmember banks were operating 18 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 2014, out of 44 banking organizations chartered as Edge Act or agreement corporations, 3 operated 7 Edge Act and agreement branches. These corporations are examined annually.

U.S. activities of foreign banks. Foreign banks continue to be significant participants in the U.S. banking system. As of year-end 2014, 163 foreign banks from 49 countries operated 187 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 47 U.S. commercial banks. Altogether, the U.S. offices of these foreign banks controlled approximately 21 percent of U.S. commercial banking assets. These 163 foreign banks also operated 89 representative offices; an additional 34 foreign banks operated in the United States through a representative office. The Federal Reserve--in coordination with appropriate state regulatory authorities--examines state-licensed, non-FDIC-insured branches and agencies of foreign banks on-site at least once every 18 months.⁸ In most cases, on-site examinations are conducted at least once every 12 months, but the period may be extended to 18 months if the branch or agency meets certain criteria. As part of the supervisory process, a review of the financial and operational profile of each organization is conducted to assess the organization's ability to support its U.S. operations and to determine what risks, if any, the organization poses to the banking system through its U.S. operations. The Federal Reserve conducted or participated with state and federal regulatory authorities in 512 examinations in 2014.

Compliance with Regulatory Requirements

The Federal Reserve examines institutions for compliance with a broad range of legal requirements, including anti-money-laundering (AML) and consumer protection laws and regulations, and other laws pertaining to certain banking and financial activities. Most compliance supervision is conducted under the oversight of the Board's Division of Banking Supervision and Regulation, but consumer compliance supervision is conducted under the oversight of the Division of Consumer and Community Affairs. The two divisions coordinate their efforts with each other and also with the Board's Legal Division to ensure consistent and comprehensive Federal Reserve supervision for compliance with legal requirements.

Anti-Money-Laundering Examinations

The Treasury regulations implementing the Bank Secrecy Act (BSA) generally require banks and other types of financial institutions to file certain reports and maintain certain records that are useful in criminal, tax, or regulatory proceedings. The BSA and separate Board regulations require banking organizations supervised by the Board to file reports on suspicious activity related to possible violations of federal law, including money laundering, terrorism financing, and other financial crimes. In addition, BSA and Board regulations require that banks develop written BSA compliance programs and that the programs be formally approved by bank boards of directors. The Federal Reserve is responsible for examining institutions for compliance with applicable AML laws and regulations and conducts such examinations in accordance with the Federal Financial Institutions Examination Council's (FFIEC) Bank Secrecy Act/Anti-Money Laundering Examination Manual.⁹

Specialized Examinations

The Federal Reserve conducts specialized examinations of supervised financial institutions in the areas of information technology, fiduciary activities, transfer agent activities, and government and municipal securities dealing and brokering. The Federal Reserve also conducts specialized examinations of certain nonbank entities that extend credit subject to the Board's margin regulations.

Information Technology Activities

In recognition of the importance of information technology to safe and sound operations in the financial industry, the Federal Reserve reviews the information technology activities of supervised financial institutions, as well as certain independent data centers that provide information technology services to these organizations. All safety-and-soundness examinations include a risk-focused review of information technology risk-management activities. During 2014, the Federal Reserve continued as the lead supervisory agency for 8 of the 16 large, multiregional data processing servicers recognized on an interagency basis.

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 2014, Federal Reserve examiners conducted 97 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 2014, the Federal Reserve conducted transfer agent examinations at 7 of the 36 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 2014, the Federal Reserve conducted seven examinations of broker-dealer activities in government securities at these organizations. These examinations are generally conducted concurrently with the Federal Reserve's examination of the state member bank or branch.

The Federal Reserve is also responsible for ensuring that state member banks and BHCs that act as municipal securities dealers comply with the Securities Act Amendments of 1975. Municipal securities dealers are examined, pursuant to the Municipal Securities Rulemaking Board's rule G-16, at least once every two calendar years. Eight of the 10 entities supervised by the Federal Reserve that dealt in municipal securities were examined during 2014.

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).

Cybersecurity and Critical Infrastructure

The Federal Reserve is actively engaged with interagency groups such as the Financial and Banking Information Infrastructure Committee (FBIIC) and the FFIEC's Cybersecurity and Critical Infrastructure Working Group (CCIWG) to share information and collaborate on cyber- and critical infrastructure-related issues impacting the financial services sector.

In 2014, the Federal Reserve conducted a targeted cybersecurity assessment on a select group of large financial institutions and FMUs. The Federal Reserve and other CCIWG members also conducted cybersecurity assessments at over 500 community financial institutions to evaluate their cybersecurity risk exposure and preparedness. The cybersecurity assessment reviewed financial institutions' current practices and overall preparedness relative to risk management and oversight, threat intelligence and collaboration, cybersecurity controls, external dependency management, and cyber incident management and resilience.

The Federal Reserve is also actively engaged in raising financial institution awareness of supervisory expectations relative to cybersecurity risk assessment and risk mitigation. In 2014, the Federal Reserve contributed to the launch of the new FFIEC cybersecurity awareness web page, which is a central repository for current and future FFIEC-related materials on cybersecurity (www.ffiec.gov/cybersecurity.htm).

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 2014, the Federal Reserve completed 37 formal enforcement actions. Civil money penalties totaling $817,653,925 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 2014, the Reserve Banks completed 117 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 2014, two major and two minor upgrades to the web-based PRISM application were completed to enhance the user's experience and provide the latest technology.

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

Training and Technical Assistance

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

International Training and Technical Assistance

In 2014, 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. In addition, the Middle East and North Africa (MENA) Financial Regulator's Training Initiative (FRTI) successfully concluded. This 10-year initiative was established to provide technical assistance and bank supervision training to central banks and supervisory authorities in the region. MENA FRTI's many accomplishments over the past decade include the sponsorship of over 50 programs and conferences as well as many short-term, on-the-job training opportunities provided for MENA regulators with U.S. banking agencies. Now that the MENA FRTI has concluded, the Federal Reserve will forge training partnerships with the central banks of Bahrain, United Arab Emirates, and Qatar to continue technical capacity building throughout the region.

In 2014, 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 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. Moreover, the Federal Reserve also contributes to the regional training provision under the Asia Pacific Economic Cooperation FRTI.

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 2014, the Federal Reserve's MOI portfolio included 18 state member banks.

Throughout 2014, the Federal Reserve System continued to support MOIs through the following activities:

• facilitating a meeting between the National Bankers Association (NBA), Chair Yellen, Vice Chairman Fischer, and Governor Powell during which the NBA shared with the governors their perspective on community banking issues of importance to MOIs;
• publishing an article in the Federal Reserve's Community Banking Connections^® publication to highlight MOIs and their contribution to the economy (www.communitybankingconnections.org/articles/2014/q3-q4/promoting-an-inclusive-financial-system );
• participating in the 87th annual NBA convention;
• hosting an internal Rapid Response^® session on the topic of MOIs to educate the Federal Reserve's community bank examination staff on the unique characteristics of these 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;
• creating formal procedures related to monitoring MOI-related proposals and continuing to offer pre-review of MOI applications to support early identification and resolution of issues that could create delays in the review process;
• 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; and
• participating in an interagency task force to consider and address supervisory challenges facing MOIs.

Throughout 2014, 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.

Supervisory Policy

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

Enhanced Prudential Standards

The Board is responsible for issuing a number of rules and guidance statements under the Dodd-Frank Act, sometimes in conjunction with other agencies. Listed below are the initiatives undertaken by the Board in 2014.

• In January, the Board issued a supervisory guidance statement, SR 14-1, to clarify the heightened supervisory expectations for recovery and resolution preparedness for the eight largest domestic BHCs that pose elevated risk to U.S. financial stability. The Board issued this SR letter as a supplement to SR letter 12-17/CA letter 12-14, "Consolidated Supervision Framework for Large Financial Institutions." The Board plans to incorporate reviews of key capabilities for recovery and resolution preparedness in its ongoing supervisory work for each BHC subject to this guidance, which is available at www.federalreserve.gov/bankinforeg/srletters/SR1401.htm.
• In March, the Board published a final rule to implement certain enhanced prudential standards required under section 165 of the Dodd-Frank Act for BHCs, including foreign banking organizations, with total global consolidated assets of $50 billion or more. These standards include risk-based and leverage capital requirements, liquidity standards, and requirements for overall risk management. In addition, the final rule requires a foreign banking organization with $50 billion or more in U.S. non-branch assets to form an intermediate holding company over its U.S. subsidiaries. The intermediate holding company of the foreign banking organization will be required to meet substantially the same capital, liquidity, and risk-management standards as a similar U.S. BHC. The final rule also establishes risk committee requirements and capital stress-testing requirements for certain BHCs and foreign banking organizations with total consolidated assets of $10 billion or more. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2014-03-27/pdf/2014-05699.pdf.
• In March, the federal banking agencies issued supervisory guidance that discusses supervisory expectations for implementing the Dodd-Frank Act company-run stress tests for banking organizations with total consolidated assets of more than $10 billion but less than $50 billion. This guidance builds upon the interagency stress testing guidance issued in May 2012 for companies with more than $10 billion in total consolidated assets. It is important to note that the guidance states that such banking organizations are not subject to other requirements and expectations applicable to BHCs with assets of at least $50 billion, including the Federal Reserve's capital plan rule, annual Comprehensive Capital Analysis and Review, supervisory stress tests for capital adequacy, or the related data collections supporting the supervisory stress test. The guidance is available at www.gpo.gov/fdsys/pkg/FR-2014-03-13/pdf/2014-05518.pdf.
• In May, the federal banking agencies issued a final rule to strengthen the leverage ratio standards for the eight largest, most systemically significant U.S. banking organizations. Under the final rule, U.S. top-tier BHCs with more than $700 billion in consolidated total assets or $10 trillion in assets under custody are required to maintain a leverage buffer greater than 2 percentage points above the 3 percent minimum supplementary leverage ratio, for a total of more than 5 percent, to avoid restrictions on capital distributions and certain discretionary bonus payments. The insured depository institution (IDI) subsidiaries of these BHCs must maintain at least a 6 percent supplementary leverage ratio to be considered "well capitalized" under the agencies' prompt corrective action framework. The final rule, which has an effective date of January 1, 2018, is available at www.gpo.gov/fdsys/pkg/FR-2014-05-01/pdf/2014-09367.pdf.
• In October, the federal banking agencies finalized a rule implementing a liquidity coverage ratio (LCR) requirement based on the BCBS's LCR standard. The LCR will be the first broadly applicable quantitative liquidity requirement for U.S. banking firms. Under the LCR, large banking organizations are required to hold an amount of high-quality liquid assets sufficient to meet expected net cash outflows over a 30-day time horizon in a standardized supervisory stress scenario. The final rule, effective January 1, 2015, applies the most stringent LCR requirements to banking organizations with consolidated total assets of $250 billion or more or consolidated total on-balance sheet foreign exposure of $10 billion or more, and their subsidiary insured depository institutions with $10 billion or more of consolidated total assets. The final rule applies a simpler, less stringent LCR requirement to depository holding companies with $50 billion or more that are not otherwise covered by the rule, effective January 1, 2016. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2014-10-10/pdf/2014-22520.pdf.
• In December, the Board invited public comment on enhanced prudential standards for the regulation and supervision of General Electric Capital Corporation (GECC), a nonbank financial company that the FSOC designated for supervision by the Board. In light of the substantial similarity of GECC's activities and risk profile to that of a similarly sized BHC, the proposal would apply enhanced prudential standards to GECC that are generally similar to those that apply to large BHCs, including standards for risk-based and leverage capital, capital planning, stress testing, liquidity, and risk management. The proposal is available at www.gpo.gov/fdsys/pkg/FR-2014-12-03/pdf/2014-28414.pdf.
• In December, the Board issued a proposed rule that would establish a methodology to identify whether a U.S. BHC is a global systemically important banking organization (GSIB). As such, a GSIB would be subject to a risk-based capital surcharge that is calibrated based on its systemic risk profile. The proposal builds on a GSIB capital surcharge framework agreed to by the BCBS and is augmented to address the risk arising from the over-reliance on short-term wholesale funding. The GSIB surcharge under the proposal would generally be higher than under the BCBS approach. Failure to maintain the capital surcharge would subject the GSIB to restrictions on capital distributions and certain discretionary bonus payments. The proposal would be phased in beginning on January 1, 2016, becoming fully effective on January 1, 2019. The proposed rule is available at www.gpo.gov/fdsys/pkg/FR-2014-12-18/pdf/2014-29330.pdf.

Other Capital Adequacy Standards

In 2014, the Board issued several rulemakings and guidance documents related to capital adequacy, including joint rulemakings with the other federal banking agencies that would implement certain revisions to the Basel capital framework.

• In March, the Board and the OCC permitted certain banking organizations to exit from the parallel run stage of the agencies' advanced approaches risk-based capital framework, and henceforth, to use the advanced approaches rule to determine their risk-based capital requirements. Concurrently, the Board issued a final rule clarifying that BHCs using the advanced approaches framework incorporate such framework into their capital planning and stress testing cycles that begin October 1, 2015. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2014-03-11/pdf/2014-05053.pdf.
• In April, the federal banking agencies proposed a rule to correct the definition of eligible guarantee in the risk-based capital rules by clarifying the types of guarantees that can be recognized for purposes of calculating a banking organization's regulatory capital under the advanced approaches framework. The federal banking agencies finalized the rule in July. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2014-07-30/pdf/2014-17858.pdf.
• In September, the federal banking agencies adopted a final rule modifying the definition of the denominator of the supplementary leverage ratio, which applies to advanced approaches banking organizations, in a manner consistent with changes agreed to by the BCBS. The final rule strengthens the supplementary leverage ratio by modifying the methodology for including off-balance sheet items, including credit derivatives, repo-style transactions, and lines of credit, in the denominator of the supplementary leverage ratio. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2014-09-26/pdf/2014-22083.pdf.
• In October, the Board issued a final rule that modifies the regulations for capital planning and stress testing and adjusts the due date for BHCs with total consolidated assets of $50 billion or more to submit their capital plans and stress test results. Beginning in 2016, the due date will shift from January to April. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2014-10-27/pdf/2014-25170.pdf.
• In December, the federal banking agencies issued a proposed rule clarifying the regulatory capital rules adopted by the agencies in July 2013. The proposal applies only to large internationally active banking organizations that are subject to the advanced approaches rule. The proposed rule would make technical corrections and clarify certain aspects of the advanced approaches rule, including the qualification criteria for application of the advanced approaches and calculation requirements for risk-weighted assets. The proposed rule is available at www.gpo.gov/fdsys/pkg/FR-2014-12-18/pdf/2014-28690.pdf.
• In December, the Board issued a proposed rule to provide additional information regarding the application of the Board's regulatory capital framework to depository institution holding companies that have non-traditional capital structures. The proposal describes examples of capital instruments potentially issued by non-stock entities that may not qualify as common equity tier 1 capital, and provides suggestions on changes that would allow qualification. The proposal also notes that the Board expects to propose regulatory capital rules in the future for SLHCs that are personal or family trusts and are not business trusts, and would provide a temporary exemption for those entities from the regulatory capital rules. Similarly, the proposal states that the Board expects to clarify the application of the regulatory capital rules to depository institution holding companies that are employee stock ownership plans. The proposed rule is available at www.gpo.gov/fdsys/pkg/FR-2014-12-19/pdf/2014-29561.pdf.
• In December, the Board and the OCC issued an interim final rule to ensure that the treatment of over-the-counter derivatives, eligible margin loans, and repo-style transactions under the two agencies' regulatory capital and liquidity coverage ratio rules would be unaffected by the implementation of certain foreign special resolution regimes for financial companies or by a banking organization's adherence to the International Swaps and Derivatives Association's Resolution Stay Protocol. The interim final rule is effective as of January 1, 2015, and is available at www.federalreserve.gov/newsevents/press/bcreg/20141216a.htm.

International Coordination on Supervisory Policies

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

Basel Committee on Banking Supervision

During 2014, the Federal Reserve participated in ongoing international initiatives to track the progress of implementation of the BCBS framework in member countries.

The Federal Reserve contributed to supervisory policy recommendations, reports, and papers issued for consultative purposes or finalized by the BCBS that are designed to improve the supervision of banking organizations' practices and to address specific issues that emerged during the financial crisis. The list below includes key final and consultative papers issued in 2014.

Final papers:

• Basel III leverage ratio framework and disclosure requirements (issued in January and available at www.bis.org/publ/bcbs270.htm ).
• Liquidity coverage ratio disclosure standards - final document (issued in January and available at www.bis.org/publ/bcbs272.htm ).
• The Liquidity Coverage Ratio and restricted-use committed liquidity facilities (issued in January and available at www.bis.org/publ/bcbs274.htm ).
• The standardised approach for measuring counterparty credit risk exposures (issued in March and available at www.bis.org/publ/bcbs279.htm ).
• Capital requirements for bank exposures to central counterparties - final standard (issued in April and available at www.bis.org/publ/bcbs282.htm ).
• Supervisory framework for measuring and controlling large exposures - final standard (issued in April and available at www.bis.org/publ/bcbs283.htm ).
• Basel III: the net stable funding ratio (issued in October and available at www.bis.org/bcbs/publ/d295.htm ).
• Revisions to the securitisation framework (issued in December and available at www.bis.org/bcbs/publ/d303.htm ).

Consultative papers:

• Basel III: the Net Stable Funding Ratio - consultative document (issued in January and available at www.bis.org/publ/bcbs271.htm ).
• Review of Pillar 3 disclosure requirements (issued in June and available at www.bis.org/publ/bcbs286.htm ).
• Operational risk - Revisions to the simpler approaches - consultative document (issued in October and available at www.bis.org/publ/bcbs291.htm ).
• Net Stable Funding Ratio disclosure standards - consultative document (issued in December and available at www.bis.org/bcbs/publ/d302.htm ).
• Fundamental review of the trading book: outstanding issues - consultative document (issued in December and available at www.bis.org/bcbs/publ/d305.htm ).
• Capital floors: the design of a framework based on standardised approaches - consultative document (issued in December and available at www.bis.org/bcbs/publ/d306.htm ).
• Revisions to the standardised approach for credit risk - consultative document (issued in December and available at www.bis.org/bcbs/publ/d307.htm ).

Financial Stability Board

In 2014, the Federal Reserve continued its active participation in the activities of the Financial Stability Board, 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.

For more information on the work of the Financial Stability Board, refer to section 3, "Financial Stability."

Joint Forum

In 2014, 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 BCBS, the International Organization of Securities Commissions, and the International Association of Insurance Supervisors. Final papers issued by the Joint Forum in 2014 include:

• Point of Sale disclosure in the insurance, banking and securities sectors - final report (issued in April and available at www.bis.org/publ/joint35.pdf ).
• Report on supervisory colleges for financial conglomerates (issued in September and available at www.bis.org/publ/joint36.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 and insurance industries in the areas of accounting, auditing, internal controls over financial reporting, financial disclosure, and supervisory financial reporting.

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

During 2014, Federal Reserve staff addressed numerous issues including loan accounting, troubled debt restructurings, accounting alternatives for private companies, financial instrument accounting and reporting, consolidation of structured entities, securitizations, securities financing transactions, 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 the Financial Accounting Standards Board's proposal related to business combinations and on the Public Company Accounting Oversight Board's proposal related to the changes in the auditor's reporting model were issued during the past year.

The Federal Reserve staff also participated in meetings of the Basel Committee's Accounting Experts Group and the International Association of Insurance Supervisors' (IAIS) Accounting and Auditing Working Group. These groups represent their respective organizations 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 comment letters and publications that were issued by the Basel Committee and the IAIS. The publications issued during 2014 included guidance on the external audits of banks and the consultative document on the review of pillar 3 disclosure requirements.

In 2014, 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 income tax allocation in a holding company structure;
• 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 credit risk retention requirements for securitization, 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 management practices; and to ensure that institutions properly identify, measure, and manage credit risk.

Shared National Credit Program

In November, the Federal Reserve and the other banking agencies released summary results of the 2014 annual review of the Shared National Credit (SNC) Program, a long-standing program 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 2014 SNC review was prepared in the second quarter of 2014 using data as of December 31, 2013, and March 31, 2014. The 2014 SNC portfolio totaled $3.39 trillion, with roughly 9,800 credit facilities to approximately 6,200 borrowers. From the previous period, the dollar volume of the portfolio commitment amount rose by $379 billion or 12.6 percent, and the number of credits increased by 502 or 5.4 percent.

The SNC examination found that the volume of criticized assets increased 12.8 percent to $340.8 billion. As a percentage of total commitments, the overall criticized asset rate remained elevated at 10.1 percent, up from 10.0 percent in 2013. The elevated criticized rate is historically high when compared to SNC portfolios at this stage of the economic cycle.

For the 2014 SNC review, supervisors placed significant emphasis on reviewing leveraged loans to evaluate safety and soundness of bank underwriting and risk-management practices relative to expectations articulated in the 2013 Interagency Guidance on Leveraged Lending. The review found that risk in the overall SNC portfolio was centered in the leveraged portfolio, noting a criticized rate of 33.2 percent for leveraged loans compared with 3.3 percent for the non-leveraged portfolio. The 2014 SNC review also identified several areas where institutions need to strengthen risk-management practices, including inadequate support for enterprise valuations and/or reliance on dated valuations, weaknesses in credit analysis, and overreliance on sponsor's projections. Underwriting standards were also noted as weak in 31 percent of the SNC loan transactions sampled. Leveraged lending transactions were the primary driver of this underwriting deterioration.

Refinancing risk increased moderately in the SNC portfolio as 25.0 percent of SNC commitments will mature in 2015 and 2016, compared with 15.0 percent for the same period in the 2013 SNC Review. During 2013 and into 2014, syndicated lenders continued to refinance and modify loan agreements to extend maturities. These transactions had the effect of relieving near-term refinancing risk, but, in many instances, did not improve borrowers' ability to repay their debts in the longer term as obligors frequently added to their existing debt burden. For more information on the 2014 SNC review, at www.federalreserve.gov/newsevents/press/bcreg/20141107a.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 2014, 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. These dialogues are designed to promote information sharing and understanding of issues surrounding correspondent banking 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 Latvia, China, and Mexico 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. In 2014, the FFIEC BSA/AML working group updated the manual to further clarify supervisory expectations and incorporate regulatory changes since its 2010 revision. The 2014 revisions also incorporate feedback from the banking industry and examination staff.

Throughout 2014, 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.

In 2014, 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, which was published in October 2014. The Federal Reserve also participated in efforts by FATF to more fully understand effective AML supervision and enforcement. 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 updating and revising a consultative paper on the general guide to account opening, originally issued in 2003.

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. Three principles are at the core of the guidance:

• 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.

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 supervisory work has been focused on assessing the potential for incentive compensation arrangements to encourage imprudent risk-taking; reviewing actions large banking organizations have taken to correct deficiencies in incentive compensation design; and evaluating the adequacy of firms' compensation-related risk management, controls, and corporate governance.

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. In 2011, the seven designated financial regulatory agencies (Federal Reserve, OCC, FDIC, OTS, NCUA, SEC, and the Federal Housing Finance Agency) issued a joint proposed incentive compensation rule. The agencies continue to work toward a rule to implement the act.

Other Policymaking Initiatives

• In March, the Board issued an advance notice of proposed rulemaking seeking comment to inform its consideration of physical commodity activities conducted by financial holding companies, including current authorizations of these activities and the appropriateness of further restrictions. The proposed rule is available at www.gpo.gov/fdsys/pkg/FR-2014-03-05/pdf/2014-04742.pdf.
• In July, the federal banking agencies with the Conference of State Bank Supervisors, issued a supervisory guidance statement, SR 14-5, to reiterate principles of sound risk management for home equity lines of credit (HELOCs) that have reached or will be reaching their end-of-draw periods. The guidance describes risk-management practices to promote a clear understanding of potential exposures and to help guide consistent, effective responses to HELOC borrowers who may be unable to meet contractual obligations at their end-of-draw periods and highlights concepts related to financial reporting for HELOCs. The guidance is available at www.federalreserve.gov/bankinforeg/srletters/sr1405.htm.
• In September, the federal banking agencies, along with the Farm Credit Administration and the Federal Housing Finance Agency, issued a proposed rule that would establish margin requirements for swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants as required by the Dodd-Frank Act. The proposed rule would establish minimum requirements for the exchange of initial and variation margin between covered swap entities and their counterparties to non-cleared swaps and non-cleared security-based swaps. The proposed rule is available at www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/2014-22001.pdf.
• In December, the federal banking agencies, along with the Department of Housing and Urban Development, the Federal Housing Finance Agency, and the SEC, issued a final rule requiring sponsors of securitization transactions to retain risk in those transactions, implementing the risk retention requirements in the Dodd-Frank Act. The final rule requires sponsors of securitizations, such as asset-backed securities (ABS), to retain not less than 5 percent of the credit risk of the assets collateralizing the ABS issuance unless certain underwriting criteria on the securitized assets are met. The rule also sets forth prohibitions on transferring or hedging the credit risk that the sponsor is required to retain. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2014-12-24/pdf/2014-29256.pdf.
• In November, the Board announced that it would apply to SLHCs certain Federal Reserve supervisory guidance documents issued prior to July 21, 2011, the date of transfer of supervision and regulation of SLHCs from the former OTS to the Board. The Board's determination to apply these SR letters to SLHCs follows an extensive review of its existing guidance documents. The list of SR letters applicable to SLHCs is available at www.federalreserve.gov/bankinforeg/srletters/sr1409.pdf.
• In November, the Board issued a final rule to implement section 622 of the Dodd-Frank Act, which establishes a financial sector concentration limit that prevents a financial company from merging and consolidating with another financial company if the resulting company's consolidated liabilities would exceed 10 percent of the aggregate consolidated liabilities of all financial companies. Financial companies subject to the limit include insured depository institutions, BHCs, SLHCs, foreign banking organizations, companies that control insured depository institutions, and nonbank financial companies designated by the FSOC for Board supervision. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2014-11-14/pdf/2014-26747.pdf.

Regulatory Reports

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

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.¹¹ 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 (FBOs) also are required to periodically submit reports to the Federal Reserve. For more information on the various reporting forms, see www.federalreserve.gov/apps/reportforms/default.aspx.

During 2014, the following reporting forms were revised:

• FR Y-9C, FR Y-9SP, and the FFIEC 101--to reflect changes to the calculation of regulatory capital consistent with the Federal Reserve's revised regulatory capital rules. The Federal Reserve modified the FR Y-9C to split Schedule HC-R, Regulatory Capital, into two parts: Part I, which collects information on revised regulatory capital components and ratios; and Part II, which collects information on existing risk-weighted assets. The Federal Reserve (with the other FFIEC member banking agencies) modified the FFIEC 101 Schedule A, Advanced Risk-Based Capital, and nine other schedules to implement the revised advanced approaches capital rules.
• Part II of Schedule HC-R of the FR Y-9C, and line items related to securities lent and borrowed on the FR Y-9C--to ensure that all banking organizations are reporting risk-weighted assets consistent with the standardized approach outlined in the revised regulatory capital rules.
• FR Y-7Q--to require all FBOs with total consolidated assets of $50 billion or more to begin filing quarterly regardless of financial holding company status. In addition, a data item was added to Part 1 to collect the top-tier FBO's total combined assets of U.S. operations, net of intercompany balances and transactions between U.S. domiciled affiliates, branches, and agencies (effective March 2014). In December 2014, the FR Y-7Q report was revised to collect a new data item to implement the enhanced prudential standards for FBOs adopted pursuant to section 165 of the Dodd-Frank Act. The new item, Total U.S. Non-Branch Assets, is used to determine which FBOs would be required to form an intermediate holding company.
• FR 2052a and 2052b--finalized in 2014. Subsequently, in December 2014, the Federal Reserve Board proposed changes to the FR 2052a report, including increasing granularity of data items, updating reporting platform structure, and expanding the scope of those institutions reporting. These changes allow the Federal Reserve to monitor compliance with the liquidity coverage ratio, but more generally improve supervisory staff's ability to monitor liquidity risk.
• FR XX-1--created to implement a reporting requirement established by Regulation XX (Concentration Limit) for financial companies that do not otherwise report consolidated total liabilities to the Federal Reserve or other appropriate federal banking agency.
• FR Y-14--to better align FR Y-14A Schedule A (Summary) with the changes to Part II of Schedule HC-R of the FR Y-9C mentioned above. Also, numerous items were added to the counterparty collection that provides netting set and asset type information for securities financing transactions and derivative exposures to support ongoing supervision and supervisory modelling. Finally, several items were added to the collection of wholesale loan information.
• FR Y-16--to incorporate the new capital framework requirements of collecting common equity tier 1 capital and the common equity tier 1 risk-based capital ratio, and to modify the reporting instructions to clarify a number of items.

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 2014, the FFIEC revised the Call Report to reflect changes to the calculation of regulatory capital consistent with the banking agencies' revised regulatory capital rules. The FFIEC modified the Call Report to split Schedule RC-R, Regulatory Capital, into two parts: Part I, which collects information on revised regulatory capital components and ratios, and Part II, which collects information on existing risk-weighted assets. The FFIEC also revised 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.

Also during 2014, the FFIEC proposed revisions to Part II of Schedule RC-R, and to line items related to securities lent and borrowed on Schedule RC-L, Derivatives and Off-Balance-Sheet Items, to ensure that all banking organizations are reporting risk-weighted assets consistent with the standardized approach outlined in the revised regulatory capital rules.

Supervisory Information Technology

The Federal Reserve's supervisory information technology function, 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. Initiatives include the development and maintenance of applications and tools to assist with the examination of banking institutions, data collection and storage, development and deployment of collaboration tools, and data security.

In 2014, the information technology supervisory function focused on

• Large bank and foreign bank supervision. Continued improving the supervision of large financial institutions and foreign banks by integrating document repositories for continuous monitoring and point-in-time examinations. One such application used to improve monitoring and tracking capabilities is C-SCAPE (Consolidated Supervision Comparative Analysis Planning and Execution).
• Community and regional bank supervision. For banking institutions with less than $50 billion in assets, worked with community and regional bank examiners, as well as the FDIC and state bank supervisors, to enhance supervisory tools used jointly by the federal and state banking agencies.
• Supervisory support tools. Continued to develop and implement administrative technical solutions to help support examiners and other supervisory staff become more efficient through the management of documentation, travel, and time. One such application implemented in 2014 is ROAM - S--a new supervisory scheduling tool that supports all supervisory programs.
• Content, collaboration, and mobility. (1) Provided technology development and support on a broader scale, with applications and programs designed to be used across the supervisory function to enhance efficiency and increase collaboration, mobility, and data collection and storage; (2) implemented a new document management platform to replace retired platforms used by the Reserve Banks; (3) unveiled new and enhanced collaboration tools, including business social sites for internal and external collaboration; and (4) leveraged an Interagency Steering Group to improve methods for sharing work among state and federal regulators.
• Streamlined data access and improved security. Continued to streamline data access for the supervisory function, while enhancing overall data security.

National Information Center

The National Information Center (NIC) is the Federal Reserve's comprehensive repository for supervisory, financial, banking structure data, as well as 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, an application that enables supervisory personnel and 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, an application that contains documents supporting the supervisory processes.

• Database enhancements. In 2014, the supervisory information technology function strengthened capabilities in the areas of data collection and data stewardship, implemented new tools for the analysis of large volumes of data, and enhanced data acquisition and analysis through the deployment of new or improved applications. The NIC team has also continued to partner with the Board's Office of the Chief Data Officer to collaborate on enterprise data inventory, application architecture, and integration activities.
• Public website and external collaboration. Several reports were added to the NIC public website, including the Banking Organization Systemic Risk Report, snapshots of data used in the calculation of global systemically important banks, and Risk-Based Capital Reporting for Institutions Subject to the Advanced Capital Adequacy Framework (FFIEC 101). Structure data were made available in bulk format for attributes, relationships, and transformation information for holding companies with total assets greater than $10 billion. In addition, steps were taken to improve collaboration with other agencies in terms of sharing institution-specific financial data.

Staff Development

The Federal Reserve's staff development program supports the ongoing development of about 3,000 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 2014 are summarized in table 3.

Table 3. Training for banking supervision and regulation, 2014

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	1,948	489	838	1,892
FFIEC	7,445	336	428	107
Rapid Response 2	17,146	4,022	11	90

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. Rapid Response ^® is a virtual program created by the Federal Reserve System as a means of providing information on emerging topics to Federal Reserve and state bank examiners. Return to table

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).¹² Examiners choose one of two specialty tracks--(1) safety and soundness or (2) consumer compliance.

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 2014, 156 examiners passed the first proficiency exam (113 in safety and soundness and 43 in consumer compliance).

Currently, the Federal Reserve is undertaking a major initiative to modernize its Community Bank Examiner Commissioning Program. Additionally, efforts are underway to build an Examiner Commissioning Program for Large Financial Institutions.

Continuing Professional Development

As part of an ongoing strategic effort related to learning and development, the Federal Reserve is enhancing continuing professional development through the addition and modernization of several courses, tools, and programs.

Technical, professional, and leadership skill development opportunities are available to examiners in a blended learning approach. This includes self-study materials, online virtual learning options, and traditional 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.

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Regulation

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

Regulation of the U.S. Banking Structure

The Federal Reserve administers six federal statutes that apply to BHCs, 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), and the International Banking Act.

In administering these statutes, the Federal Reserve acts on a variety of applications and notices that directly or indirectly affect the structure of the U.S. banking system at the local, regional, and national levels; the international operations of domestic banking organizations; or the U.S. banking operations of foreign banks. The applications and notices concern BHC and SLHC formations and acquisitions, bank mergers, and other transactions involving banks and savings associations or nonbank firms. In 2014, the Federal Reserve acted on 1,133 applications filed under the six statutes.

In 2014, the Federal Reserve released its first Semiannual Report on Banking Applications Activity, which provides aggregate information on proposals filed by banking organizations and reviewed by the Federal Reserve. The report includes statistics on the number of proposals that have been approved, denied, and withdrawn, as well as general information about the length of time taken to process proposals. Additionally, the report discusses common reasons that proposals have been withdrawn from consideration. The first report is available at www.federalreserve.gov/newsevents/press/other/20141124a.htm.

Bank Holding Company Act Applications

Under the BHC Act, a corporation or similar legal entity must obtain the Federal Reserve's approval before forming a BHC through the acquisition of one or more banks in the United States. Once formed, a BHC must receive Federal Reserve approval before acquiring or establishing additional banks. Also, BHCs generally may engage in only those nonbanking activities that the Board has previously determined to be closely related to banking under section 4(c)(8) of the BHC Act.¹³ 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 approval, the Federal Reserve considers the financial and managerial resources of the applicant, the future prospects of both the applicant and the firm to be acquired, financial stability factors, the convenience and needs of the community to be served, the potential public benefits, the competitive effects of the 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 must consider the views of the U.S. Department of Justice regarding the competitive aspects of any proposed BHC acquisition involving unaffiliated insured depository institutions. In the case of a foreign banking organization seeking to acquire control of a U.S. bank, the Federal Reserve also considers whether the foreign bank is subject to comprehensive supervision or regulation on a consolidated basis by its home-country supervisor. In 2014, the Federal Reserve acted on 253 applications and notices filed by BHCs to acquire a bank or a nonbank firm, or to otherwise expand their activities.

A BHC may repurchase its own shares from its shareholders. Certain stock redemptions require prior Federal Reserve approval. The Federal Reserve may object to stock repurchases by holding companies that fail to meet certain standards, including the Board's capital adequacy guidelines. In 2014, the Federal Reserve acted on six stock repurchase applications by BHCs.

The Federal Reserve also reviews elections submitted by BHCs seeking financial holding company status under the authority granted by the Gramm-Leach-Bliley Act. BHCs seeking financial holding company status must file a written declaration with the Federal Reserve. In 2014, 32 domestic financial holding company declarations were approved.

Bank Merger Act Applications

The Bank Merger Act requires that all applications involving the merger of insured depository institutions be acted on by the relevant federal banking agency. The Federal Reserve has primary jurisdiction if the institution surviving the merger is a state member bank. In acting on a merger application, the Federal Reserve considers the financial and managerial resources of the applicant, the future prospects of the existing and combined organizations, financial stability factors, the convenience and needs of the communities to be served, and the competitive effects of the proposed merger. The Federal Reserve also must consider the views of the U.S. Department of Justice regarding the competitive aspects of any proposed bank merger involving unaffiliated insured depository institutions. In 2014, the Federal Reserve approved 70 merger applications under the Bank Merger Act.

Change in Bank Control Act Applications

The Change in Bank Control Act requires individuals and certain other parties that seek control of a U.S. bank, BHC, or SLHC to obtain approval from the relevant federal banking agency before completing the transaction. The Federal Reserve is responsible for reviewing changes in the control of state member banks, BHCs, and SLHCs. In its review, the Federal Reserve considers the financial position, competence, experience, and integrity of the acquiring person; the effect of the proposed change on the financial condition of the bank, BHC, or SLHC being acquired; the future prospects of the institution to be acquired; the effect of the proposed change on competition in any relevant market; the completeness of the information submitted by the acquiring person; and whether the proposed change would have an adverse effect on the Deposit Insurance Fund. A proposed transaction should not jeopardize the stability of the institution or the interests of depositors. During its review of a proposed transaction, the Federal Reserve also may contact other regulatory or law enforcement agencies for information about relevant individuals. In 2014, the Federal Reserve approved 131 change in control notices.

Federal Reserve Act Applications

Under the Federal Reserve Act, a bank must seek Federal Reserve approval to become a member bank. A member bank may be required to seek Federal Reserve approval before expanding its operations domestically or internationally. State member banks must obtain Federal Reserve approval to establish domestic branches, and all member banks (including national banks) must obtain Federal Reserve approval to establish foreign branches. When reviewing applications for membership, the Federal Reserve considers, among other things, the bank's financial condition and its record of compliance with banking laws and regulations. When reviewing applications to establish domestic branches, the Federal Reserve considers, among other things, the scope and nature of the banking activities to be conducted. When reviewing applications for foreign branches, the Federal Reserve considers, among other things, the condition of the bank and the bank's experience in international banking. In 2014, the Federal Reserve acted on 47 membership applications, 525 new and merger-related domestic branch applications, and one foreign branch application.

State member banks also must obtain Federal Reserve approval to establish financial subsidiaries. These subsidiaries may engage in activities that are financial in nature or incidental to financial activities, including securities-related and insurance agency-related activities. In 2014, one financial subsidiary application was approved.

Home Owners' Loan Act Applications

Under HOLA, a corporation or similar legal entity must obtain the Federal Reserve's approval before forming an SLHC through the acquisition of one or more savings associations in the United States. Once formed, an SLHC must receive Federal Reserve approval before acquiring or establishing additional savings associations. Also, SLHCs generally may engage in only those nonbanking activities that are specifically enumerated in HOLA or that the Board has previously determined to be closely related to banking under section 4(c)(8) of the BHC Act. Depending on the circumstances, these activities may or may not require Federal Reserve approval in advance of their commencement. In 2014, the Federal Reserve acted on 29 applications 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 2014, the Federal Reserve acted on no applications for MHC reorganizations. In 2014, the Federal Reserve acted on nine applications filed by MHCs to convert to stock form, and seven applications to waive dividends.

When reviewing an SLHC application or notice that requires approval, the Federal Reserve considers the financial and managerial resources of the applicant, the future prospects of both the applicant and the firm to be acquired, the convenience and needs of the community to be served, the potential public benefits, the competitive effects of the 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 must consider the views of the U.S. Department of Justice regarding the competitive aspects of any SLHC proposal involving the acquisition or merger of unaffiliated insured depository institutions.

The Federal Reserve also reviews elections submitted by SLHCs seeking status as 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 2014, three 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 2014, the Federal Reserve approved 15 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 2014, the Federal Reserve approved four 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 and are subsequently reported in the Board's weekly H.2 statistical release. The H.2 release also contains announcements of applications and notices received by the Federal Reserve upon which action has not yet been taken. For each pending application and notice, the related H.2A release gives the deadline for comments. The Board's website provides information on orders and announcements (www.federalreserve.gov/newsevents/press/orders/2014orders.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. ¹⁴ As most of the publicly held banking organizations are BHCs and the reporting threshold was recently raised, only two state member banks were required to submit data to the Federal Reserve in 2014. The information submitted by these two small state member banks is available to the public upon request and is primarily used for disclosure to the bank's shareholders and public investors.

Securities Credit

Under the Securities Exchange Act of 1934, the Board is responsible for regulating credit in certain transactions involving the purchasing or carrying of securities. The Board's Regulation T limits the amount of credit that may be provided by securities brokers and dealers when the credit is used to purchase debt and equity securities. The Board's Regulation U limits the amount of credit that may be provided by lenders other than brokers and dealers when the credit is used to purchase or carry publicly held equity securities if the loan is secured by those or other publicly held equity securities. The Board's Regulation X applies these credit limitations, or margin requirements, to certain borrowers and to certain credit extensions, such as credit obtained from foreign lenders by U.S. citizens.

Several regulatory agencies enforce the Board's securities credit regulations. The SEC, the Financial Industry Regulatory Authority, and the Chicago Board Options Exchange examine brokers and dealers for compliance with Regulation T. With respect to compliance with Regulation U, the federal banking agencies examine banks under their respective jurisdictions; the Farm Credit Administration and the NCUA examine lenders under their respective jurisdictions; and the Federal Reserve examines other Regulation U lenders.

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References

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