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.

2015 Developments

During 2015, 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 2015. U.S. BHCs, in aggregate, reported earnings reaching an all-time high of $160 billion for 2015, up from $139 billion for the year ending December 31, 2014. The proportion of unprofitable BHCs continued to decline, reaching 2 percent, down from 4 percent in 2014, the lowest level since 1998. However, assets from unprofitable BHCs increased to 2.1 percent in 2015, up from 0.7 percent in 2014. Net interest margin continued to decline, reaching 2.1 percent, the lowest level in over 20 years. While provisions increased to 0.23 percent of average assets, up from 0.19 percent in 2014, they remained in line with historical lows. Nonperforming assets continued to decline, but remained elevated relative to historical levels at 2.8 percent of loans and foreclosed assets, down from 3.4 percent as of year-end 2014. (Also see "Bank Holding Companies" later in this section.)

Performance of state member banks. The performance at state member banks in 2015 improved from 2014. In aggregate, state member banks reported profits of $21.8 billion for 2015, up 15.3 percent from $18.9 billion in 2014. Return-on-assets (ROA) and return-on-equity (ROE) also improved, but both measures still lagged pre-crisis levels. The percent of profitable state member banks continued to increase and now exceeds pre-crisis levels, as only 2.4 percent of firms reported a loss for the year, down from 3.6 percent in 2014. Problem loans continued to decline from 1.8 percent of total loans in 2014 to 1.6 percent in 2015, and are now in line with pre-crisis levels. However, problem loans increased in state member bank commercial & industrial and agricultural loan portfolios due to increases in nonaccrual loans. Provisions (as a percent of revenue) increased to 2.7 percent after falling five consecutive years from a high of 32.4 percent in 2009 to a low of 2.2 percent in 2014. The risk-based capital ratios for state member banks slipped 32 basis points from 14.83 percent in 2014 to 14.51 percent in 2015, however the percent of banks deemed well capitalized under prompt corrective action standards increased slightly to 99.5 percent. In 2015, one state member bank, with $31.7 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 2015, the Board established or proposed to establish a variety of enhanced prudential standards. (See "Enhanced Prudential Standards" later in this section for details.)

Regulation of global systemically important banking institutions (G-SIBs). The Board continued to advance its macroprudential regulatory program for G-SIBs, the banking firms whose failure would cause the most harm to the U.S. financial system and the broader economy. In this regard, the Board in 2015 issued a final rule that raises the risk-based capital requirements for G-SIBs, and issued for public comment a proposed rule to require the top-tier BHCs of U.S. G-SIBs and the U.S. intermediate holding companies of foreign G-SIBs to maintain minimum levels of unsecured, long-term debt and "total loss-absorbing capacity" (TLAC), which is made up of both capital and long-term debt. (See box 1 for more information).

Federal Reserve supervision of insurance companies. The Board is the consolidated supervisor of all BHCs, savings and loan holding companies (SLHCs), and nonbank financial companies that the Financial Stability Oversight Council (FSOC) has determined should be subject to Federal Reserve supervision and prudential standards (nonbank financial companies). During 2015, the Board continued to develop and enhance its supervision of nonbank financial companies, SLHCs, and banking organizations, including those engaged in insurance activities, with a focus on consolidated risk exposures, financial strength, capital adequacy, and liquidity. (See box 2 for more information.)

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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 FSOC as systemically important. In addition, the Dodd-Frank Act transferred authority for consolidated supervision of more than 400 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, 2011-15

Entity/item	2015	2014	2013	2012	2011
State member banks
Total number	839	858	850	843	828
Total assets (billions of dollars)	2,356	2,233	2,060	2,005	1,891
Number of examinations	698	723	745	769	809
By Federal Reserve System	392	438	459	487	507
By state banking agency	306	285	286	282	302
Top-tier bank holding companies
Large (assets of more than $1 billion)
Total number	547	522	505	508	491
Total assets (billions of dollars)	16,961	16,642	16,269	16,112	16,443
Number of inspections	709	738	716	712	672
By Federal Reserve System 1	669	706	695	691	642
On site	458	501	509	514	461
Off site	211	205	186	177	181
By state banking agency	40	32	21	21	30
Small (assets of $1 billion or less)
Total number	3,719	3,902	4,036	4,124	4,251
Total assets (billions of dollars)	938	953	953	983	982
Number of inspections	2,783	2,824	3,131	3,329	3,306
By Federal Reserve System	2,709	2,737	2,962	3,150	3,160
On site	123	142	148	200	163
Off site	2,586	2,595	2,814	2,950	2,997
By state banking agency	74	87	169	179	146
Financial holding companies
Domestic	442	426	420	408	417
Foreign	40	40	39	38	40

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 planning 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 minimum regulatory capital requirements. From a microprudential perspective, 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, including how those might evolve under stress, which is an essential element of effective risk management. From a macroprudential perspective, the use of a common scenario allows us to assess how a particular risk or combination of risks might affect the banking system as a whole under stressful conditions--not just individual institutions. The 2015 CCAR results are available at www.federalreserve.gov/newsevents/press/bcreg/bcreg20150311a1.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 2015 DFAST results are available at www.federalreserve.gov/newsevents/press/bcreg/bcreg20150305a1.pdf.

State Member Banks

At the end of 2015, a total of 1,829 banks (excluding nondepository trust companies and private banks) were members of the Federal Reserve System, of which 839 were state chartered. Federal Reserve System member banks operated 56,669 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 16 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 392 exams of state member banks in 2015.

Bank Holding Companies

At year-end 2015, a total of 4,739 U.S. BHCs were in operation, of which 4,266 were top-tier BHCs. These organizations controlled 4,508 insured commercial banks and held approximately 97 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 2015, the Federal Reserve conducted 669 inspections of large BHCs and 2,709 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 2015, a total of 442 domestic BHCs and 40 foreign banking organizations had financial holding company status. Of the domestic financial holding companies, 25 had consolidated assets of $50 billion or more; 31, between $10 billion and $50 billion; 129, between $1 billion and $10 billion; and 257, 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 2015, a total of 470 SLHCs were in operation, of which 261 were top tier SLHCs. These SLHCs control 266 thrift institutions and include 21 companies engaged primarily in nonbanking activities, such as insurance underwriting (12 SLHCs), securities brokerage (4 SLHCs), and commercial activities (5 SLHCs). Excluding nonbank SIFI SLHCs, the 25 largest SLHCs accounted for more than $1.4 trillion of total combined assets. Approximately 90 percent of SLHCs engage primarily in depository activities. These firms hold approximately 16 percent ($251 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 five years.

Table 2. Savings and loan holding companies, 2011-15

Entity/item	2015	2014	2013	2012	20111
Top-tier savings and loan holding companies
Large (assets of more than $1 billion)2
Total number	67	76	81	94	n/a
Total assets (billions of dollars)	1,525	1,493	1,500	1,715	n/a
Number of inspections	58	83	72	82	n/a
By Federal Reserve System1	57	82	71	80	n/a
On site	31	45	58	53	n/a
Off site	26	37	13	27	n/a
By states' Department of Insurance	1	1	1	2	n/a
Small (assets of $1 billion or less)
Total number	194	221	251	272	n/a
Total assets (billions of dollars)	55	65	76	82	n/a
Number of inspections	187	212	258	229	n/a
By Federal Reserve System	187	212	258	229	n/a
On site	13	10	21	46	n/a
Off site	174	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

n/a Not applicable.

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 (see box 2 for information about the Board's supervisory approach for insurance SLHCs), issues pertaining to intermediate holding companies for commercial SLHCs, and the adoption of formal rating systems.

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 coordinates 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 Board 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 certain designated FMUs, the Board established risk-management standards and expectations that are articulated in Board Regulation HH. In addition to setting minimum risk-management standards, Regulation HH establishes requirements for the advance notice of proposed material changes to the rules, procedures, or operations of a designated FMU for which the Board is the supervisory agency under title VIII. Finally, Regulation HH also establishes minimum conditions and requirements for a Federal Reserve Bank to establish and maintain an account for, and provide services to, a designated FMU. The Federal Reserve Banks maintain accounts for and provide services to several designated FMUs.

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 the roles of LISCC firms in FMUs; the payment, clearing, and settlement activities of LISCC firms; and the FMU activities and implications for financial institutions in the LISCC portfolio.

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 (CFTC), 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 regulators' ability to monitor and mitigate systemic risks.

Designated Nonfinancial Companies

Since 2013, the FSOC has designated four nonbank financial companies for supervision by the Board: American International Group, Inc.; General Electric Capital Corporation, Inc. (GECC); Prudential Financial, Inc.; and MetLife, Inc.⁸

The Federal Reserve's supervisory approach for designated companies is consistent with the approach used for the largest BHCs, tailored to account for different material characteristics of each firm. The Dodd-Frank Act requires the Board to apply enhanced prudential standards 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. In July 2015, the Board issued a final order that established enhanced prudential standards for GECC. In the case of the remaining nonbank financial companies, which are primarily in the business of insurance, the Federal Reserve is developing enhanced prudential standards, including standards regarding capital. These standards will be appropriately tailored and applied to the firms after a process of notice and comment. Additionally, the Federal Reserve monitors developments at the designated nonbank financial companies and exercises its supervisory authority to foster safe and sound practices and to promote financial stability. (See box 2 for more information about the Board's supervisory approach for insurance firms.)

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 2015, a total of 35 member banks were operating 429 branches in foreign countries and overseas areas of the United States; 19 national banks were operating 377 of these branches, and 16 state member banks were operating the remaining 52. In addition, 8 nonmember banks were operating 15 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 2015, out of 41 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 2015, a total of 154 foreign banks from 49 countries operated 176 state-licensed branches and agencies, of which 6 were insured by the Federal Deposit Insurance Corporation (FDIC), and 49 OCC-licensed branches and agencies, of which 4 were insured by the FDIC. These foreign banks also owned 9 Edge Act and agreement corporations and 1 commercial lending company. In addition, they held a controlling interest in 46 U.S. commercial banks. Altogether, the U.S. offices of these foreign banks controlled approximately 20 percent of U.S. commercial banking assets. These 154 foreign banks also operated 91 representative offices; an additional 41 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.⁹ 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 452 examinations of foreign banks in 2015.

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 (BS&R), but consumer compliance supervision is conducted under the oversight of the Division of Consumer and Community Affairs (DCCA).¹⁰ 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.¹¹

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 service providers that provide information technology services to these organizations. All safety-and-soundness examinations conducted by the Federal Reserve include a risk-focused review of information technology risk-management activities. During 2015, the Federal Reserve continued as the lead supervisory agency for 6 of the 16 large, multiregional data processing servicers recognized on an interagency basis.

During 2015, the Federal Reserve contributed to updates to the FFIEC Information Technology Examination Handbook (IT Handbook), which provides guidance to examiners, financial institutions, and technology service providers. The Management Booklet was substantially revised to reflect the importance of incorporating technology operations management into an institution's enterprise risk management program. The updated booklet addresses how changes in technology could introduce new sources of risk to the institution and emphasizes how IT risk management is an essential component of effective governance and operational risk management.

In addition, the Business Continuity Planning Booklet was updated with Appendix J, "Strengthening the Resilience of Outsourced Technology Services," to explain the components of an effective third-party management program to identify, measure, monitor, and control the risks associated with outsourcing. The appendix highlights the importance of business continuity planning at technology service providers that perform or support critical operations for financial institutions.

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 2015, Federal Reserve examiners conducted 103 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 2015, the Federal Reserve conducted transfer agent examinations at nine state member banks 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 2015, the Federal Reserve conducted six examinations of broker-dealer activities in government securities at these organizations. These examinations are generally conducted concurrently with the Federal Reserve's examination of the state member bank or branch.

The Federal Reserve is also responsible for ensuring that state member banks and BHCs that act as municipal securities dealers comply with the Securities Act Amendments of 1975. Municipal securities dealers are examined, pursuant to the Municipal Securities Rulemaking Board's rule G-16, at least once every two calendar years. Four entities supervised by the Federal Reserve that dealt in municipal securities were examined during 2015.

Securities Credit Lenders

Under the Securities Exchange Act of 1934, the Board is responsible for regulating credit in certain transactions involving the purchasing or carrying of securities. As part of its general examination program, the Federal Reserve examines the banks under its jurisdiction for compliance with Board Regulation U (Credit by Banks and Persons other than Brokers or Dealers for the Purpose of Purchasing or Carrying Margin Stock). In addition, the Federal Reserve maintains a registry of persons other than banks, brokers, and dealers who extend credit subject to Regulation U. The Federal Reserve may conduct specialized examinations of these lenders if they are not already subject to supervision by the Farm Credit Administration (FCA) or the National Credit Union Administration (NCUA).

Cybersecurity and Critical Infrastructure

The Federal Reserve is actively engaged in raising financial institution awareness of supervisory expectations relative to cybersecurity risk assessment and risk mitigation. In 2015, Federal Reserve examiners continued to conduct targeted cybersecurity assessments at a select group of large financial institutions and FMUs. The Federal Reserve also contributed to the FFIEC joint statements on cyber attacks involving extortion, cyber attacks compromising credentials, and destructive malware. These statements and other resources are available on the FFIEC cybersecurity awareness web page, which is a central repository for FFIEC-related materials on cybersecurity (www.ffiec.gov/cybersecurity.htm).

The Federal Reserve continued to contribute to interagency groups such as the Financial and Banking Information Infrastructure Committee, the Cybersecurity Forum for Independent and Executive Branch Regulators, 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 2015, the CCIWG released a Cybersecurity Assessment Tool to help institutions identify their risks and determine their cybersecurity preparedness. The assessment tool provides a repeatable and measurable process for financial institutions to measure their cybersecurity preparedness over time.

The Federal Reserve also collaborated with the U.S. Treasury to plan and execute several financial services sector-wide tabletop exercises in 2015. The exercises focused on strategic, operational, and tactical considerations that tested both government and private sector processes and capabilities for addressing cyber incidents across the financial services sector. In addition, the Board coordinated with the U.S. Treasury and the Bank of England to plan the first international financial services sector cybersecurity tabletop exercise. The Resilient Shield exercise was a collaborative public-private initiative with an international dimension, focused on responding to a significant cyber-incident impacting the financial services sectors in both the United States and the United Kingdom (U.K.). The exercise focused on enhancing processes and mechanisms for maintaining a shared awareness of cybersecurity threats between the U.S. and U.K. governments and furthering a mutual understanding of each country's cybersecurity information-sharing processes and incident response coordination structures.

The Federal Reserve also announced an expansion of its Emergency Communications System (ECS) to include contact information of employees at Federal Reserve-supervised financial institutions who are capable of acting upon cyber emergencies. The Federal Reserve previously issued guidance to highlight the supervisory practices that the Federal Reserve can employ when financial institutions and their customers are affected by a major disaster or emergency. The Federal Reserve enhanced its communications capabilities by expanding the ECS contact information in response to heightened efforts by cyber criminals to penetrate financial institutions.

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 2015, the Federal Reserve completed 51 formal enforcement actions. Civil money penalties totaling $2,197,656,265 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 2015, the Reserve Banks completed 90 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 2015, 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 2015, 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 of Governors or the Reserve Banks.

The Federal Reserve offered a number of training courses exclusively for foreign supervisory authorities, both in the United States and in many foreign jurisdictions. Federal Reserve staff also took part in technical assistance and training assignments led by the International Monetary Fund, the World Bank, and the Financial Stability Institute. The Federal Reserve also contributed to the regional training provision under the Asia Pacific Economic Cooperation Financial Regulator's Training Initiative.

Training partners that collaborated with the Federal Reserve during 2015 to organize regional training programs also included The South East Asian Central Banks Research and Training Centre, The Caribbean Group of Bank Supervisors, Banque de France, the Central Bank of the United Arab Emirates, the Union of Arab Banks, and Banco de Portugal.

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

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 depository institutions (MDIs) 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 MDIs 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 MDIs by providing targeted supervisory guidance, identifying additional resources, and fostering mutually beneficial partnerships between MDIs and community organizations. As of year-end 2015, the Federal Reserve's MDI portfolio included 18 state member banks.

Throughout 2015, the Federal Reserve System continued to support MDIs through the following activities:

• co-organized the bi-annual 2015 Interagency Minority Depository Institutions and Community Development Financial Institutions (CDFI) Bank Conference. PFP staff at the Board of Governors and Federal Reserve Banks co-hosted this meeting with staff from the OCC and FDIC. The theme was "Celebrating 150 Years of MDIs: Changes, Challenges, and Opportunities," with over 200 people in attendance;
• formalized a partnership between the Board's DCCA and BS&R divisions to share management of the PFP program and diversify the resources and programing available to MDIs in 2016;
• participated in the 88th annual National Bankers Association (NBA) convention;
• provided technical assistance to MDIs on a wide variety of topics, including topics focused on improving regulatory ratings, navigating the regulatory applications process, the Community Reinvestment Act, and refining capital-planning practices;
• created formal procedures related to monitoring MDI-related proposals and continuing to offer pre-review of MDI applications to support early identification and resolution of issues that could create delays in the review process;
• in conjunction with DCCA, conducted joint outreach efforts to educate MDIs on community reinvestment and supervisory topics; and
• participated in an interagency task force to consider and address supervisory challenges facing MDIs.

Throughout 2015, PFP representatives hosted and participated in numerous banking workshops and seminars aimed at promoting and preserving MDIs, including the NBA's Legislative and Regulatory Conference. Further, program representatives continued to collaborate with community leaders, trade groups, the CDFI Fund, and other organizations to seek support for MDIs.

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, the Joint Forum, and the International Association of Insurance Supervisors (IAIS).¹²

Consistent with the Federal Reserve's risk-focused approach to supervision and when permitted by law, the Federal Reserve tailors supervisory rules and guidance in a way that applies the most stringent requirements to the largest, most complex banking organizations that pose the greatest risk to the financial system.

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 2015.

• In July, the Board issued a final rule requiring the largest, most systemically important U.S. BHCs to further strengthen their capital positions. Under the rule, a firm identified as a global systemically important bank holding company is required to hold additional capital to increase its resiliency in light of the greater threat it poses to U.S. financial stability. The final rule establishes the method for identifying whether a U.S. BHC is a G-SIB, and establishes a surcharge requirement that is calibrated to each firm's overall systemic risk. The final rule builds on a G-SIB capital surcharge framework agreed to by the BCBS and is augmented to address the risk arising from the overreliance on short-term wholesale funding. The G-SIB surcharge will generally be higher than under the BCBS approach. Failure to maintain the capital surcharge will subject the G-SIB to restrictions on capital distributions and certain discretionary bonus payments. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2015-08-14/pdf/2015-18702.pdf.
• In July, the Board issued a final order establishing enhanced prudential standards for GECC, a nonbank financial company designated by the FSOC for supervision by the Board (also see "Designated Nonfinancial Companies" earlier in this section). Because of the substantial similarity of GECC's current activities and risk profile to that of a large BHC, the enhanced prudential standards are similar to those applied to large BHCs. To take into account General Electric's announced timeline to substantially shrink GECC's systemic footprint and retain only those business lines that support General Electric's core industrial businesses, the final order provides for application of enhanced prudential standards in two phases. The final order is available at https://federalregister.gov/a/2015-18124.
• In October, the Board proposed a rule that would strengthen the ability of the largest domestic and foreign banks operating in the United States to be resolved without extraordinary government support or taxpayer assistance. The proposed rule would apply to firms identified by the Board as G-SIBs and to U.S. operations of foreign G-SIBs, and would require these firms to meet a new long-term debt requirement and a new TLAC requirement. The proposed requirements will bolster financial stability by improving the ability of banking organizations covered by the rule to withstand financial stress and failure without imposing losses on taxpayers. In addition, the proposed rule would require the parent holding company of a U.S. G-SIB to avoid entering into certain financial arrangements that would create obstacles to an orderly resolution. The proposed rule is available at www.gpo.gov/fdsys/pkg/FR-2015-11-30/pdf/2015-29740.pdf.
• In November, the Board issued a final rule modifying its capital plan and stress testing rules that will take effect for the 2016 capital plan and stress testing cycle. Specifically, the final rule makes targeted amendments that delay and/or modify the application of certain rules to BHCs and SLHCs based on the amount of total consolidated assets held by such firms. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2015-12-02/pdf/FR-2015-12-02.pdf.
• Additionally in 2015, the enhanced prudential standards rule (Regulation YY) and the liquidity coverage ratio rule (Regulation WW) became effective for certain large U.S. banking organizations. The complementary liquidity standards required by these regulations build upon the Board's overall supervisory framework for liquidity adequacy and liquidity risk supervision. The enhanced prudential standards rule ensures that BHCs with total consolidated assets of $50 billion or more maintain robust liquidity risk management practices, including liquidity stress testing for determining the adequacy of their liquidity resources. The liquidity coverage ratio rule establishes, for the first time, a quantitative minimum liquidity requirement for large U.S. banking organizations that will be fully phased in by January 2017. The rule requires the largest and most internationally active U.S. banking organizations to maintain an amount of unencumbered high-quality liquid assets that is no less than the expected net cash outflows of the organization over a 30-day period of liquidity stress. Requiring these banking organizations to hold high-quality liquid assets that they can use to meet their short-term obligations in a time of stress will help strengthen the resilience of these organizations and the broader U.S. financial system.

Other Capital Adequacy Standards

In 2015, 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 and September, 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.
• In April, the Board published a final rule to expand the applicability of its Small Bank Holding Company Policy Statement and also apply it to certain SLHCs. The final rule raises the asset threshold of the policy statement from $500 million to $1 billion in total consolidated assets and also expands the application of the policy statement to certain SLHCs. Holding companies that meet the qualification requirements of the policy statement, including those pertaining to nonbanking activities, off-balance sheet activities, and publicly registered debt and equity, are excluded from consolidated regulatory capital requirements. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2015-04-15/pdf/2015-08513.pdf.
• In June, the federal banking agencies issued a final rule modifying the capital rules applicable to advanced approaches banking organizations. The revisions correct technical and typographical errors and clarify certain requirements of the advanced approaches rule based on observations made by the agencies during the parallel run review, while simultaneously enhancing the consistency of the advanced approaches rule with relevant international standards. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2015-07-15/pdf/2015-15748.pdf.
• In November, the federal banking agencies issued a supervisory guidance statement, SR letter 15-13, to clarify the interaction between the regulatory capital rule and the Volcker rule with respect to the appropriate capital treatment for investments in certain private equity funds and hedge funds (covered funds). Specifically, the guidance clarifies supervisory expectations on how a banking organization's regulatory capital deductions of investments in covered funds made pursuant to the Volcker rule relate to deductions of these investments pursuant to the regulatory capital rule. The supervisory guidance is available at www.federalreserve.gov/bankinforeg/srletters/sr1513.htm.
• In December, the Board issued a final rule providing information regarding the application of the Board's regulatory capital framework to depository institution holding companies that have non-traditional capital structures (such as depository institution holding companies that are not organized as traditional stock corporations). The final rule is available at www.gpo.gov/fdsys/pkg/FR-2015-12-09/pdf/2015-31013.pdf.
• In December, the Board proposed a policy statement detailing the framework for setting the countercyclical capital buffer (CCyB), which would apply only to banking organizations subject to the advanced approaches rule. The proposed policy statement provides background on the range of factors the Board could take into account in setting the buffer. Once fully phased in, the CCyB could range from 0 percent of risk-weighted assets in times of moderate financial-system vulnerabilities to a maximum of 2.5 percent when vulnerabilities are significantly elevated. Banks that fail to meet the CCyB requirement would face restrictions on capital distributions and certain discretionary bonus payments. The proposed policy statement is available at www.gpo.gov/fdsys/pkg/FR-2016-02-03/pdf/2016-01934.pdf.

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 2015, 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 2015.

Final papers:

• Revised Pillar 3 disclosure requirements (issued in January and available at www.bis.org/bcbs/publ/d309.htm).
• Margin requirements for non-centrally cleared derivatives (issued in March and available at www.bis.org/bcbs/publ/d317.htm).
• Net Stable Funding Ratio disclosure standards (issued in June and available at www.bis.org/bcbs/publ/d324.htm).
• Frequently asked questions on the Basel III leverage ratio framework (issued in July and available at www.bis.org/bcbs/publ/d327.htm).
• Criteria for identifying simple, transparent and comparable securitisations (issued in July and available at www.bis.org/bcbs/publ/d332.htm).
• Basel III: The standardised approach for measuring counterparty credit risk exposures: Frequently asked questions (issued in August and available at www.bis.org/bcbs/publ/d333.htm).
• Frequently asked questions on the Basel III Countercyclical Capital Buffer (issued in October and available at www.bis.org/bcbs/publ/d339.htm).
• Fundamental review of the trading book - interim impact analysis (issued in November and available at www.bis.org/bcbs/publ/d346.htm).

Consultative papers:

• Interest rate risk in the banking book - consultative document (issued in June and available at www.bis.org/bcbs/publ/d319.htm).
• Review of the Credit Valuation Adjustment (CVA) risk framework - consultative document (issued in July and available at www.bis.org/bcbs/publ/d325.htm).
• Haircut floors for non-centrally cleared securities financing transactions - consultative document (issued in November and available at www.bis.org/bcbs/publ/d340.htm).
• TLAC Holdings - consultative document (issued in November and available at www.bis.org/bcbs/publ/d342.htm).
• Capital treatment for "simple, transparent and comparable" securitisations - consultative document (issued in November and available at www.bis.org/bcbs/publ/d343.htm).
• Revisions to the Standardised Approach for credit risk - second consultative document (issued in December and available at www.bis.org/bcbs/publ/d347.htm).
• Identification and measurement of step-in risk - consultative document (issued in December and available at www.bis.org/bcbs/publ/d349.htm).

Financial Stability Board

In 2015, 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 2015, 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 IAIS. One final paper was issued by the Joint Forum in 2015:

• Developments in credit risk management across sectors: current practices and recommendations (issued in June and available at www.bis.org/bcbs/publ/joint38.htm).

Accounting Policy

The Federal Reserve supports 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 2015, Federal Reserve staff addressed numerous issues including accounting for transfers of financial instruments, 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. A comment letter on the Financial Accounting Foundation's proposal related to revisions to the operating procedures of the Private Company Council was issued during the past year.

Federal Reserve staff also participated in meetings of the BCBS Accounting Experts Group and the IAIS Accounting and Auditing Working Group. These groups represent their respective organizations at international meetings on accounting, auditing, and disclosure issues affecting global banking and insurance organizations. Working with international bank supervisors, Federal Reserve staff contributed to the development of publications that were issued by the BCBS, including guidance on accounting for expected credit losses. In collaboration with international insurance supervisors, Federal Reserve staff also made contributions to work related to enhancing IAIS standards on valuation, disclosures, and expectations for external audit-related matters.

In 2015, 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

• developed and participated in a number of domestic and international supervisory training programs and 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 questions related to financial accounting, auditing, reporting, and disclosures.

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 as well as various Basel capital-related 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 2015 annual review of the Shared National Credit (SNC) program, a long-standing program to further sound credit risk management, gain insight into credit trends, and 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, which has the following characteristics: 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 2015 SNC review was prepared in the second quarter of 2015 using data as of December 31, 2014. The 2015 SNC portfolio totaled $3.9 trillion, with 10,675 credit facilities to approximately 6,600 borrowers.

The SNC examination found that the volume of criticized assets increased 9.4 percent to $372.6 billion. As a percentage of total commitments, the overall criticized asset rate remained elevated at 9.5 percent, and is historically high when compared to SNC portfolios at this stage of the economic cycle.

Leveraged lending, which accounts for approximately one quarter of the SNC portfolio, remained a focus of the agencies as they continue to evaluate the safety and soundness of bank underwriting and risk-management practices relative to expectations articulated in the 2013 Interagency Guidance on Leveraged Lending (guidance) and subsequent Frequently Asked Questions documents. The review found that risk in the overall SNC portfolio continues to be centered in the leveraged portfolio. Leveraged loans make up 82.8 percent of all SNC special mention commitments, 65.2 percent of all substandard loans, 65.1 percent of all doubtful loans, and 59.3 percent of all nonaccrual loans. The prevalence of leveraged lending is the primary contributor to the overall SNC special mention and classified rate of 9.5 percent.

This year's review found that banks are making progress in aligning their underwriting practices with the guidance as the incidence of non-pass loan originations to new borrowers (to either hold or distribute) fell in the second half of 2014. However, the review highlighted continuing gaps between industry practices and the expectations for safe and sound banking. Leveraged transactions originated within the past year continued to exhibit structures that were cited as weak by examiners. The persistent structural deficiencies found in loan underwriting by the agencies warrant continued attention.

The review also noted an increase in weakness among credits related to oil and gas exploration, production, and energy services following the decline in energy prices since mid-2014. Aggressive acquisition and exploration strategies from 2010 through 2014 led to increases in leverage, making many borrowers more susceptible to a protracted decline in commodity prices. Oil and gas commitments to the exploration and production sector and the services sector totaled $276.5 billion, or 7.1 percent, of the SNC portfolio. Classified commitments among oil and gas borrowers totaled $34.2 billion, or 15.0 percent, of total classified commitments, compared with $6.9 billion, or 3.6 percent, in 2014. Classified commitments are defined as substandard, doubtful, or loss.

Refinancing risk decreased in the SNC portfolio as 22.3 percent of SNC commitments will mature in 2016 and 2017, compared with 25.0 percent for the same period in the 2014 SNC Review. During 2014 and into 2015, syndicators 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.

For more information on the 2015 SNC review, visit the Board's website at www.federalreserve.gov/newsevents/press/bcreg/20151105a.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 2015, 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 Mexican, Chinese, U.K., and Gulf State 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 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 CFTC, the Internal Revenue Service, and the Office of Foreign Assets Control (OFAC). The chairmanship rotates among its members and in 2015, the Federal Reserve assumed the position of Chairman of the working group for the next two years.

The FFIEC BSA/AML working group is responsible for updating the FFIEC Bank Secrecy Act/Anti-Money Laundering Examination Manual. The FFIEC developed this manual as part of its ongoing commitment to provide current and consistent interagency guidance on risk-based policies, procedures, and processes for financial institutions to comply with the BSA and safeguard their operations from money laundering and terrorist financing.

Throughout 2015, 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.

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. 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 contributed to the guidance issued in October 2015 by FATF to more fully understand effective AML supervision and enforcement. Throughout 2015, the Federal Reserve also assisted in preparation for the 2016 FATF mutual evaluation of the United States. The FATF mutual evaluation assesses the U.S. AML and counter-terrorist financing framework against the FATF recommendations and includes a review of the U.S. legal, law enforcement, and supervisory structures.

The Federal Reserve also continues to participate in committees and subcommittees through the Bank for International Settlements. Specifically, the Federal Reserve actively participates in the AML Experts Group under the BCBS that focuses on AML/counter-terrorism financing issues, as well as the Committee on Payments and Market Infrastructures (CPMI). With respect to the AML Experts Group, the Federal Reserve contributed to updating and revising a consultative paper on the general guide to account opening, originally issued in 2003. Also, the Federal Reserve participated in drafting a consultative report on Correspondent Banking (October 2015). The report, issued by the CPMI Correspondent Banking Working Group, made recommendations which could potentially alleviate some of the costs and concerns associated with the reduction of foreign correspondent banking services.

Incentive Compensation

To foster improved incentive compensation practices in the financial industry, the Federal Reserve along with the other federal banking agencies has adopted interagency guidance oriented to the risk-taking incentives created by incentive compensation arrangements.¹³ 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.

Section 956 of the Dodd-Frank Act requires the financial regulatory agencies to prohibit incentive-based arrangements which the agencies determine to encourage inappropriate risks by covered institutions. The Federal Reserve continues to work with five federal agencies (OCC, FDIC, SEC, NCUA, and Federal Housing Finance Agency (FHFA)) on a Dodd-Frank rulemaking on incentive compensation. The number of agencies, the complexity of the subject, and scope of firms covered by the potential rulemaking (all over $1 billion in assets) have resulted in an ongoing multiyear effort. Additionally, through our ongoing supervision, the Federal Reserve continues to help improve incentive compensation practices at the largest firms.

Other Policymaking Initiatives

• In February, the federal banking agencies issued a supervisory guidance statement, SR letter 15-4, which presents an automated tool developed by the agencies to assist financial institutions subject to the regulatory capital rule in calculating risk-based capital requirements for individual securitization exposures. Specifically, institutions that use the regulatory capital rule's Simplified Supervisory Formula Approach to calculate risk-based capital requirements for securitization exposures may use the tool to calculate capital requirements for such exposures. The guidance is available at www.federalreserve.gov/bankinforeg/srletters/SR1504.htm.
• In April, the federal banking agencies issued a supervisory guidance statement, SR letter 15-6, which responds to frequently asked questions from regulated institutions about the agencies' regulatory capital rule. The guidance provides responses to questions on a variety of topics, including, but not limited to, the definition of capital, high-volatility commercial real estate exposures, and credit valuation adjustments. The guidance is available at www.federalreserve.gov/bankinforeg/srletters/sr1506.htm.
• In October, the federal banking agencies, together with the FCA and the FHFA, issued a final rule to establish capital and margin requirements for swap dealers, major swap participants, security-based swap dealers, and major security-based swap participants regulated by one of these prudential regulators. Specifically, the margin requirements mandate the collection and posting of initial and variation margin for non-cleared swap activity (that is, not cleared through a clearinghouse), subject to certain exemptions, with the amount of margin varying based on the relative riskiness of the non-cleared swap activity. The requirements are intended to help ensure the safety and soundness of non-cleared swap trading by reducing risk to the financial system, increasing transparency, and promoting market integrity. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2015-11-30/pdf/2015-28671.pdf.
• In December, the federal banking agencies issued a supervisory guidance statement, SR letter 15-17, which reminds financial institutions of existing regulatory guidance on prudent risk-management practices for commercial real estate (CRE) lending activity through economic cycles. Specifically, in light of substantial growth in many CRE assets and lending markets, financial institutions should maintain underwriting discipline and exercise prudent risk-management practices as well as develop risk-management practices commensurate with the level and nature of their CRE concentration risk. The guidance is available at www.federalreserve.gov/bankinforeg/srletters/sr1517.htm.
• In December, the Board issued two supervisory guidance statements, SR letter 15-18 and SR letter 15-19, to explain its supervisory expectations for capital planning at (1) U.S. BHCs and intermediate holding companies of foreign banking organizations that are subject to the Federal Reserve's LISCC framework, or that have total consolidated assets of $250 billion or more or consolidated total on-balance-sheet foreign exposure of $10 billion or more; and (2) U.S. BHCs and intermediate holding companies of foreign banking organizations that have total consolidated assets of at least $50 billion but less than $250 billion, have consolidated total on-balance sheet foreign exposures of less than $10 billion, and are not otherwise subject to the Board's LISCC framework. The Board has different expectations for sound capital planning and capital adequacy depending on the size, scope of operations, activities, and systemic importance of a firm. Accordingly, the guidance provides the Board's core capital planning expectations for the respective firms. SR 15-18 is available at www.federalreserve.gov/bankinforeg/srletters/sr1518.htm and SR 15-19 is available at www.federalreserve.gov/bankinforeg/srletters/sr1519.htm.

Regulatory Reports

The Federal Reserve's risk, surveillance, and data function is 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.¹⁴ This information is essential to formulating and conducting bank regulation and supervision. It is also used in responding to requests by Congress and the public for information about HCs and their nonbank subsidiaries. Foreign banking organizations also are required to periodically submit reports to the Federal Reserve. For more information on the various reporting forms, see www.federalreserve.gov/apps/reportforms/default.aspx.

During 2015, the following reporting forms were revised:

• FR Y-9C, FR Y-9LP, and FR Y-9SP--to reflect changes related to a law passed by the Congress in December 2014 (Public Law 113-250) and associated changes to the Board's Small Bank Holding Company Policy Statement and regulatory capital rules. The changes to implement the law increased the asset threshold of the policy statement from $500 million to $1 billion and applied the policy statement to SLHCs (also see "Other Capital Adequacy Standards" earlier in this section). Concurrent with this change, the Board took steps to relieve regulatory reporting burden for the BHCs and SLHCs that also meet the qualitative requirements of the policy statement. Specifically, the Board eliminated quarterly and more complex consolidated financial reporting requirements (FR Y-9C) and parent-only statements (FR Y-9LP) for approximately 470 of these institutions, and instead required semiannual parent-only financial statements (FR Y-9SP). The Board also eliminated all FR Y-9SP regulatory capital reporting items for approximately 240 SLHCs with less than $500 million in total consolidated assets. The Board made these changes effective March 31, 2015, for the
  FR Y-9C and FR Y-9LP, and June 30, 2015, for the FR Y-9SP. Also, the FR Y-9C was revised, effective March 31, 2015, to implement changes related to the regulatory capital rules.
• FR 2052a--to provide additional data items to facilitate a more sophisticated approach to monitoring liquidity risk. Additionally, the revisions to the FR 2052a allow the Federal Reserve to monitor compliance with the liquidity coverage ratio rule. The revisions tailor the FR 2052a data items and frequency of reporting to the size and complexity of the firms. Less data and maturity granularity are required for smaller, less-complex firms. Also, the Federal Reserve revised the FR 2052b reporting panel by modifying the firms that are required to respond and the applicable asset threshold, as well as eliminating monthly reporting.
• FR Y-6, FR Y-7, and FR Y-10--to collect the Legal Entity Identifier (LEI) for all banking and nonbanking legal entities reportable on the Banking, Non-Banking, SLHC, and 4K schedules (excluding Branch schedules) of the FR Y-10 and on the Organization Chart section of the FR Y-6 and
  FR Y-7, if an LEI has already been obtained (effective December 31, 2015). The Federal Reserve did not require an LEI to be obtained for the sole purpose of reporting the LEI on the FR Y-6, FR Y-7, and FR Y-10.
• FR Y-14--to shift the FR Y-14A as-of date by one quarter in accordance with the modifications to the Federal Reserve capital plan and stress test rules (effective December 31, 2015). The Federal Reserve also aligned the reports with changes in the regulatory capital rule by removing certain items related to tier 1 common capital, implemented the FR Y-14A Business Plan Changes schedule, and eliminated an FR Y-14Q Securities sub-schedule.
• FR Y-15--to add a new schedule to capture short-term wholesale funding, new data items on total exposures and intra-financial system liabilities, and more dimensions of a firm's systemic footprint (effective December 31, 2015). The Federal Reserve also aligned definitions with international standards published by the BCBS and expanded the scope of the reporting panel to include SLHCs. These changes allow the Federal Reserve to monitor, on an ongoing basis, the systemic risk profile of the institutions that are subject to enhanced prudential standards under section 165 of the Dodd-Frank Act.
• FR Y-16--to change the report as-of date from September 30 to December 31, and in effect, change the corresponding report due date from March to July (effective December 31, 2015). The Federal Reserve also modified the reporting instructions to make technical changes related to final implementation of the Basel capital requirements, and clarified the instructions in coordination with the other federal regulatory agencies.

FFIEC Regulatory Reports

The law establishing the FFIEC and defining its functions requires the FFIEC to develop uniform reporting systems for federally supervised financial institutions. The Federal Reserve, along with the other member FFIEC agencies, requires banks to submit various uniform regulatory reports. This information is essential to formulating and conducting bank regulation and supervision and for the ongoing assessment of the overall soundness of the nation's banking system. During 2015, the following FFIEC reporting forms were implemented or revised.

• FFIEC 102 was implemented as of March 31, 2015, to collect information from insured depository institutions and HCs subject to the market risk rule. The report collects key information from these institutions on how they measure and calculate market risk under these revised rules.
• FFIEC 030 and FFIEC 030S were revised to include a change to the officer declaration requirement, eliminate the requirement for a branch to submit the cover page of the applicable report if it is consolidated into the report for the institution's principal branch in a country, and add a new field on the FFIEC 030 cover page for an institution to indicate whether the branch meets the criteria for annual or quarterly filing when submitting a year-end report (effective December 31, 2015). These data are used to plan examinations and to analyze the foreign operations of domestic banks. Additionally, growth trends can be measured by bank, by country, and by bank within country.
• FFIEC 031 and FFIEC 041 (Call Reports) were revised (Schedule RC-R, Regulatory Capital) effective March 31, 2015, to implement changes related to the banking agencies' regulatory capital rules. Information from the Call Reports 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 Burden Reduction Initiative for Community Institutions

In September 2015, the FFIEC announced detailed steps regulators are taking to streamline and simplify regulatory reporting requirements for community banks and reduce their reporting burden. The objectives of the community bank burden-reduction initiative are consistent with the early feedback the FFIEC received as part of the regulatory review currently being conducted under the Economic Growth and Regulatory Paperwork Reduction Act of 1996.

As an initial step to streamline some reporting requirements, the federal banking agencies, under the auspices of the FFIEC, sought comment on proposals to, in part, eliminate or revise several Call Report data items. These changes would simplify the reporting requirements for banks and savings associations.

In evaluating changes to the Call Reports, the FFIEC sought to balance reporting burden against regulators' need for reliable data to ensure banks and savings associations operate in a safe and sound manner and are able to meet the financial needs of the communities they serve.

In addition to the reporting changes proposed, the FFIEC also focused on four other areas:

• Accelerating the start of a statutorily required review of the continued appropriateness of the data items collected in the Call Reports, which was scheduled to commence in 2017;¹⁵
• Evaluating the feasibility and merits of creating a streamlined version of the quarterly Call Report for community institutions;
• Continuing dialogue with community institutions to identify additional opportunities to reduce reporting burden by revising or redefining Call Report data items; and
• Reaching out to banks and savings associations through teleconferences and webinars to explain upcoming reporting changes and clarify technical reporting requirements.

While this initiative will span several years, progress made during 2015 by the FFIEC included:

• publishing a Federal Register notice with several proposed burden-reducing changes to the Call Reports,
• visiting a limited number of institutions to gather additional information on challenges related to Call Report preparation, and
• holding two teleconferences to train bankers on recent changes to regulatory capital data items.

Finally, as a foundation for the actions it is undertaking, the FFIEC has developed a set of guiding principles for use in evaluating potential additions and deletions of Call Report data items and other revisions to the Call Reports. In general, any Call Report changes must meet three guiding principles for the data items to be collected:

• The data items serve a long-term regulatory or public policy purpose by assisting the FFIEC's member entities in fulfilling their missions of ensuring the safety and soundness of financial institutions and the financial system and protecting consumers, as well as entity-specific missions affecting national and state-chartered institutions;
• The data items maximize practical utility and minimize, to the extent practicable and appropriate, burden on financial institutions; and
• Equivalent data items are not readily available through other means.

Supervisory Information Technology

The Federal Reserve's supervisory information technology function (SIT), under the guidance of the Subcommittee on Supervisory Administration and Technology, works to deliver information technology solutions within the supervision and regulation business line. The services provided to the business line include the development and maintenance of applications and tools to assist with the examination of supervised institutions, data collection and storage, development and deployment of collaboration tools, provisioning and support of quantitative analysis and data visualization software, and information security. SIT also provides IT project management support to several critical national business applications supporting the supervisory business line.

Large bank and foreign bank supervision. In 2015, SIT helped to improve the supervision of large financial institutions and foreign banking organizations through the integration of document repositories for continuous monitoring and point-in-time examinations. In addition, a key accomplishment was the integration of platforms and tools used for sharing and collaborating on supervisory information between Reserve Banks, the Board of Governors, and other federal agencies, which better aligns the large financial institution supervisory documents available to authorized users, and improves the quality and consistency of reports being filed.

Community and regional bank supervision. For banking institutions with less than $50 billion in assets, SIT worked with bank examiners, the FDIC, and the Conference of State Banking Supervisors to deploy new functionality, which improves usability, process standardization, examiner efficiency, and supervisory effectiveness. In line with efforts to improve standardization and efficiency, SIT standardized examination documentation and supported an interagency platform providing states with electronic loan review tools to prepare for the automation of production and maintenance of loan line sheets in 2016.

Supervisory support tools. To support examiners and other supervisory staff, SIT deployed tools to support the collection, use, and storage of supervisory data. SIT integrated supervisory planning and collection tools with a task and resource management program allowing management to better track and align resources. Additionally, a new user front-end to the Consolidated Supervision Comparative Analysis, Planning and Execution (C-SCAPE) program was implemented to provide simpler access to key reports. On the analysis side, SIT also provides and supports software to analyze the data gathered through the supervisory process. Quantitative analysis and data visualization software allow supervisory analysts to glean insights from supervisory data.

Content, collaboration and mobility. The SIT provides applications and programs designed to be used across the supervisory function to enhance efficiency and increase collaboration and mobility. As part of SIT's effort to enhance collaboration between agencies and examiners, the team completed a targeted review of connectivity options to move to an "always connected" posture where examiners working remotely have solutions for situations when network connectivity is limited.

Streamlined data access and improved security. In addition to data collection and collaboration, SIT continued to streamline ease of data access for the supervisory function, while enhancing overall information security. SIT provides access to data through a central area for all access-related responsibilities, and establishes effective prevention and detection controls to limit information security threats. In addition to data access provisioning, the team provides information security measures through routine procedures to check and verify users with access to information.

The National Information Center

The NIC is the Federal Reserve's comprehensive repository for supervisory, financial, and banking structure data, as well as supervisory documents. The NIC includes (1) data on banking structure throughout the United States and foreign banking concerns; (2) the National Examination Data, an application that enables Federal Reserve 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 process.

Information sharing and external collaboration. In 2015, the NIC prioritized the review of all existing data exchange relationships with state agencies, federal government agencies, and internal applications within the Federal Reserve System. The review ensured all data being shared is accurate, used in a consistent and secure manner, and within the bounds specified in the user agreement. NIC broadened the scope and focus of information provided to the public in 2015 through the NIC public website. Additionally, the NIC made strides in improving efficiencies and reducing redundancies in national applications utilized throughout the Federal Reserve System and by the other federal and state regulators.

Document management. A high priority for the NIC was to improve document tracking, storage, and access through the implementation of document management software. The newly deployed software eliminates point-to-point interfaces between document management systems and systems uploading or referencing documents. The software also moves and tracks documents between management systems as the documents progress through their life cycle.

Data quality and usability. Due to the constant acquisition of new data sets, the data housed in NIC is continuously changing. The NIC continues to ensure that the underlying data is consistent, readily available, and easily accessible for authorized use. The NIC also works to ensure that all NIC data is easily understood and integrated in a flexible manner.

Staff Development

The Federal Reserve's staff development program supports the ongoing development of about 3,100 professional supervisory staff, ensuring that they have the requisite skills necessary to meet their evolving supervisory responsibilities. The Federal Reserve also provides course offerings to staff at state banking agencies. Training activities in 2015 are summarized in table 3.

Table 3. Training for banking supervision and regulation, 2015

Course sponsor or type	Number of enrollments		Instructional time (approximate training days)1	Number of course offerings
	Federal Reserve personnel	State and federal banking agency personnel
Federal Reserve System	2,117	456	720	195
FFIEC	703	307	392	98
Rapid Response2	19,421	2,966	10	83

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 examiner commissioning program for assistant examiners is set forth in the Examiner Commissioning Program (SR letter 98-2).¹⁶ Examiners choose from one of two specialty tracks--(1) safety and soundness or (2) consumer compliance. In 2015, 103 examiners passed the proficiency examination (77 in safety and soundness and 26 in consumer compliance).

On average, individuals move through a combination of classroom offerings, self-paced learning, virtual instruction, 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 2015, The Federal Reserve completed a major initiative to modernize its Community Bank Examiner Commissioning Program. Additionally, learning units were released for the Large Financial Institutions Examiner Commissioning Program (LFI ECP). The LFI ECP program will continue to be developed and deployed over the course of 2016 and 2017.

Continuing Professional Development

Throughout the course of 2015, the Federal Reserve System made enhancements to the continuing professional development (CPD) program for examiners through the addition and modernization of several courses, tools, job aids, and learning programs. Most notably, the Federal Reserve developed a multi-layered Capital Markets Specialty Track to develop varying degrees of capital markets expertise across the System. The Federal Reserve System CPD 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 2015, the Federal Reserve acted on 1,014 applications filed under the six statutes.

In 2015, the Federal Reserve released its second and third 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, withdrawn, mooted or returned, 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 reports are available at www.federalreserve.gov/bankinforeg/semiannual-reports-banking-applications-activity.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. Depending on the circumstances, these activities may or may not require Federal Reserve approval in advance of their commencement.¹⁷

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 2015, the Federal Reserve acted on 299 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 2015, the Federal Reserve acted on four 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 2015, 40 domestic and two foreign 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 2015, the Federal Reserve approved 73 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 2015, the Federal Reserve approved 152 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 2015, the Federal Reserve acted on 31 membership applications, 360 new and merger-related domestic branch applications, and no foreign branch applications.

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 2015, 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 2015, the Federal Reserve acted on 12 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 2015, the Federal Reserve acted on two applications for MHC reorganizations. In 2015, the Federal Reserve acted on six 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 2015, no SLHC financial holding company declarations were received.

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 2015, the Federal Reserve approved 20 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 2015, the Federal Reserve approved five 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/2015orders.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 SEC.¹⁸ 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 2015. 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.

Assessments for Supervision and Regulation

The Dodd-Frank Act directs the Board to collect assessments, fees, or other charges equal to the total expenses the Board estimates are necessary or appropriate to carry out the supervisory and regulatory responsibilities of the Board for BHCs and SLHCs with total consolidated assets of $50 billion or more and nonbank financial companies designated for Board supervision by the FSOC. As a collecting entity, the Board does not recognize the supervision and regulation assessments as revenue nor does the Board use the collections to fund Board expenses; the funds are transferred to the Treasury. The Board collected and transferred $443,068,345 for the 2014 supervision and regulation assessment in 2015.

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 FCA 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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