Board of Governors of the Federal Reserve System

The Federal Reserve has revised its safety-and-soundness surveillance program (the Surveillance Program) for state member banks (SMBs) and top-tier bank and savings and loan holding ompanies (HCs).¹  This letter summarizes the Surveillance Program’s objectives, structure, and maintenance. Additional information on the metrics, procedures, and write-up requirements used to monitor SMBs and HCs is provided in the attachment.

Since the financial crisis, the Federal Reserve has worked to make its supervision framework more forward-looking and data-driven.  The enhanced Surveillance Program represents an important milestone in these efforts and will help the Federal Reserve efficiently allocate supervisory staff resources, particularly for community and regional banking organizations.  Two key improvements are:

• New risk classification algorithms (“Outlier Metrics”) that provide examiners and other supervisory staff with early signals of an institution’s risk-taking.
• A new early-warning model for HCs (“HC-SABR”) that complements the existing early-warning model for financial weaknesses at SMBs (“SR-SABR”).

Other elements of the Surveillance Program remain in place. The program monitors adherence to regulation and guidance, produces financial industry analysis, and distributes surveillance results across the Federal Reserve’s supervision function.  The program provides for flexibility in its modeling initiatives, employing a variety of statistical approaches and promoting the evolution and continuous improvement of these models.  While a Reserve Bank may communicate some of the monitoring results to a specific institution, the information is not shared with the public or institutions generally, unless otherwise noted.  In addition, the program now incorporates the Federal Reserve’s responsibility for savings and loan holding companies.

Program Objectives

The Surveillance Program’s objectives are as follows:

Institution Monitoring

• Use forward-looking and data-driven metrics to target high-risk institutions and institutions with emerging financial difficulties for enhanced supervisory attention.
• Further support risk-aligned supervision by identifying low-risk institutions and applying a more streamlined supervisory approach to them.
• Detect possible regulatory violations and departures from supervisory guidance.
• Provide regular financial reports covering individual SMBs and HCs.

Industry Analysis

• Inform Federal Reserve leaders of broad financial institution conditions and trends through aggregate data views and accompanying financial analyses.

Metric Distribution

• Distribute surveillance results to examiners and other supervisory staff.

Program Structure

The Surveillance Program includes the following products:

Institution Monitoring

• An Outlier List that highlights SMBs and HCs with elevated risk positions and quickly identifies institutions with expanded or new areas of risk-taking.
• A Watch List that highlights SMBs and HCs with emerging financial weaknesses and flags institutions in the initial phases of financial deterioration.  
• An SMB Monitoring Screen and an HC Monitoring Screen that identify complex operations, flag potential compliance deviations in a variety of regulatory and supervisory areas, and supplement the Outlier List and Watch List with additional metrics on risk and financial condition.
• An Intercompany Transactions Exception List that shows insured depository institutions with possible violations of section 23A of the Federal Reserve Act.
• Quarterly financial reports on individual SMBs and HCs, including a publicly available Bank Holding Company Performance Report (BHCPR).

Industry Analysis

• Financial Conditions Reports prepared by Reserve Banks and the Board’s Surveillance Section covering financial conditions and trends at supervised institutions.²

Metric Distribution

• Focus Report, a web application for interactive risk assessment by Federal Reserve examiners and other supervisory staff.
• Performance Report Information and Surveillance Monitoring (PRISM), a web application for interactive data analysis by Federal Reserve examiners and other supervisory staff.

Program Maintenance

The Board’s Surveillance Section is responsible for the Surveillance Program’s performance and coordination of its maintenance.  Several System workgroups help assess on a regular basis the effectiveness of the metrics underlying the various monitoring lists and screens.

Board staff confer with each Reserve Bank annually regarding the timeliness, accuracy, and thoroughness of local responses to surveillance information.  Related to this evaluation process, the Board’s Surveillance Section also assists with quantitative assessments of the effectiveness of System supervisory efforts more generally.

Reserve Banks are asked to distribute this letter to appropriate safety-and-soundness examiners and other supervisory staff.  Questions about the Surveillance Program should be directed to the Board’s Surveillance Section officer, Jeffery W. Gunther, Deputy Associate Director, at (202) 452-3085, or submitted via the Board’s public website.³

Notes: