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    which part of the federal reserve system is primarily responsible for supervising financial institutions and sending bank examiners to conduct inspections?


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    Banking Supervision

    Banking Supervision


    The Federal Reserve System supervises and regulates a wide range of financial institutions and activities. The Federal Reserve works in conjunction with other federal and state authorities to ensure that financial institutions safely manage their operations and provide fair and equitable services to consumers. Bank examiners also gather information on trends in the financial industry, which helps the Federal Reserve System meet its other responsibilities, including determining monetary policy.

    How a Bank Earns Profit

    Just like any other business, a bank earns money so that it can run its operations and provide services. First, customers deposit their money in a bank account. The bank provides safe storage and pays interest on customers’ deposits. The bank is required to keep a percentage of deposits in reserve as cash in its vault or in an account at a Federal Reserve Bank. The bank can lend the rest to qualified borrowers. Potential borrowers may wish to buy a house or a new car; however, they may not have enough money to pay the full price at one time. Instead of waiting to save the money to pay for a new house, which could take years, they take out a loan from a bank. Borrowers are charged interest on the loan – a bank’s primary source of income. Banks also make money from charging fees for other financial services, such as debit cards, automated teller machine (ATM) usage and overdrafts on checking accounts.

    Safety and Soundness

    Two major focuses of banking supervision and regulation are the safety and soundness of financial institutions and compliance with consumer protection laws. To measure the safety and soundness of a bank, an examiner performs an on-site examination review of the bank's performance based on its management and financial condition, and its compliance with regulations.

    Institution Supervision

    The Federal Reserve is responsible for supervising--monitoring, inspecting, and examining--certain financial institutions to ensure that they comply with rules and regulations, and that they operate in a safe and sound manner. Supervision of financial institutions is tailored based on the size and complexity of the institution.

    Regulatory Resources

    Regulation entails establishing the rules within which financial institutions must operate. This includes issuing specific reg­ulations and guidelines governing the formation, operations, activities, and acquisitions of financial institutions. The Federal Reserve offers numerous resources to assist banking organizations and the public understand these rules and related expectations.

    Other Bank Regulators

    Several federal and state authorities regulate banks along with the Federal Reserve. The Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Office of Thrift Supervision (OTS) and the banking departments of various states also regulate financial institutions. The OCC charters, regulates and supervises nationally chartered banks. The FDIC, the Federal Reserve and state banking authorities regulate state-chartered banks. Bank holding companies and financial services holding companies, which own or have controlling interest in one or more banks, are also regulated by the Federal Reserve. The OTS examines federal and many state-chartered thrift institutions, which include savings banks and savings and loan associations.

    Additional Resources

    Federal Reserve Board Supervision & Regulation

    Source : www.federalreserveeducation.org

    What is the Fed: Supervision and Regulation – Education

    Introduction The Fed has supervisory and regulatory authority over many banking institutions. In this role the Fed 1) promotes the safety and soundness of the banking system; 2) fosters stability in financial markets; and 3) ensures compliance with laws and regulations under its jurisdiction.

    What is the Fed: Supervision and Regulation


    The Fed has supervisory and regulatory authority over many banking institutions. In this role the Fed 1) promotes the safety and soundness of the banking system; 2) fosters stability in financial markets; and 3) ensures compliance with laws and regulations under its jurisdiction. Supervision involves examining the financial condition of individual banks and evaluating their compliance with laws and regulations. Bank regulation involves setting rules and guidelines for the banking system.


    Supervisory Agencies

    The objective of supervision is to evaluate the financial condition of banking organizations and their compliance with laws and regulations.

    The Fed supervises several kinds of institutions. It supervises bank and financial holding companies (the companies that own banks and other financial operating units), including savings and loan holding companies (the companies that own thrifts or savings banks). The Fed also supervises state-chartered banks that are members of the Federal Reserve System and various foreign banking organizations. Finally, the Fed supervises the nonbank financial institutions whose safety and soundness are important to the overall financial system.

    Several other financial regulatory agencies also supervise banking institutions. By law, nationally chartered banks must be members of the Federal Reserve System. However, they are supervised by the Office of the Comptroller of the Currency (OCC), part of the U.S. Treasury Department. The Federal Deposit Insurance Corporation (FDIC) supervises state-chartered banks that are not members of the Federal Reserve System. In addition, state-chartered banks are also supervised by their respective state banking agencies. And credit unions are supervised by the National Credit Union Administration (NCUA).

    As outlined in the graphic below, of the 10,413 banks and credit unions in the U.S. that take deposits, the Fed supervises its 753 state member banks; the OCC supervises 1,086 national banks; the FDIC picks up the 3,338 remaining state banks that aren’t Fed members; and the NCUA supervises 5,236 credit unions.

    The Supervisory Process

    Bank supervisors examine banking organizations to make sure that they are operating in a safe and sound manner and following laws and regulations. Supervisors at each of the 12 Reserve Banks and at the Board of Governors perform on-site and off-site examinations and off-site monitoring.

    The 2007–2008 financial crisis put the financial system and the whole economy under a lot of stress. In response, the Fed and other bank regulatory agencies issued new rules, regulations, and guidelines to strengthen the supervision and resiliency of large banking organizations. The goal was to better ensure that these organizations could withstand most forms of financial and economic stress. For example, banks are required to have enough capital to absorb large losses and withstand wide fluctuations in values that could affect their balance sheets, revenues, and costs. Regulators assess large banks’ capital projections and estimations under current and stress conditions to make sure that they’re sufficient. Large banking organizations also undergo reviews to ensure that they have adequate liquidity to meet current and stress conditions.

    The largest banking organizations also are required to submit resolution plans or ‘living wills’ to the Fed and the FDIC. Each plan must describe the organization’s strategy for rapid and orderly resolution in the event of material financial distress or failure.

    During the 2020 COVID-19 pandemic, Fed supervisors increased monitoring and outreach to banks to help them understand the challenges and risks of the situation. In addition, the Fed allowed banks additional time to address non-critical supervisory issues.


    The Fed’s regulations often are adopted in response to specific legislation passed by Congress.

    As one of the nation’s bank regulatory agencies, the Fed, through the Board of Governors, sets standards of operation for banks through regulations, rules, policy guidelines, and interpretations of relevant laws. Sometimes regulations are restrictive, meaning they limit a bank’s activities. Other times they are permissive, which means they allow banks to conduct a given activity. And sometimes regulations prescribe action. For example, the Community Reinvestment Act places an obligation on banks to serve lower-income communities in their areas.

    Regulations and interpretations are scaled to the size and complexity of the bank or holding company. Smaller banks would face an undue burden if they had some of the regulations that larger banks do, and any financial weaknesses of smaller banks would not shake the whole economy. So, regulators have more basic expectations for smaller, less complex banks. For example, although capital requirements for institutions of all sizes have strengthened since the 2007–2008 financial crisis, some requirements do not apply to smaller banks.


    Source : www.frbsf.org

    Financial Institution Supervision


    Dianne Dobbeck (bio)

    Executive Vice President

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    Our Supervisory Approach | Examination Process | Supervisory Teams

    The Board of Governors of the Federal Reserve System has supervisory and regulatory authority over a wide range of financial institutions, including state-chartered banks that are members of the Federal Reserve System (state member banks), bank holding companies, thrift holding companies and foreign banking organizations that have a branch, agency, a commercial lending company subsidiary or a bank subsidiary in the United States. While the Board establishes supervisory policies, the Board delegates day-to-day supervision to the Reserve Banks.

    Acting on delegated authority from the Board, the Supervision Group of the Federal Reserve Bank of New York supervises the financial institutions that are subject to the Board's supervision and are located in the Second Federal Reserve District, which includes New York state, the 12 northern counties of New Jersey, Fairfield County in Connecticut, Puerto Rico and the U.S. Virgin Islands.

    The objectives of supervision are to evaluate, and to promote, the overall safety and soundness of the supervised institutions (micro-prudential supervision), the stability of the financial system of the United States (macro-prudential supervision), and compliance with relevant laws and regulations. The supervision mandate is carried out through a combination of methods, including the conduct of both on-site and off-site examinations and inspections; continuous supervision performed by supervisory teams dedicated to a specific supervised institution; review of reports and data; and coordination with other supervisory agencies.

    Our Supervisory Approach The Supervision Group takes a risk-focused approach based on a supervisory plan that is customized to a firm’s risk profile and organizational structure. Examiners look at key aspects of a supervised firm’s businesses and risk management functions to assess the adequacy of the firm’s systems and processes for identifying, measuring, monitoring and controlling the risks the firm is taking.

    Under this risk-focused approach, activities identified as those likely to pose the highest risk to the firm receive the most scrutiny and the Supervision Group examiners employ the assistance of specialists with skills tailored to these specific activities.

    In addition, the Supervision Group evaluates the adequacy of a firm’s capital and liquidity. The presence of strong capital and liquidity buffers promotes the objective of enhancing a firm’s ability to absorb losses and withstand financial stress. Especially in the case of a large bank holding company, it can contribute to the stability of the financial system as a whole.

    The Supervision Group coordinates its supervisory activities with those of other federal and state authorities, including the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Commodities Futures Exchange Commission, the FDIC and state banking and insurance regulators, who have primary supervisory responsibility over certain types of entities.

    The Examination Process

    Examination of a firm may be conducted either on-site or off-site, and may be full scope or target, depending on the risks and complexity of the firm, as well as the current rating. A full scope examination involves the collection and analysis of a wide array of information and data from across the firm. The frequency of full-scope examination is determined by asset size and complexity of the firm. A target examination is performed on a particular area or risk within the firm and usually entails determining or validating that controls and processes for the targeted area or risk are effective. Full scope and target examination findings are reported back to the firm.

    Examiners also continuously monitor, review and analyze financial, managerial, and organizational data as well as periodic reports filed by firms. Continuous monitoring is designed to develop and maintain an understanding of strategic business developments, changes in the firm’s risk profile, and associated policies and practices. The scope of continuous monitoring is adjusted, as appropriate, based on specific events, such as (i) significant changes in inherent risk, control processes or key personnel; (ii) concerns regarding the adequacy of controls; (iii) the absence of sufficiently recent exams; or (iv) market events.

    Findings from examinations or continuous monitoring can lead to further engagement with the firm in an effort to improve the firm’s processes, financial condition or the safety of the financial market. In some cases, findings may also lead to an enforcement action against the firm.

    The Supervisory Teams

    Supervisory teams can be responsible for one specific firm, in the case of large complex financial firms, or be responsible for a portfolio of firms, in the case of community and regional banks and many foreign financial firms. In both cases, supervisory teams are led by a senior staff member and include a number of specialists.

    For large complex institutions, the team is led by a senior supervisory officer, who, in addition to leading the development and execution of the supervisory program for the firm, is responsible for interactions with the board of directors and executive management.

    Source : www.newyorkfed.org

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