Proactive Monitoring of Markets and Institutions

The changing nature of risks and fluctuations in financial markets and the broader economy require timely monitoring of domestic and foreign financial markets and their effect on financial institutions. They even require monitoring of the nonfinancial sector to identify buildups of vulnerabilities that might require further study or policy action.

To this end, the Federal Reserve maintains a flexible, forward-looking financial stability monitoring program to help inform policymakers of the financial system’s vulnerabilities to a range of potential adverse events or shocks. Such a monitoring program is a critical part of a broader Federal Reserve System effort to assess and address vulnerabilities in the U.S. financial system. In the case of individual institutions, the Federal Reserve may take more direct action and in various ways.

Research Examining Causes, Effects, and Remedies for Financial Instability

A macroprudential approach to ensuring financial stability builds on a substantial and growing body of research on the factors that lead to vulnerabilities in the financial system and how government policies can mitigate such risks.

The Federal Reserve actively engages in financial stability research to improve understanding of issues related to financial stability and to engage with the broader research community on crucial policy matters. This engagement often involves collaboration with researchers at other domestic and international institutions.

Macroprudential Supervision and Regulation of Large, Complex Financial Institutions

Large, complex financial institutions interact with financial markets and the broader economy in a manner that may—during times of stress and in the absence of an appropriate regulatory framework and effective supervision—lead to financial instability.

The Federal Reserve promotes the safety and soundness of Systemically Important Financial Institutions (SIFIs)—including large bank holding companies and financial market utilities—through robust supervision and regulation programs that are informed by the macroprudential monitoring programs. In addition, the Federal Reserve serves as a “consolidated supervisor” of nonbank financial companies that the Financial Stability Oversight Council (FSOC) has determined should be supervised by the Federal Reserve Board and subject to prudential standards. Currently, there are no such firms that have been designated by the FSOC.

Monitoring Systemically Important Financial Institutions

The Federal Reserve actively monitors indicators of the riskiness of Systemically Important Financial Institions (SIFIs), both individually as well as through interlinkages in the broader network of financial institutions, to help identify vulnerabilities. It also imposes certain regulatory requirements on SIFIs in order to ensure that these large and interconnected institutions properly manage potentially risky activities and to mitigate spillover of distress into the broader economy. If a SIFI were to become distressed, disruptions in the financial system could arise from direct losses imposed on SIFI counterparties, contagion, fire sales effects, or a loss of critical services.

Recovery and Resolution Framework

During the 2007–09 financial crisis, the lack of effective resolution strategies contributed to the damaging spillovers of distress at or between individual institutions and from those institutions to the broader economy. The Federal Reserve, in collaboration with other U.S. agencies, has continued to work with large financial institutions to develop a range of recovery and resolution strategies in the event of their distress or failure. Improvements in resolution planning are intended to, among other things, diminish adverse effects from perceptions of certain institutions as “too big to fail” and contribute to more orderly conditions in the financial system if institutions face strains or fail.

International Financial Stability Monitoring

The U.S. dollar is the leading global funding and investment currency and is used widely for trade and other international transactions, and well-functioning dollar funding markets in the United States and abroad are critical in supporting these roles. Strains in these markets can adversely affect U.S. and foreign businesses, governments, households, and NBFIs that borrow in dollars. The Federal Reserve actively monitors the functioning and health of dollar funding markets and, in cooperation with foreign central banks, has worked to mitigate strains in these markets through the use of the Federal Reserve’s dollar liquidity swap arrangements.

The Federal Reserve actively monitors the resilience of foreign financial systems and potential transmission channels of foreign financial stress. An understanding of financial vulnerabilities abroad and how foreign shocks are transmitted to the United States is important for gauging the significant risks to the U.S. financial system.


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Last Update: December 17, 2021