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.
During 2016, 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 2016. U.S. BHCs, in aggregate, reported earnings reaching an all-time high of $162 billion for 2016, up from $158 billion for the year ending December 31, 2015. The proportion of unprofitable BHCs was 2 percent, the same as 2015. However, assets from unprofitable BHCs increased to 3.1 percent in 2016, up from 2.9 percent in 2015. Provisions increased to 0.26 percent of average assets, up from 0.23 percent in 2015. They remained in line with historical lows. Nonperforming assets continued to decline, but remained elevated relative to historical levels at 2.4 percent of loans and foreclosed assets, down from 2.8 percent as of year-end 2015. (See "Bank Holding Companies" later in this section.)
Performance of state member banks. The performance at state member banks in 2016 improved from 2015. In aggregate, state member banks reported profits of $24.4 billion for 2016, up 11.7 percent from $21.8 billion in 2015. Return-on-assets improved while return-on-equity dipped slightly, but both measures continue to lag pre-crisis levels. The percent of profitable state member banks decreased slightly but remains well above pre-crisis levels as 2.7 percent of firms reported a loss for the year, up from 2.4 percent in 2015. Problem loans stayed flat in 2016 at 1.6 percent, in line with pre-crisis levels, ending a six-year declining trend. However, problem loans increased sharply in state member bank commercial & industrial and agricultural loan portfolios due to increases in nonaccrual loans. Provisions (as a percent of revenue) increased for a second consecutive year to 3.5 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 increased very slightly from 14.51 percent in 2015 to 14.52 percent in 2016, matching a similar increase in the percent of banks deemed well capitalized under prompt corrective action standards to 99.6 percent. In 2016, one state member bank, with $66.3 million in assets, failed. (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 2016, 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. For example, in 2016 the Board issued a final 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. The Board also finalized and issued for comment several other rulemakings that would apply to the largest and most systemically important institutions, as described further below in the "Supervisory Policy" section. (See box 1 for more information on G-SIBs.)
Community bank burden reduction. The Federal Reserve continually seeks to minimize regulatory burden for community banks by tailoring its regulations, guidance, and supervisory programs to an institution's size, risk, and complexity. The Federal Reserve took a number of steps in 2016, including conducting more supervisory work offsite and reducing regulatory reporting requirements, to reduce burden on community banks and make the supervisory program for these institutions more efficient and effective. (See box 2 for more information on easing regulatory burden.)
Cybersecurity. Cybercrime has been identified by financial institutions and supervisors as a significant threat to specific institutions and to the broader financial system. In 2016, the Federal Reserve worked independently and in collaboration with other agencies, public/private partnerships, and international authorities to strengthen risk-management practices and reduce cyber risk to the financial system. (See box 3 for more information on cyber guidance.)
Box 1. Regulation of Global Systemically Important Banking Institutions
In 2016, the Board continued to advance its regulatory and supervisory program for G-SIBs, the banking firms whose failure would cause the most harm to the U.S. financial system and the broader economy. The Board's rules for G-SIBs pursue two complementary goals: reducing the probability that a G-SIB will fail, and reducing the harm that a G-SIB's failure would cause the financial system and economy. The Board had two significant accomplishments in 2016 in furtherance of that latter goal. First, the Board finalized its long-term debt and TLAC rule. Second, together with the Federal Deposit Insurance Corporation (FDIC), the Board issued public feedback to domestic G-SIBs on their resolution plans, as well as guidance for incorporation into the next full plan submission.
TLAC final rule
In December 2016, the Board issued a final 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 TLAC, which is made up of both capital and long-term debt. The final rule also prohibits covered holding companies (but not their operating subsidiaries) from engaging in certain financial activities, such as short-term debt issuance and derivatives contracts with third parties, which would pose a substantial risk to financial stability if the holding company were to fail.
If a covered holding company were to fail and enter resolution under bankruptcy or under the Dodd-Frank Act's Orderly Liquidation Authority, its unsecured, long-term debt could be converted into equity to recapitalize the firm's critical operations. The TLAC final rule would particularly improve a G-SIB's resolvability under a "single-point-of-entry" strategy, pursuant to which the failed firm's recapitalized subsidiaries would continue to operate normally--limiting disruption to the financial system--while only the top-tier holding company would enter a resolution proceeding. The TLAC final rule constitutes an important step forward in addressing the "too big to fail" problem by substantially reducing the harm a G-SIB's failure would do to U.S. financial stability.
The Federal Reserve, in collaboration with the FDIC, 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. In April 2016, the FDIC and the Board jointly determined that the 2015 resolution plans of five G-SIBs were not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, and issued notices of deficiencies detailing the actions needed by October 1, 2016, to avoid restrictions on activities. Simultaneously, the agencies issued a white paper, Resolution Plan Assessment Framework and Firm Determinations (2016), explaining the determinations and processes for reviewing the plans as well as new guidance for the July 2017 submissions of all firms (www.federalreserve.gov/newsevents/pressreleases/files/bcreg20160413a2.pdf and www.federalreserve.gov/newsevents/pressreleases/files/bcreg20160413a1.pdf). The guidance sets forth a number of key vulnerabilities in resolution (for example, capital, liquidity, governance mechanisms, operational continuity, legal entity rationalization and separability, and derivatives and trading activities), and each G-SIB is expected to satisfactorily address these vulnerabilities in its 2017 submission.
In December 2016, the agencies announced determinations on the October 2016 submissions (www.federalreserve.gov/newsevents/pressreleases/bcreg20161213a.htm). Four of the five firms were found to have adequately remediated deficiencies in their 2015 resolution plans, while the fifth is subject to restrictions on the growth of international and non-bank activities. This latter firm is expected to file a revised submission by March 31, 2017. The deadline for the next full plan submission for all eight G-SIBs is July 1, 2017.
Box 2. Easing Regulatory Burden for Community Banking Organizations
The Federal Reserve continually seeks to minimize regulatory burden for community banks. To accomplish this, the Federal Reserve tailors its regulations, guidance, and supervisory programs to an institution's asset size, risk profile, and complexity. Over the past year, the Federal Reserve took a number of steps to reduce burden on community banks and to advance a more efficient and effective supervisory program. Some of these actions were taken in the context of the decennial review required by the Economic Growth and Regulatory Paperwork Reduction Act of 1996 (EGRPRA). Key examples of burden reduction efforts undertaken in 2016 include
- Expanding the number of banks eligible for an 18-month examination cycle. The total asset threshold for banks that may qualify for an 18-month versus 12-month examination cycle was increased from $500 million to $1 billion. As a result, 82 percent of state member banks may now qualify for the longer examination cycle compared to 68 percent previously.
- Completing more examination work off-site. In response to banker concerns about the disruption caused by large examination teams at community banks, the Federal Reserve issued new examination procedures in April 2016 encouraging examiners to conduct a greater portion of their examination work off-site whenever possible, including review of a bank's loan files, which is typically the most labor-intensive portion of the examination.
- Making better use of off-site monitoring tools to tailor examination work. The Federal Reserve continued to improve the rigor and accuracy of its off-site analysis, resulting in more efficient on-site examinations and reducing the amount of time spent reviewing well-managed activities at community banks that present lower risks.
Reducing regulatory reporting requirements. A number of changes to regulatory filing require-ments sought to reduce the amount of financial data that community banks must report while preserving data needed by the Federal Reserve for safety and soundness purposes. For financial institutions with total assets of $1 billion or greater, the Federal Reserve, in conjunction with the other banking agencies represented on the Federal Financial Institutions Examination Council (FFIEC), made burden-reducing changes to the Call Report in 2016 by deleting a number of data items and increasing the reporting threshold for certain other items.For small, non-complex financial institutions with fewer than $1 billion in total assets, the Federal Reserve, in conjunction with the FFIEC, implemented a new streamlined Call Report effective for the March 31, 2017 report date with approximately 40 percent less data items than the existing Call Report. Approximately 90 percent of all institutions that are required to file the existing Call Report will qualify to file the streamlined Call Report as of the March 2017 report date. Moreover, the agencies continue to evaluate the burden associated with regulatory reports and are considering further reductions to the Call Report.
- Simplifying and streamlining regulations. The Federal Reserve is working independently and with the other federal banking agencies to address concerns about regulatory burden. For example, the agencies reviewed the burden associated with elements of regulatory capital regulations and are considering options to simplify capital requirements for community banks. Similarly, the agencies are reviewing the current thresholds for when an institution is required to obtain an appraisal and are considering options to adjust the appraisal requirements, including in rural markets, to reduce burden in a manner consistent with safety and soundness. Additional regulatory burden reduction efforts are underway for community banks as described in the EGRPRA report.
Box 3. Cybersecurity Guidance
Financial institutions consistently identify cybercrime as one of the top threats to the safety and soundness of their firms. In 2016, well publicized cyber incidents in the financial sector underscored the growing sophistication of cyber attackers and the importance of recognizing the highly interconnected nature of the sector in developing and implementing cyber resilience strategies.
It is against this backdrop that the Federal Reserve recognizes the risk that ineffective cybersecurity poses to individual firms, the financial sector, and financial stability more broadly. In 2016, the Federal Reserve worked independently and in collaboration with other agencies, public/private partnerships, and international authorities to strengthen risk-management practices and reduce cyber risk to the financial system.
Guidance on Cyber Resilience for Financial Market Infrastructures
In June 2016, the Committee on Payments and Market Infrastructures (CPMI) and the International Organization of Securities Commissions (IOSCO) published Guidance on Cyber Resilience for Financial Market Infrastructures (guidance), which supplements the risk-management expectations set out in the CPMI-IOSCO Principles for Financial Market Infrastructures. Although the guidance is not mandatory, financial market infrastructures (FMIs) supervised by the Board are expected to apply the guidance as they strive to meet established standards. The guidance calls for FMIs to immediately take necessary steps, in concert with relevant stakeholders, to improve their cyber resilience and develop concrete plans to improve their capabilities to meet resumption time objectives by mid-2017. The following are key messages in the guidance:
- An FMI's board and its senior management should proactively address cyber risks within the context of managing an FMI's enterprise wide risks.
- FMIs should be prepared for the eventuality of successful attacks, and make preparations to respond and recover key services safely and promptly-the resumption objective is within two hours of a disruption.
- Effective use of high-quality threat intelligence as well as a rigorous testing regime are critical for ensuring that an FMI's cyber resilience measures continue to be effective.
- FMIs should pursue strong collaboration with connected entities to achieve collective resilience.
Enhanced Cyber Risk Management Standards
The Federal Reserve, FDIC, and Office of the Comptroller of the Currency (OCC) in October 2016 released an advance notice of proposed rulemaking (ANPR) on enhanced cyber risk management standards to increase the cybersecurity resilience of the largest and most interconnected entities under the agencies' supervision. By targeting the firms and systems at which a cyber event could most likely impact other firms, the potential standards would increase the resiliency of the financial sector more broadly.
The proposed standards would apply to the activities of banking organizations with total assets of $50 billion or more, FMIs, and nonbank financial companies supervised by the Federal Reserve and their third-party service providers. A key aspect of the standards is that they are tiered. While the potential standards would apply broadly to all of the firms within scope, a subset of higher standards would apply to the sector-critical systems operated by those firms, such as systems supporting payment, clearing, and settlement operations.
The proposed standards would require covered firms to
- demonstrate effective, enterprise-wide cyber risk management and governance;
- continuously monitor and manage cyber risks within the risk appetite and tolerance levels approved by their boards of directors;
- establish and implement strategies for cyber resilience and business continuity in the event of a disruption;
- establish protocols for secure, trustworthy storage of critical records; and
- maintain continuing situational awareness of their operational status and cybersecurity posture on an enterprise-wide basis.
The potential standards for sector-critical systems include minimizing cyber risk by implementing the most effective, commercially-available controls and establishing a two-hour time objective to recover from a cyber event.
The Federal Reserve is the federal supervisor and regulator of all U.S. BHCs, including financial holding companies (FHCs), savings and loan holding companies (SLHCs), 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. Fur-thermore, through the Dodd-Frank Act, the Federal Reserve has been assigned responsibilities for nonbank financial firms and financial market utilities (FMUs) designated by the by the Financial Stability Oversight Council (FSOC) as systemically important.
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, 2012-16
|State member banks|
|Total assets (billions of dollars)||2,577||2,356||2,233||2,060||2,005|
|Number of examinations||663||698||723||745||769|
|By Federal Reserve System||406||392||438||459||487|
|By state banking agency||257||306||285||286||282|
|Top-tier bank holding companies|
|Large (assets of more than $1 billion)|
|Total assets (billions of dollars)||17,593||16,961||16,642||16,269||16,112|
|Number of inspections||659||709||738||716||712|
|By Federal Reserve System 1||646||669||706||695||691|
|By state banking agency||13||40||32||21||21|
|Small (assets of $1 billion or less)|
|Total assets (billions of dollars)||914||938||953||953||983|
|Number of inspections||2,597||2,783||2,824||3,131||3,329|
|By Federal Reserve System||2,525||2,709||2,737||2,962||3,150|
|By state banking agency||72||74||87||169||179|
|Financial holding companies|
1. For large bank holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews. Return to table
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 to 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 only 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). The LISCC coordinates the Federal Reserve's supervision of domestic bank holding companies and foreign banking organizations that pose elevated risk to U.S. financial stability as well as other nonbank financial institutions designated as systemically important by the FSOC.
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:
- 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.
- 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 or for validating the remediation of previously identified control weaknesses and similar concerns.
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 review.
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 supervisory exercise to evaluate capital adequacy, internal capital planning processes, and planned capital distributions simultaneously at all large and complex 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 BHC is required to demonstrate in its capital plan how it 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 the Federal Reserve to assess not just individual institutions, but also how a particular risk or combination of risks might affect the banking system as a whole under stressful conditions. The 2016 CCAR results are available at www.federalreserve.gov/newsevents/press/bcreg/bcreg20160629a1.pdf.
DFAST is a supervisory stress test conducted by the Federal Reserve to evaluate whether large BHCs 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 2016 DFAST results are available at www.federalreserve.gov/newsevents/press/bcreg/bcreg20160623a1.pdf.
State Member Banks
At the end of 2016, a total of 1,750 banks (excluding nondepository trust companies and private banks) were members of the Federal Reserve System, of which 829 were state chartered. Federal Reserve System member banks operated 55,301 branches, and accounted for 34 percent of all commercial banks in the United States and for 70 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 16 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 However, qualifying well-capitalized, well-managed state member banks with less than $1 billion in total assets are eligible for an 18-month examination cycle.5 The Federal Reserve conducted 406 examinations of state member banks in 2016.
Bank Holding Companies
At year-end 2016, a total of 4,614 U.S. BHCs were in operation, of which 4,115 were top-tier BHCs. These organizations controlled 4,373 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 FHCs, are built around a rating system introduced in 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 2016, the Federal Reserve conducted 646 inspections of large BHCs and 2,525 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 FHCs 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 2016, a total of 473 domestic BHCs and 42 foreign banking organizations had FHC status. Of the domestic FHCs, 25 had consolidated assets of $50 billion or more; 35, between $10 billion and $50 billion; 146, between $1 billion and $10 billion; and 267, less than $1 billion.
Savings and Loan Holding Companies
The Dodd-Frank Act transferred responsibility for supervision and regulation of SLHCs from the former Office of Thrift Supervision (OTS) to the to the Federal Reserve in July 2011. At year-end 2016, a total of 436 SLHCs were in operation, of which 238 were top tier SLHCs. These SLHCs control 243 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 $1.5 trillion of total combined assets. Approximately 90 percent of SLHCs engage primarily in depository activities. These firms hold approximately 16 percent ($256 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, 2012-16
|Top-tier savings and loan holding companies|
|Large (assets of more than $1 billion)1|
|Total assets (billions of dollars)||1,664||1,525||1,493||1,500||1,715|
|Number of inspections||54||58||83||72||82|
|By Federal Reserve System2||54||57||82||71||80|
|Small (assets of $1 billion or less)|
|Total assets (billions of dollars)||50||55||65||76||82|
|Number of inspections||181||187||212||258||229|
|By Federal Reserve System||181||187||212||258||229|
1. Excludes SIFI SLHCs (AIG and GE). Return to table
2. For large savings and loan holding companies subject to continuous, risk-focused supervision, includes multiple targeted reviews. Return to table
Several complex policy issues continue to be addressed by the Board, including those related to consolidated capital requirements for insurance SLHCs, issues pertaining to intermediate holding companies for commercial SLHCs, and the adoption of formal rating systems. A request for public comment on the adoption of the formal rating system for certain SLHCs was issued on December 9, 2016. The proposal would not apply the formal rating system to SLHCs engaged in significant insurance or commercial activities.
Savings and loan holding companies primarily engaged in insurance underwriting activities. The Federal Reserve supervises twelve non-SIFI insurance SLHCs (ISLHCs), with $1.015 trillion in estimated total combined assets, and $118 billion in thrift assets. Of the twelve, four firms have total assets greater than $50 billion, four firms have total assets between $10 billion and $50 billion, and four firms have total assets less than $10 billion. With the exception of one ISLHC, which owns a thrift subsidiary that comprises more than half of the firm's total assets, thrift subsidiary assets for most ISLHCs represent less than 25 percent of total assets. Since ISLHCs were transferred to the Federal Reserve from the former OTS in 2011, seventeen have deregistered as SLHCs.
As the consolidated supervisor of ISLHCs, the Federal Reserve evaluates the organization's risk-management practices, the financial condition of the overall organization, and the impact of the nonbank activities on the depository institution. The Federal Reserve focuses supervisory attention on legal entities and activities that are not directly supervised or regulated by state insurance regulators, including intercompany transactions between the depository institution and its affiliates. The Federal Reserve relies to the fullest extent possible on the work of state insurance regulators as part of the overall supervisory assessment of ISLHCs. The Federal Reserve has been active in engaging with the state departments of insurance and the National Association of Insurance Commissioners (NAIC) on general insurance supervision matters.
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 the Board's 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.8
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 as well as 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 Nonbank Financial Companies
Since 2013, the FSOC has designated four nonbank financial companies for supervision by the Board. These companies are General Electric Capital Corporation, Inc. (GECC)9 and three companies with significant insurance activities: American International Group, Inc.; Prudential Financial, Inc.; and MetLife, Inc.10
The Federal Reserve's supervisory approach for designated companies is 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 June 2016, the Board issued an advance notice of proposed rulemaking (ANPR) inviting comment on conceptual frameworks for capital standards that could apply to companies with significant insurance activities. The Board also issued a proposed rule to apply enhanced prudential standards relating to corporate governance, risk-management, and liquidity risk-management standards to such companies. 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.
The Federal Reserve supervises the foreign branches and overseas investments of state 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 2016, a total of 33 member banks were operating 404 branches in foreign countries and overseas areas of the United States; 18 national banks were operating 354 of these branches, and 15 state member banks were operating the remaining 50. In addition, 7 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 2016, out of 42 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 2016, a total of 148 foreign banks from 48 countries operated 174 state-licensed branches and agencies, of which 6 were insured by the 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 45 U.S. commercial banks. Altogether, the U.S. offices of these foreign banks controlled approximately 20 percent of U.S. commercial banking assets. These 148 foreign banks also operated 87 representative offices; an additional 42 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.11 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 647 examinations of foreign banks in 2016.
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 Supervision and Regulation (S&R), but consumer compliance supervision is conducted under the oversight of the Division of Consumer and Community Affairs (DCCA).12 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.
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.13
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 2016, 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 2016, the Federal Reserve contributed to updates to the FFIEC Information Technology Examination Handbook, which provides guidance to examiners, financial institutions, and technology service providers. The revised Information Security booklet addresses the factors necessary to assess the level of security risks to a financial institution's information systems. The booklet describes effective information security program management and provides an overview of information security operations. Some of these operations include the need for effective threat identification, assessment, and monitoring as well as incident identification, assessment, and response. In addition, the Retail Payment Systems booklet was updated with the addition of a new appendix on Mobile Financial Services. The appendix focuses on the unique risks associated with mobile financial services and emphasizes an enterprise-wide risk-management approach to effectively manage and mitigate those risks.
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 compliance risk exposures; the quality and level of earnings; the management of fiduciary assets; and audit and control procedures. In 2016, Federal Reserve examiners conducted 103 fiduciary examinations--excluding transfer agent examinations--of state member banks.
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 2016, the Federal Reserve conducted transfer agent examinations at five 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 2016, the Federal Reserve conducted five 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 2016.
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 the Board's Regulation U. 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 mitigation. In 2016, Federal Reserve examiners continued to conduct targeted cybersecurity assessments of the largest, most systemically important financial institutions, FMUs, and technology service providers. The Federal Reserve also implemented a new risk-focused information technology examination program that enhances the identification and assessment of technology and cybersecurity risks, as described below.
In October 2016, the Federal Reserve Board, FDIC, and OCC issued an ANPR and invited comment on a set of potential enhanced cybersecurity risk-management and resilience standards. The standards would apply to depository institutions and depository institution holding companies with total consolidated assets of $50 billion or more, the U.S. operations of foreign banking organizations with total U.S. assets of $50 billion or more, and financial market infrastructure companies and nonbank financial companies supervised by the Board. The standards would also apply to the services provided to these firms by third parties. The ANPR is available at www.federalregister.gov/documents/2016/10/26/2016-25871/enhanced-cyber-risk-management-standards.
The Federal Reserve is an active participant in the Group of Seven (G7) initiatives on cyber resilience. In 2016, the Federal Reserve played a leadership role in the development of cyber resilience guidance for FMIs by the Committee on Payments and Market Infrastructures (CPMI) and International Organization of Securities Commissions (IOSCO). The CPMI-IOSCO Guidance on Cyber Resilience for FMIs outlines an expectation that FMIs must be prepared for the eventuality of successful attacks and make preparations to respond and recover critical services safely and promptly. The Federal Reserve also participated in a G7 initiative to identify a core set of cyber resilience measures expected across the global financial sector, which led to the publication of the G7 Fundamental Elements of Cybersecurity for the Financial Sector. The publication identifies eight key elements as the building blocks upon which an entity can design and implement its cybersecurity strategy and operating framework: 1) cybersecurity strategy and framework, 2) governance, 3) risk and control assessment, 4) monitoring, 5) response, 6) recovery, 7) information sharing, and 8) continuous learning. (See box 3 on cyber guidance.)
The Federal Reserve, FDIC, and state banking agencies collaborated to develop the Information Technology Risk Examination program (InTREx). In general, InTREx applies to state member and non-member banks with less than $50 billion in total assets. The Federal Reserve also applies InTREx to foreign banking organizations' U.S. branches and agencies with less than $50 billion in assets, as well as certain bank holding companies and savings and loan holding companies with less than $50 billion in total consolidated assets. InTREx provides supervisory staff with risk-focused and efficient examination procedures for conducting information technology reviews and assessing information technology and cybersecurity risks at supervised institutions.
The Federal Reserve continued to contribute to interagency groups such as the Financial and Banking Information Infrastructure Committee (FBIIC), 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. Through participation in the FBIIC, the Federal Reserve collaborated with the U.S. Treasury to plan and execute several financial services sector-wide tabletop exercises in 2016. The exercises focused on strategic, operational, financial stability, and tactical considerations that tested both government and private sector processes and capabilities for addressing cyber incidents across the financial services sector. In light of the findings from the 2016 exercises, the FBIIC formed new initiatives with Federal Reserve participation to strengthen cooperation and information sharing among sector-specific agencies and private-sector financial firms.
The Federal Reserve also contributed to FFIEC cybersecurity and critical infrastructure efforts, including a joint statement highlighting the threat of cyber attacks targeting interbank messaging and wholesale payment functions at institutions. The joint statement stressed that financial institutions should review risk-management practices and controls related to information technology systems and wholesale payment networks, including risk assessment; authentication, authorization, and access controls; monitoring and mitigation; fraud detection; and incident response. This statement and other resources are available on the FFIEC cybersecurity awareness website, which is a central repository for FFIEC-related materials on cybersecurity (www.ffiec.gov/cybersecurity.htm).
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.14 In 2016, the Federal Reserve completed 72 formal enforcement actions. Civil money penalties totaling $257,263,485 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/search.aspx).
In 2016, the Reserve Banks completed 94 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 2016, 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 2016, the Federal Reserve continued to provide training and 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 the benefit of foreign supervisory authorities, which were held both in the United States and in many foreign jurisdictions. Federal Reserve staff 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 provided under the Asia-Pacific Economic Cooperation Financial Regulators Training Initiative. Other training partners that collaborated with the Federal Reserve during 2016 to organize regional training programs included The South East Asian Central Banks Research and Training Centre, the Caribbean Group of Banking Supervisors, the Banque de France, and the Central Bank of the United Arab Emirates.
Additionally, 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 North and South America and the Caribbean. The Federal Reserve contributes significantly to ASBA's organizational management and to its training and technical assistance activities. ASBA, which is headquartered in Mexico, coordinates training programs throughout the region while promoting communication and cooperation among its members.
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 Federal Reserve Districts, along with staff from the S&R and DCCA divisions at 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 2016, the Federal Reserve's MDI portfolio included 16 state member banks.
Throughout 2016, the Federal Reserve System continued to support MDIs through the following activities:
- Co-organized the biannual Interagency Minority Depository Institutions and Community Development Financial Institutions (CDFI) Bank Conference to take place April 5-6, 2017 in Los Angeles, California. PFP staff at the Board of Governors and Reserve Banks will co-host this conference with staff from the OCC and FDIC. The theme is "Expanding the Impact: Increasing Capacity & Influence," and attendance is expected to be over 175 people, most of whom will be MDI bank leadership;
- Formalized and implemented a partnership between the Board's DCCA and S&R divisions to share management of the PFP program and diversify the resources and programing available to MDIs. The Federal Reserve System also worked to encourage partnership between examiner and community development staff at the Federal Reserve Banks to bring additional resources to MDIs around the country;
- Participated in the annual National Bankers Association (NBA) convention by hosting an exhibit table and speaking on a regulators panel;
- Provided technical assistance to MDIs on a wide variety of topics, including improving regulatory ratings, navigating the regulatory applications process, understanding changes to the Community Reinvestment Act, and refining capital-planning practices;
- Conducted outreach efforts through an internal teleconference session in October 2016 to educate Federal Reserve examiners and community development staff on the PFP program and related supervisory topics;
- Participated in an interagency task force to consider and address supervisory challenges facing MDIs;
- Facilitated in-person meetings between Federal Reserve and MDI leaders to better understand the challenges and opportunities facing Federal Reserve-regulated MDIs; and
- Commissioned research on MDIs that will be presented in 2017.
Throughout 2016, 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, Reserve Bank program representatives continued to collaborate with community leaders, trade groups, the CDFI Fund, and other organizations to seek support for MDIs.
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 (FSB), the CPMI, and the International Association of Insurance Supervisors (IAIS).
Consistent with the Federal Reserve's risk-focused approach to supervision and as provided 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 2016.
- In March, the Board re-proposed a rule that would address the risk associated with excessive credit exposures of large banking organizations to a single counterparty. As demonstrated during the financial crisis, large credit exposures, particularly between financial institutions, can spread financial distress and undermine financial stability. The proposal would apply single-counterparty credit limits to bank holding companies with total consolidated assets of $50 billion or more and to certain foreign banks operating in the United States. The proposed limits are tailored to increase in stringency as the systemic footprint of a firm increases. The proposed rule would implement part of the Dodd-Frank Act and promote global consistency by generally reflecting the international large exposures framework released by the BCBS in 2014. The proposal is available at www.gpo.gov/fdsys/pkg/FR-2016-03-16/pdf/2016-05386.pdf. The Board also released a white paper associated with the proposal, available at www.gpo.gov/fdsys/pkg/FR-2016-03-16/pdf/2016-05386.pdf.
- In June, the Board approved an ANPR inviting comment on two tailored conceptual frameworks for capital standards that could apply to insurance companies. The ANPR contemplates that for nonbank financial companies that have significant insurance activities (systemically important insurance companies), which have been designated by the FSOC for supervision by the Board, the Board would determine minimum capital requirements at a consolidated level. For insurance companies that own a bank or thrift, the Board would aggregate capital resources and requirements for each legal entity as computed under existing regulatory requirements, with some adjustments to determine a combined, group-level requirement. The approaches described in the ANPR reflect differences between insurance companies and banks, and would use insurance-focused risk weights and formulas. The ANPR is available at www.gpo.gov/fdsys/pkg/FR-2016-06-14/pdf/2016-14004.pdf.
- In June, the Board proposed a rule that would apply enhanced prudential standards relating to liquidity, corporate governance, and risk-management standards to systemically important insurance companies. These firms would also be required to conduct periodic liquidity stress testing and hold a buffer of highly liquid assets sufficient to meet 90 days of stressed cash-flow needs. The proposal is available at www.gpo.gov/fdsys/pkg/FR-2016-06-14/pdf/2016-14005.pdf.
- In September, the Board proposed a rule to modify its capital plan and stress testing rules for the 2017 capital planning cycle.15 Among other changes, the proposal would effectively remove large and noncomplex firms from the qualitative component of the Federal Reserve's CCAR assessment. The proposed rule would define large and noncomplex firms as firms with total consolidated assets between $50 billion and $250 billion, on-balance sheet foreign exposure of less than $10 billion, and total consolidated nonbank assets of less than $75 billion. These firms would continue to be subject to the quantitative requirements of CCAR as well as normal supervision by the Federal Reserve regarding their capital planning. The proposed rule would also reduce certain reporting requirements for these firms. The proposal is available at www.gpo.gov/fdsys/pkg/FR-2016-09-30/pdf/2016-23629.pdf.
- In December, the Board issued a final rule that is designed to strengthen the ability of government authorities to resolve in an orderly way the largest domestic and foreign banks operating in the United States without support from taxpayer-provided capital. The final rule applies to domestic firms identified by the Board as G-SIBs and to the U.S. operations of foreign G-SIBs, requiring these firms to meet a new long-term debt requirement and a new TLAC requirement. The final rule bolsters financial stability by improving the ability of banking organizations covered by the rule to withstand financial stress and failure without imposing losses on taxpayers. The final rule also requires the parent holding company of a domestic G-SIB to avoid entering into certain financial arrangements that would create obstacles to an orderly resolution. The final rule is available at www.federalreserve.gov/newsevents/press/bcreg/bcreg20161215a1.pdf.
- In December, the Board finalized technical amendments to the rule that identifies G-SIBs and requires such firms to hold additional amounts of risk-based capital to avoid restrictions on capital distributions and discretionary bonus payments. The changes do not materially alter the underlying rule approved by the Board in July 2015. The final rule is available at www.federalreserve.gov/newsevents/press/bcreg/bcreg20161209b2.pdf. The Board also invited comment on an interim final rule extending the initial implementation of certain reporting requirements related to the G-SIB rule for firms that have $50 billion or more in total consolidated assets and are not currently identified as G-SIBs in order to align these requirements with other reporting requirements. The interim final rule is available at www.federalreserve.gov/newsevents/press/bcreg/bcreg20161209b1.pdf.
In 2016, the Board issued several other rulemakings and guidance documents related to liquidity and regulatory capital, as listed below.
- In April, the Board finalized a rule to include certain U.S. general obligation state and municipal securities in the range of assets that large banking organizations may use to satisfy regulatory requirements designed to ensure that these banking organizations have the capacity to meet their liquidity needs during a period of financial stress. The liquidity coverage ratio (LCR) requirement adopted by the federal banking agencies in September 2014 requires large banking organizations to hold a minimum amount of high-quality liquid assets (HQLA) that can be readily converted into cash during a 30-day period of financial stress. While the LCR requirement did not initially include U.S. municipal securities as HQLA, subsequent analysis by the Federal Reserve suggested that certain U.S. municipal securities should qualify as HQLA because they have liquidity characteristics similar to other HQLA classes, such as corporate debt securities. The final rule allows investment-grade, U.S. general obligation state and municipal securities to be counted as HQLA up to certain levels if they meet the same liquidity criteria that currently apply to corporate debt securities. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2016-04-11/pdf/2016-07716.pdf.
- In May, the federal banking agencies proposed a net stable funding ratio rule to strengthen the resilience of large banking organizations by requiring them to maintain a minimum level of stable funding relative to the liquidity of their assets, derivatives, and commitments over a one-year period. The proposal is designed to reduce the likelihood that disruptions to a banking organization's sources of funding will compromise its liquidity position. The proposal would require institutions subject to the rule to maintain sufficient levels of stable funding, thereby reducing liquidity risk in the banking system. By requiring firms to have more stable funding profiles, the proposal would also enhance financial stability. The proposal is available at www.federalreserve.gov/newsevents/press/bcreg/bcreg20160503a1.pdf.
- In September, the Board proposed a rule that would strengthen existing requirements and limitations on the physical commodity activities of FHCs. The proposal would help reduce the catastrophic, legal, reputational, and financial risks that physical commodity activities pose to FHCs. Specifically, the proposal would require firms to hold additional capital in connection with activities involving physical commodities for which existing laws would impose liability for such commodities' unauthorized release into the environment. In addition, the proposal would rescind authorizations that permit FHCs to engage in energy tolling and energy management activities and establish new public reporting requirements. The proposal is available at www.gpo.gov/fdsys/pkg/FR-2016-09-30/pdf/2016-23349.pdf.
- In October, the Board voted to affirm the countercyclical capital buffer in the United States at its current level of 0 percent. The Board made this determination in accordance with the Board's policy statement adopted in September 2016 for setting the countercyclical capital buffer for private-sector credit exposures located in the United States. The countercyclical capital buffer is a macroprudential tool that can be used to increase the resilience of the financial system by raising capital requirements on internationally active banking organizations when there is an elevated risk of above-normal future losses and when the banking organizations for which capital requirements would be raised by the buffer are exposed to or are contributing to this elevated risk--either directly or indirectly. The Board consulted with the FDIC and the OCC in making this determination. The Board's announcement on the countercyclical capital buffer is available at www.federalreserve.gov/newsevents/press/bcreg/20161024a.htm and the final policy statement is available at www.gpo.gov/fdsys/pkg/FR-2016-02-03/pdf/2016-01934.pdf.
- In December, the Board issued a final rule requiring large banking organizations to disclose publicly certain quantitative liquidity risk metrics. The disclosures will provide market participants and the public with reliable and timely information for evaluating the financial strength and resiliency of the nation's largest banking organizations. The final rule requires large banking organizations to disclose their consolidated LCRs each quarter based on averages over the prior quarter as well as several other LCR-related metrics. Compliance dates would range from April 2017 through October 2018. The final rule is available at www.federalreserve.gov/newsevents/press/bcreg/bcreg20161219a1.pdf.
International Coordination on Supervisory Policies
As a member of several international financial standard-setting bodies, the Federal Reserve actively participates in efforts to advance sound supervisory policies for internationally active financial organizations and to enhance the strength and stability of the international financial system. By participating in the development of international regulatory standards, the Federal Reserve can influence these standards in ways to promote the financial stability of the United States and the competitiveness of U.S. firms.
Basel Committee on Banking Supervision
During 2016, 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 2016.
- Fundamental review of the trading book - Minimum capital requirements for market risk (issued in January and available at www.bis.org/bcbs/publ/d352.pdf).
- Frequently asked questions on the Basel III leverage ratio framework (issued in April and available at www.bis.org/bcbs/publ/d365.pdf).
- Interest rate risk in the banking book (issued in April and available at www.bis.org/bcbs/publ/d368.pdf).
- Revisions to the securitisation framework (issued in July and available at www.bis.org/bcbs/publ/d374.pdf).
- Basel III- The Net Stable Funding Ratio: frequently asked questions (issued in July and available at www.bis.org/bcbs/publ/d375.pdf).
- Frequently asked questions on the revised Pillar 3 disclosure requirements (issued in August and available at www.bis.org/bcbs/publ/d376.pdf).
- Frequently asked questions on the supervisory framework for measuring and controlling large exposures (issued in September and available at www.bis.org/bcbs/publ/d384.pdf)
- TLAC holdings standard (issued in October and available at www.bis.org/bcbs/publ/d387.pdf).
- Standardised Measurement Approach for operational risk (issued in March and available at
- Pillar 3 disclosure requirements - consolidated and enhanced framework (issued in March and available at www.bis.org/bcbs/publ/d356.htm).
- Reducing variation in credit risk-weighted assets - constraints on the use of internal model approaches (issued in March and available at www.bis.org/bcbs/publ/d362.htm).
- Prudential treatment of problem assets - definitions of non-performing exposures and forbearance (issued in April and available at www.bis.org/bcbs/publ/d367.pdf).
- Revisions to the Basel III leverage ratio framework (issued in April and available at www.bis.org/bcbs/publ/d365.htm).
- Regulatory treatment of accounting provisions - discussion document (issued in October and available at www.bis.org/bcbs/publ/d385.pdf).
- Regulatory treatment of accounting provisions - interim approach and transitional arrangements (issued in October and available at www.bis.org/bcbs/publ/d386.htm).
Financial Stability Board
In 2016, the Federal Reserve continued its participation in the activities of the FSB, 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. Several key publications are listed below.
- Proposed Policy Recommendations to Address Structural Vulnerabilities from Asset Management Activities (issued in June and available at www.fsb.org/wp-content/uploads/FSB-Asset-Management-Consultative-Document.pdf).
- Guiding principles on the temporary funding needed to support the orderly resolution of a global systemically important bank ("G-SIB") (issued in August and available at www.fsb.org/wp-content/uploads/Guiding-principles-on-the-temporary-funding-needed-to-support-the-orderly-resolution-of-a-global-systemically-important-bank-"G-SIB".pdf).
- Guiding Principles on the Internal Total Loss-absorbing Capacity of G-SIBs ("Internal TLAC") (issued in December and available at www.fsb.org/wp-content/uploads/Guiding-Principles-on-the-Internal-Total-Loss-absorbing-Capacity-of-G-SIBs.pdf).
Committee on Payments and Market Infrastructures
In 2016, the Federal Reserve continued its active participation in the activities of the CPMI, a forum in which central banks promote the safety and efficiency of payment, clearing, settlement, and related arrangements. In conducting its work on financial market infrastructures and market-related reforms, the CPMI often coordinates with IOSCO. Over the course of 2016, CPMI-IOSCO continued to monitor implementation of the Principles for financial market infrastructures published in 2012 and produce further guidance on these principles in order to enhance the resilience of central counterparties. In addition, the CPMI-IOSCO advanced work on the harmonization of data elements reported to trade repositories. The CPMI and CPMI-IOSCO issued several final and consultative reports as well as research reports in 2016. Additional information is available at
International Association of Insurance Supervisors
The Federal Reserve continued its participation in 2016 in the development of international supervisory standards and guidance to ensure that they best meet the needs of the U.S. insurance market. The Federal Reserve continues to participate actively in standard setting at the IAIS in consultation and collaboration with state insurance regulators, the NAIC, and the Federal Insurance Office to present a coordinated U.S. voice in these processes. The Federal Reserve's participation focuses on those aspects most relevant to the supervision of FSOC-designated insurance firms and in research and analysis related to financial stability topics.
The IAIS issued several final and consultative reports as well as research reports in 2016. Additional information is available at www.iaisweb.org.
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.
The Financial Accounting Standards Board (FASB) issued a new expected credit losses standard (Accounting Standards Update (ASU) 2016-13, Financial Instruments--Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments), commonly referred to as the current expected credit losses (CECL) methodology, in June 2016.16 The new accounting standard introduced a single measurement objective to be applied to all financial assets carried at amortized cost, including held-for-investment loans and held-to-maturity debt securities. During 2016, the Federal Reserve together with the other federal banking agencies spent significant time monitoring developments and providing comments on significant interpretations and potential changes in the proposed standard as members of the FASB's Transition Resource Group and through other routine discussions with standard setters, as described above.
In addition to monitoring developments and the implementation of the new accounting standard on credit losses, 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, revenue recognition, accounting for incentive compensation, and external and internal audit processes.
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 publications on the regulatory treatment of expected credit losses in light of pending changes to accounting standards. 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 2016, 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
- participated in a banking supervision interagency steering committee established by the federal banking agencies. This steering committee is focused on CECL and has developed an overall project plan for the implementation period and has begun issuing interagency frequently asked questions to aid in the implementation of CECL. The day after the FASB issued the new accounting standard on credit losses in June, the federal banking agencies and the NCUA issued the "Joint Statement on the New Accounting Standard on Financial Instruments--Credit Losses" that provides initial supervisory views regarding the implementation of the new accounting standard (the Federal Reserve issued this as SR letter 16-12, "Interagency Guidance on the New Accounting Standard on Financial Instruments--Credit Losses," which is available at www.federalreserve.gov/bankinforeg/srletters/sr1612.htm). In December, the federal banking agencies and the NCUA also issued a supervisory guidance statement, published by the Federal Reserve as SR letter 16-19, "Frequently Asked Questions on the Current Expected Credit Losses Methodology (CECL)," to further aid institutions in their implementation of CECL. The guidance is available at www.federalreserve.gov/bankinforeg/srletters/sr1619.htm;
- 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 regulatory capital-related issues.
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
The Shared National Credit (SNC) program is a key supervisory program employed by the Federal Reserve and the other federal banking agencies to ensure the safety and soundness of the financial system. SNC is a long-standing program used to assess credit risk and trends as well as underwriting and risk-management practices associated with the largest and most complex loans shared by multiple regulated financial institutions. After four decades of annual reviews, in 2016 the federal banking agencies transitioned to twice-annual SNC examinations to increase the ability to react to changing market conditions and to increase the frequency of feedback to institutions on supervisory assessments.
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 2016 SNC review was prepared in the first quarter of 2016 using data as of September 30, 2015. The 2016 SNC portfolio totaled $4.1 trillion, with 10,837 credit facilities to 6,676 borrowers.
The SNC examination found that the volume of non-pass criticized assets increased 11.5 percent to $421.4 billion. As a percentage of total commitments, the overall criticized asset rate remained elevated at 10.3 percent. The level of adversely rated assets in the SNC portfolio continued to be higher than observed in previous periods of economic expansion, such that losses could rise considerably in the event of an economic downturn. The level of credit risk stemmed from a large share of leveraged finance loans underwritten based on weak practices, and the significant decline in oil prices since mid-2014 that reduced the repayment capacity of obligors in the oil and gas sector. The agencies noted improved underwriting and risk-management practices related to the most recent leveraged loan originations in 2015 as underwriters continued to better align practices with regulatory expectations, and as investor risk appetite moderated away from transactions at the lower end of the credit spectrum.
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 (FAQs) documents. The 2016 SNC reviews found the incidence of non-pass loan originations was low.
The review noted that banks had made continued progress in aligning their underwriting and risk-management practices with expectations set forth in the 2013 leveraged lending guidance and FAQs. However, some gaps between industry practices and supervisory expectations for safe and sound banking remained, which require continued supervisory attention. Examiners again raised concerns about borrowers' capacity to repay certain new originations--both underwritten and refinanced loans--if economic conditions deteriorated, or if interest rates rose to historical norms. Any downturn in the economy could result in a significant increase in the already considerable adversely-rated, leveraged lending exposures, especially considering the limited financial flexibility present in many of the credits that were not currently adversely rated.
The severe and prolonged decline in energy prices since 2014 caused financial stress to many energy companies, particularly non-investment grade and unrated exploration and production (E&P) and energy service companies. Increasing credit risk from reduced revenue was exacerbated by the high leverage of some E&P companies, primarily resulting from debt-funded acquisitions during recent drilling expansion activity, and corresponding reductions in liquidity. The low commodity price environment and declining hedging programs of many companies caused reductions in operating cash flow and lower valuations of reserve assets used to secure financing for further development. Many energy companies responded by taking actions to reduce operating costs and overhead, while preserving liquidity through asset sales, issuance of additional debt and equity instruments, and drawing on remaining senior bank commitments.
Generally, banks were found to have shown flexibility in working with borrowers by relaxing financial covenants to allow borrowers time to develop strategies to curtail borrowing base over-advances, reduce leverage, and reestablish profitable operations. Nonetheless, the reductions in liquidity and unsustainable debt burdens from excessive accumulation of second lien and unsecured debt resulted in a significant increase in borrower defaults and bankruptcy filings. Bank commitments to these borrowers were primarily in a senior secured position with the lowest risk of loss.
For more information on the 2016 SNC review, visit the Board's website at www.federalreserve.gov/newsevents/press/bcreg/20160729a.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 2016, 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 a host of Treasury-led private/public sector dialogues with financial institutions, regulators, and supervisors from Mexico, the United Kingdom, Central America, and the Gulf States, to name a few. These dialogues are designed to promote information sharing and understanding of BSA/AML issues 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 Kyrgyzstan, Belize, the Marshall Islands, Jamaica, St. Maarten, and Curaçao, primarily regarding foreign correspondent banking.
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 the Federal Reserve continued to chair the working group throughout 2016. 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 2016, the Federal Reserve 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. Throughout 2016, the Federal Reserve also participated in extensive collaboration with the federal banking and other agencies in order to develop a coordinated U.S. government response for the 2016 FATF mutual evaluation of the United States. The FATF mutual evaluation assessed the U.S. AML and counter-terrorist financing framework against the FATF recommendations and included 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 and counter-terrorism financing issues as well as the CPMI. With respect to the AML Experts Group, the Federal Reserve contributed to developing the annex to the General Guide to Account Opening, issued by the BCBS in February 2016, which supplements previous guidance on the sound management of risks related to money laundering and financing of terrorism. In addition, the Federal Reserve participated in developing a consultative document on foreign correspondent banking issued in November 2016, which is another annex to the same sound management of risks guidance referred to above. In addition, the Federal Reserve participated in drafting a report on Correspondent Banking issued in July 2016 by the CPMI Correspondent Banking Working Group. The report made recommendations which could potentially alleviate some of the costs and concerns associated with the reduction of foreign correspondent banking services.
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.17 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 Federal Reserve Board, OCC, FDIC, SEC, NCUA, and Federal Housing Finance Agency to prohibit incentive-based arrangements which the agencies determine to encourage inappropriate risks by covered institutions. The agencies published a notice of proposed rulemaking in the Federal Register on June 10, 2016, and are continuing to consider the comments received. Additionally, through ongoing supervision, the Federal Reserve continues to help improve incentive compensation practices at the largest firms.
Other Policymaking Initiatives
- In March, the federal banking agencies issued SR letter 16-3, "Interagency Guidance on Funds Transfer Pricing Related to Funding and Contingent Liquidity Risks," which seeks to address weaknesses observed in large financial institutions' funds transfer pricing practices related to funding risk (including interest rate and liquidity components) and contingent liquidity risk. The guidance builds on the principles of sound liquidity risk management described in previous supervisory guidance letters and it applies to large financial institutions that are domestic BHCs, SLHCs, and state member banks with consolidated assets of $250 billion or more or foreign exposure of $10 billion or more, and to the U.S. operations of foreign banking organizations with combined U.S. assets of $250 billion or more. The guidance is available at www.federalreserve.gov/bankinforeg/srletters/sr1603.htm.
- In March, the Board issued SR letter 16-4, "Relying on the Work of the Regulators of the Subsidiary Insured Depository Institution(s) of Bank Holding Companies and Savings and Loan Holding Companies with Total Consolidated Assets of Less than $50 Billion," which explains the Board's expectations for its examiners' reliance on the work of the regulators of insured depository institution subsidiaries in the supervision of BHCs and SLHCs. The letter presents separate tailored supervisory approaches for community banking organizations, which are defined as companies with total consolidated assets of $10 billion or less, and for regional banking organizations, which are defined as companies with total consolidated assets between $10 billion and $50 billion. The guidance is available at www.federalreserve.gov/bankinforeg/srletters/sr1604.htm.
- In December, the Board issued SR letter 16-18, "Procedures for a Banking Entity to Request an Extended Transition Period for Illiquid Funds," which provides guidance on how banking entities may seek an extension to conform their investments in a narrow class of funds that qualify as "illiquid funds" to the requirements of section 619 of the Dodd-Frank Act, commonly known as the Volcker rule. In particular, the supervisory guidance provides banking entities with information on the procedures for submitting a request for an extended transition period to conform investments in a limited class of hedge funds and private equity funds (covered funds) that qualify as an illiquid fund pursuant to section 13 of the Bank Holding Company Act of 1956. The supervisory guidance is available at www.federalreserve.gov/bankinforeg/srletters/sr1618.htm.
- In December, the federal banking agencies finalized an interim final rule issued in February that increases the number of small banks and savings associations eligible for an 18-month examination cycle rather than a 12-month cycle. The final rule is intended to reduce regulatory compliance costs for smaller institutions, while maintaining safety and soundness protections. Under the final rule, qualifying well-capitalized and well-managed banks and savings associations with less than $1 billion in total assets are eligible for an 18-month examination cycle. Previously, only firms with less than $500 million in total assets were eligible for the extended examination cycle. Qualifying well-capitalized and well-managed U.S. branches and agencies of foreign banks with less than $1 billion in total assets are also eligible. The final rule increases the number of institutions that may qualify for an 18-month examination cycle by more than 600 to approximately 4,800 banks and savings associations. In addition, the final rule increases the number of U.S. branches and agencies of foreign banks that may qualify for an 18-month examination cycle by 30 branches and agencies to a total of 89. The final rule is available at www.gpo.gov/fdsys/pkg/FR-2016-12-16/pdf/2016-30133.pdf. The Board also issued a supervisory guidance statement providing updates on the expanded examination cycle of 18 months for certain state member banks and U.S. branches and agencies of foreign banking organizations, which was subsequently updated in January 2017.
The Federal Reserve's data collections, reporting, and governance 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.18 This information is essential to formulating and conducting financial institution 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 2016, the following reporting forms were revised:
FR Y-9C--to direct institutions using the advanced risk-based capital adequacy standards to report the supplementary leverage ratio (SLR) and implement a number of revisions, most of which were consistent with changes to the FFIEC Consolidated Reports of Condition and Income (Call Reports) (FFIEC 031 & 041; OMB No. 7100-0036). The FR Y-9C was revised (effective September 2016 and March 2017) to
- delete certain existing data items pertaining to troubled debt restructurings, FDIC loss share agreements and unused commitments to asset-backed commercial paper conduits;
- increase existing reporting thresholds for certain data items;
- add one new threshold for reinsurance recoverables; and
- eliminate the concept of extraordinary items and revise affected data items.
- FR Y-6, FR Y-7, and FR Y-10--to modify the confidentiality questions on the reporting forms and instructions, require foreign banking organizations to report their interest in an IHC on the FR Y-7 organization chart, expand the FR Y-10 reporting form and instructions to include IHC reporting guidance in the instructions, provide the option of electronically submitting the FR Y-6, and clarify several items in the FR Y-6, FR Y-7, and FR Y-10 reporting instructions.
- FR Y-7Q--to collect 12 new data items to monitor compliance with enhanced prudential standards for foreign banking organizations adopted pursuant to Subparts N and O of Regulation YY. The new data items allow the Federal Reserve to determine whether a foreign banking organizations with total consolidated assets of $50 billion or more meets capital adequacy standards at the consolidated level that are consistent with the Basel Capital Framework, as defined in Regulation YY.
- FR Y-14--to add a phased-in requirement for LISCC BHC respondents to attest to the material correctness and conformance to instructions of, and internal controls around, the data reported on the FR Y-14A/Q/M (effective beginning December 31, 2016) and add a similar phased-in attestation requirement for LISCC IHCs (effective beginning December 31, 2017). Also, the Federal Reserve modified other elements of the report schedules to improve consistency of reported data across firms, address industry concerns, and improve supervisory modeling.
- FR Y-15--to extend the amount of time that certain firms have to complete Schedule G, which captures short-term wholesale funding (effective December 31, 2016). The Federal Reserve also increased the reporting frequency from annual to quarterly (effective June 30, 2016). The Federal Reserve uses the data to monitor the systemic risk profile of the institutions which are subject to enhanced prudential standards under section 165 of the Dodd-Frank Act.
- Form TA-1--to require respondents to submit the forms and attachments to a designated Federal Reserve Board e-mail address, make instructional clarifications, and reduce the number of copies registrants are required to file with the Federal Reserve Board.
Also during 2016, the Federal Reserve implemented reporting requirements for U.S. IHCs to require designated IHCs to file regulatory reports applicable to holding companies, and comply with the information collection requirements associated with regulatory capital requirements beginning in 2016.19 In addition, separate final notices were published for IHCs to begin filing several FFIEC reporting forms in 2016.20 The information collected on these reports provides the Board with information regarding the financial condition of the IHC, foreign and domestic legal entities, and intercompany transactions between legal entities. In addition, the Federal Reserve required an IHC to provide U.S. financial information in support of the Federal Reserve's supervisory programs, including its capital assessment and stress testing programs.
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 financial institutions to submit various uniform regulatory reports. This information is essential to formulating and conducting supervision and regulation and for the ongoing assessment of the overall soundness of the nation's financial system. During 2016, the following FFIEC reporting forms were implemented or revised.
- FFIEC 101 was revised to include the addition of two new tables to collect information related to the SLR disclosures required in section 173 of the agencies' advanced approaches risk-based capital rule and to generally align with the international leverage ratio common disclosure template adopted by the BCBS. The two new SLR tables ensure transparency and comparability of reporting of regulatory capital elements among internationally active banking organizations. The FFIEC 101 was also revised to collect the Legal Entity Identifier (LEI) if the organization already has a currently valid LEI.
- FFIEC 102, FFIEC 009, and FFIEC 009a were revised to collect the LEI if the organization already has a currently valid LEI.
FFIEC 031 and FFIEC 041 (Call Reports) were revised effective September 30, 2016, to
- delete certain existing data items pertaining to troubled debt restructurings and unused commitments to asset-backed commercial paper conduits;
- increase existing reporting thresholds for certain data items;
- add contact information for the reporting institution's chief executive officer;
- report the LEI for the reporting institution (if the institution already has a currently valid LEI);
- eliminate the concept of extraordinary items and revise affected data items;
- add a new item on "dually payable" deposits in foreign branches of U.S. banks (FFIEC 031 only); and
- revise the information reported about the SLR by institutions using the advanced risk-based capital adequacy standards.
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 as required by the Economic Growth and Regulatory Paperwork Reduction Act of 1996. Work on this initiative continued throughout 2016.
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;21
- 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.
Progress made during 2016 by the FFIEC on this multiyear initiative included implementing previously proposed burden-reducing changes to the Call Reports, effective September 2016, and announcing further burden-reducing changes to the Call Reports to be implemented in March 2017. In addition, the FFIEC finalized a new and streamlined "Call Report" for small financial institutions (FFIEC 051) effective March 2017. Financial institutions with domestic offices only and less than $1 billion in total assets would qualify for this new report, representing approximately 90 percent of all institutions required to file Call Reports. The streamlined Call Report would reduce the existing Call Report from 85 to 61 pages resulting from the removal of approximately 950--or about 40 percent of the nearly 2,400--data items in the Call Report.
As a foundation for the actions it is undertaking, the FFIEC is using the guiding principles developed in 2015 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.
Other Burden Reduction Initiatives
To reduce reporting burden and respond to industry comments, the Federal Reserve developed a mapping document (Appendix VII to the FR 2052a instructions) to assist firms required to submit both the FR 2052a (liquidity monitoring report) and the FR Y-15 (systemic risk report). The document maps specific tables of the FR 2052a to specific line items on Schedule G (Short-Term Wholesale Funding) of the FR Y-15.
Supervisory Information Technology
The Federal Reserve's supervisory information technology function (SIT), under the governance of the Subcommittee on Supervisory Administration and Technology, works to deliver information technology solutions within the supervision and regulation function. Working collaboratively with the Federal Reserve System supervision and regulation business sponsors, the services provided to the business line include the development and maintenance of software applications and tools to assist with the examination of supervised institutions, data collections, collaboration, provisioning and review of user-access, quantitative analysis and data visualization software, and information security. SIT also provides information technology project management support to several critical national business applications supporting supervision and regulation.
Supervisory and 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. SIT deployed advanced quantitative analysis and data visualization software to allow supervisory analysts to glean insights from supervisory data.
Streamlined data access and improved security. SIT streamlined data access for the supervision function, while enhancing overall information security. SIT provides access to data through a central access management tool to support data, applications, and research access-related responsibilities, and establishes effective prevention and detection controls to limit information security threats. In addition to data access provisioning, the tool supports information security measures through routine procedures to verify users' access to data and information to confirm whether there is a continued need for this access.
The National Information Center
The National Information Center (NIC) is the Federal Reserve's authoritative source 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) national applications supporting the various supervisory programs and the data they capture, (3) data collection processes, and (4) the sharing of the information with external agencies.
Information sharing and external collaboration. In 2016, in support of increasing requests for data from other regulatory agencies, the NIC developed a standard process to ensure that the appropriate prioritization and conditions were determined by the corresponding business areas for each data request received. NIC also began working with the business areas to identify gaps in business capabilities for collaboration between the agencies.
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. Efforts continue to meet the demand of the increasing amount of data being collected and shared. Much of the data is collected under revised supervisory programs. Similar data between programs cannot always be matched and requires alignment for cross-portfolio purposes. 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.
Data collections. The NIC provides program budgetary oversight along with ensuring that information technology solutions for data collections meet architectural standards. Increased emphasis on data governance, security, and awareness prompted the build-out of a data collection management system that provides intake on data requests, playbook and tracking of the regulatory process as well as overall status reporting.
The Federal Reserve's staff development program supports the ongoing development of nearly 3,000 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 2016 are summarized in table 3.
Table 3. Training for banking supervision and regulation, 2016
|Course sponsor or type||Number of enrollments||Instructional time (approximate training days)1||Number of course offerings|
|Federal Reserve personnel||State and federal banking agency personnel|
|Federal Reserve System||1,243||190||650||130|
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 SR letter 98-2, "New Training Program Leading to Commissioned Examiner Status."22 Examiners choose from one of two specialty tracks: (1) safety and soundness or (2) consumer compliance. In 2016, 98 examiners passed the proficiency examination (69 in safety and soundness and 29 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 2016, the Federal Reserve completed a major redesign of the community banking organization proficiency examination. In addition, further learning units were released for the Large Financial Institutions Examiner Commissioning Program, which will continue to be developed and deployed in 2017.
Continuing Professional Development
Throughout 2016, the Federal Reserve System continued to enhance its continuing professional development program. Rapid Response sessions evolved to incorporate interactive elements into the sessions as well as provide continuing professional education credits for select archived sessions.
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, FHCs, 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 2016, the Federal Reserve acted on 1,073 applications filed under the six statutes.
In 2016, the Federal Reserve published its 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 and common reasons for proposals to be 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.23
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 2016, the Federal Reserve acted on 269 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 2016, the Federal Reserve acted on seven stock repurchase applications by BHCs.
The Federal Reserve also reviews elections submitted by BHCs seeking FHC status under the authority granted by the Gramm-Leach-Bliley Act. BHCs seeking FHC status must file a written declaration with the Federal Reserve. In 2016, 48 domestic and 2 foreign FHC 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 2016, the Federal Reserve approved 55 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 2016, the Federal Reserve approved 163 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 2016, the Federal Reserve acted on 27 membership applications, 451 new and merger-related domestic branch applications, and one foreign branch application.
State member banks also must obtain Federal Reserve approval to establish financial subsidiaries. These subsidiaries may engage in activities that are financial in nature or incidental to financial activities, including securities-related and insurance agency-related activities. In 2016, two financial subsidiary applications were 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 2016, the Federal Reserve acted on 15 applications filed by SLHCs to acquire a savings association 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 2016, the Federal Reserve acted on one MHC reorganization application. In 2016, the Federal Reserve acted on four applications filed by MHCs to convert to stock form, and six 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 FHCs under the authority granted by the Dodd-Frank Act. SLHCs seeking FHC status must file a written declaration with the Federal Reserve. In 2016, no SLHC FHC 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 2016, the Federal Reserve approved 17 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 2016, 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/2017orders.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 the 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.24 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 2016. 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 $464,929,002 in 2016 for the 2015 supervision and regulation assessment.
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.
2. "Banking offices" are defined as U.S. depository institution subsidiaries as well as the U.S. branches and agencies of foreign banking organizations. Return to text
3. For more information about the supervisory framework, see the Board's press release and SR letter 12-17/CA 12-14 at www.federalreserve.gov/newsevents/press/bcreg/20121217a.htm. Return to text
4. The Office of the Comptroller of the Currency examines nationally chartered banks, and the Federal Deposit Insurance Corporation examines state-chartered banks that are not members of the Federal Reserve. Return to text
5. 81 Fed. Reg. 90,949 (December 16, 2016). Return to text
6. Each of the first two components has four subcomponents: Risk Management--(1) Board and Senior Management Oversight; (2) Policies, Procedures, and Limits; (3) Risk Monitoring and Management Information Systems; and (4) Internal Controls. Financial Condition--(1) Capital, (2) Asset Quality, (3) Earnings, and (4) Liquidity. Return to text
7. The special supervisory program was implemented in 1997, most recently modified in 2013. See SR letter 13-21 for a discussion of the factors considered in determining whether a BHC is complex or noncomplex (www.federalreserve.gov/bankinforeg/srletters/sr1321.htm). Return to text
8. The Federal Reserve Banks maintain accounts for and provide services to several designated FMUs. Return to text
9. In June 2016, the FSOC rescinded the designation of GECC as systemically important. As a result, GECC is no longer supervised by the Federal Reserve. Return to text
10. In March 2016, the U.S. District Court in Washington, D.C., rescinded the FSOC's designation of MetLife as a systemically important firm subject to Federal Reserve supervision. The effect of the court's action is that MetLife is no longer subject to supervision by the Federal Reserve. Return to text
11. The OCC examines federally licensed branches and agencies, and the FDIC examines state-licensed FDIC-insured branches in coordination with the appropriate state regulatory authority. Return to text
13. The FFIEC is an interagency body of financial regulatory agencies established to prescribe uniform principles, standards, and report forms and to promote uniformity in the supervision of financial institutions. The council has six voting members: the Board of Governors of the Federal Reserve System, the FDIC, the National Credit Union Administration, the OCC, the Consumer Financial Protection Bureau, and the chair of the State Liaison Committee. Return to text
14. On July 20, 2016, the Board issued an interim final rule modifying its Rules of Practice for Hearings, 12 CFR part 263, to adjust the maximum levels of its civil money penalties as required by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015. Return to text
15. The rule was finalized in early 2017 and is effective for the 2017 capital planning cycle. For further information see www.federalreserve.gov/newsevents/press/bcreg/20170130a.htm. Return to text
16. The ASU on credit losses will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. For public companies that are not SEC filers, the ASU on credit losses will take effect for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. For all other organizations, the ASU on credit losses will take effect for fiscal years beginning after December 15, 2020, and for interim periods within fiscal years beginning after December 15, 2021. Return to text
17. See "Guidance on Sound Incentive Compensation Policies," 75 Fed. Reg. 36,395-36,414 (June 25, 2010). Return to text
18. HCs are defined as BHCs, intermediate holding companies (IHCs), SLHCs, and securities holding companies. Return to text
19. 81 Fed. Reg. 35,016 (June 1, 2016): FR 2314, FR 2314S, FR 4200, FR 4201, FR Y-6, FR Y-9C, FR Y-9LP, FR Y-9SP, FR Y-9ES, FR Y-9CS, FR Y-11, FR Y-11S, FR Y-12, FR Y-12A, FR Y-14A, FR Y-14Q, FR Y-14M, and FR Y-15. Return to text
20. 81 Fed. Reg. 47,237 (July 20, 2016): FFIEC 009 and FFIEC 009a, 81 Fed. Reg. 55,260 (September 19, 2016): FFIEC 101, and 81 Fed. Reg. 70,739 (October 13, 2016): FFIEC 102. Return to text
21. This review is mandated by section 604 of the Financial Services Regulatory Relief Act of 2006 (12 USC 1817(a)(11)). Return to text
22. SR letter 98-2 is available at www.federalreserve.gov/boarddocs/srletters/1998/sr9802.htm. Return to text
23. Since 1996, the BHC Act has provided an expedited prior notice procedure for certain permissible nonbank activities and for acquisitions of small banks and nonbank entities. Since that time, the BHC Act has also permitted well-run BHCs that satisfy certain criteria to commence certain other nonbank activities on a de novo basis without first obtaining Federal Reserve approval. Return to text
24. Under section 12(g) of the Securities Exchange Act, certain companies that have issued securities are subject to SEC registration and filing requirements that are similar to those imposed on public companies. Per section 12(i) of the Securities Exchange Act, the powers of the SEC over banking entities that fall under section 12(g) are vested with the appropriate banking regulator. Specifically, state member banks with 2,000 or more shareholders and more than $10 million in total assets are required to register with, and submit data to, the Federal Reserve. These thresholds reflect the recent amendments by the Jumpstart Our Business Startups Act (JOBS Act). Return to text