This section provides an overview of key developments related to the Federal Reserve's prudential supervision of financial institutions, including large financial institutions (LISCC firms and LFBO firms) as well as regional and community banking organizations.
The Federal Reserve also has responsibility for certain laws and regulations relating to consumer protection and community reinvestment. The scope of the Federal Reserve's supervisory jurisdiction varies based on the particular law or regulation and on the asset size of the state member bank. The Federal Reserve's consumer-focused supervisory work is designed to promote a fair and transparent financial services marketplace and to ensure that the financial institutions under the Federal Reserve's jurisdiction comply with applicable federal consumer protection laws and regulations.
More information about the Federal Reserve's consumer-focused supervisory program can be found in the Federal Reserve's 105th Annual Report 2018.8 The Federal Reserve also publishes the Consumer Compliance Supervision Bulletin, which shares information about examiners' supervisory observations and other noteworthy developments related to consumer protection.9 This report additionally addresses the Federal Reserve Board's recent statements related to consumer protection and compliance within the above sections.
Federal Reserve supervision is responding quickly to the current crisis.
The Federal Reserve has the task of ensuring a safe, sound, and efficient banking system as well as a fair and transparent consumer financial services marketplace that supports the growth and financial stability of the U.S. economy. With the rapid developments and challenges posed by the containment measures, Federal Reserve supervisors are focused in the short-term on supporting financial institutions as they meet the challenges of COVID-19 containment measures for their customers and local communities. In many ways, the short-term supervisory response to the containment measures echoes the response to a natural disaster, such as a hurricane or flood, except that the response has been nationwide. While providing support, examiners will continue to ensure that banks remain safe and sound and financially able to support the economic recovery.
The Federal Reserve and the other federal banking agencies have encouraged banks to work prudently with borrowers affected by COVID-19 containment measures. This can mean, for example, working with a customer who has a car loan but has been furloughed temporarily because of the containment measures. The Revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirusissued on April 7, 2020, explains that agencies will not criticize institutions for working with borrowers in a safe and sound manner.10
Additionally, this statement clarifies that the agencies view prudent loan modification programs offered to bank customers affected by COVID-19 as positive and proactive actions that can manage or mitigate adverse impacts on borrowers, and lead to improved loan performance and reduced credit risk. This statement also explains that financial institutions generally do not need to categorize COVID-19-related modifications as troubled debt restructurings.11 Previous supervisory guidance stating that banks should accurately identify credit risk through the assignment of appropriate loan risk ratings continues to be applicable.12
In response to the current crisis, the Federal Reserve has temporarily adjusted its supervisory approach to focus on monitoring. Monitoring efforts concentrate on understanding the challenges and risks that the current environment presents for firms, including their customers, staff, operations, and financial condition and the firms' response to these challenges. In these efforts, Federal Reserve supervisors are coordinating with relevant stakeholders, including primary financial regulatory agencies.
The Federal Reserve also temporarily modified its practices for examinations and inspections. The Federal Reserve temporarily ceased most regular examination activity for institutions with less than $100 billion in total consolidated assets, except where the examination work is critical to safety and soundness or consumer protection, or is required to address an urgent or immediate need. The approach to examinations for these firms is currently being reassessed.
For the health and safety of both examiners and bank employees, all examination activities are being conducted off-site until normal operations are resumed at supervised firms and at Federal Reserve Banks. The Federal Reserve also extended the deadlines for remediating most noncritical existing supervisory findings by 90 days.13 The goal of these temporary changes is to help financial institutions deploy their resources as efficiently as possible and continue to support their customers and local economies in a prudent and fair manner while meeting current challenges.
Before the current crisis, the Federal Reserve had launched the 2020 supervisory stress test. The 2020 supervisory stress test will evaluate the resiliency of bank capital, based on bank exposure data as of the end of 2019, to a severe economic and financial stress that was published in early February 2020. Given the containment measures, the current plan is to conduct the 2020 supervisory stress test as originally announced—to maintain the established process under the Federal Reserve's stress test and capital rules—and also conduct a series of sensitivity analyses using alternative scenarios and certain adjustments to portfolios to credibly reflect current economic and banking conditions.
Large Financial Institutions
This section discusses adjustments to the supervision of firms with assets greater than $100 billion, which includes firms in the LISCC and LFBO portfolios.
Frequent monitoring at large firms enables an understanding of the impact of current containment measures on the financial condition of firms and the financial system.
At large financial institutions, the Federal Reserve's monitoring efforts involve review of relevant data and regular discussions between examiners and firm management regarding risks in areas significant to the current environment, such as operations and technology, liquidity, capital, and asset quality. For example, to monitor bank liquidity planning and positions, examiners analyze frequent regulatory reports (e.g., daily liquidity reports for LISCC firms) and communicate often with firms, with conversations occurring daily, bi-weekly, or weekly, depending on the severity of the stress.
In addition to increased information gathering at supervised institutions, Federal Reserve staff also monitor financial market developments and the impact of current containment measures on firms. The Federal Reserve is coordinating these efforts with other financial authorities, including the OCC, FDIC, U.S. Securities and Exchange Commission (SEC), state agencies, and foreign supervisors, as appropriate.
In response to current containment measures, the Federal Reserve has deferred or cancelled non-critical examinations at large financial institutions.
Consistent with the March 24 public statement issued by the Federal Reserve on how its supervisory approach has been adjusted, for large financial institutions, the Federal Reserve reviewed planned examination activity to identify examinations that were appropriate to be deferred given burden on supervised firms from the effects of the current crisis. A significant portion of examinations planned for the second quarter of 2020 were deferred. Examinations that are important for understanding the safety and soundness of the firm, consumer protection, or financial stability continue. For the remainder of the year, examination activity will reflect operating conditions and will continue to target areas of heightened risk due to containment measure-related developments as well as known deficiencies that existed prior to the current crisis.
The Federal Reserve is further modifying its approach to the execution of supervisory activities for large financial institutions. First, examinations that were already in progress are being completed off-site. Second, for new examinations, Federal Reserve examiners are carefully scoping activities to focus on risks that are elevated due to the current environment. For example, for the Comprehensive Capital Analysis and Review (CCAR) and horizontal capital review exercises, firms' capital plans are being used to monitor how firms are managing their capital in the current environment, planning for contingencies, and positioning themselves to continue lending to creditworthy households and businesses.
Regional and Community Banking Organizations
This section of the report discusses adjustments to the supervision of firms with assets less than $100 billion, which includes CBOs, which have less than $10 billion in total assets, and RBOs, which have total assets between $10 billion and $100 billion.
In response to current containment measures, the Federal Reserve has shifted supervisory activities for CBOs and RBOs from examinations to off-site monitoring.
For supervised institutions with less than $100 billion in total consolidated assets, the Federal Reserve suspended all regular examination activity, beginning in late March, except where exam work is critical to safety and soundness or consumer protection or is required to address an urgent supervisory concern. The approach to examinations for these firms is currently being reassessed.
After suspending exams in March, the Federal Reserve shifted to off-site monitoring activities at CBOs and RBOs. The Federal Reserve monitors supervised CBOs and RBOs based on each firm's size, risk, and complexity. Supervisory emphasis is placed on larger state member banks, CBOs with less-than-satisfactory supervisory ratings, complex holding companies with significant lending activities or risk management functions within the holding company, and higher-risk firms of all sizes.
Off-site monitoring activities include regular contact with bank management and other regulators to provide a better understanding of market conditions. Monitoring activities take place weekly for RBOs and periodically for CBOs. Supervisory areas of focus include bank business continuity planning, operations, credit, liquidity including deposit flows, and work-with-your-borrower programs. The Federal Reserve is working closely with state and federal banking agencies to coordinate supervision and off-site monitoring efforts, identify emerging issues, and discuss industry concerns and trends.
8. See 105th Annual Report 2018, section 5, "Consumer and Community Affairs," at https://www.federalreserve.gov/publications/annual-report.htm. Return to text
9. See The Consumer Compliance Supervision Bulletin at https://www.federalreserve.gov/publications/2019-december-consumer-compliance-supervision-bulletin.htm. Return to text
10. See "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised)," news release, April 7, 2020, https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20200407a1.pdf. Return to text
11. Specifically, no further TDR analysis is required for a loan modification if the modification is in response to the national emergency, the borrower was current on payments at the time the modification program is implemented, and the modification is short-term (e.g., six months). Additional guidance on troubled debt restructurings can be found in SR 13-17, available at https://www.federalreserve.gov/supervisionreg/srletters/sr1317.htm. Return to text
12. For example, SR 06-17, Interagency Policy Statement on the Allowance for Loan and Lease Losses (ALLL), available at https://www.federalreserve.gov/boarddocs/srletters/2006/SR0617a1.pdf. Return to text
13. Supervisory findings include matters requiring attention, matters requiring immediate attention, and provisions in formal or informal enforcement actions. Return to text