This section provides an overview of key developments related to the Federal Reserve's prudential supervision of financial institutions, including large financial institutions (known as LISCC firms and LFBO firms) as well as community and regional banking organizations (known as CBOs and RBOs). Table 2 provides an overview of the organizations supervised by the Federal Reserve, by portfolio, including the number of institutions and total assets in each portfolio.
Table 2. Summary of organizations supervised by the Federal Reserve (as of 2020:Q2)
|Large Institution Supervision Coordinating Committee (LISCC)||Eight U.S. global systematically important banks (G-SIBs) and three foreign banking organizations||11||13.8|
|State member banks (SMBs)||SMBs within LISCC organizations||5||1.0|
|Large and foreign banking organizations (LFBOs)||Non-LISCC U.S. firms with total assets $100 billion and greater and non-LISCC FBOs||175||8.5|
|Large banking organizations (LBOs)||Non-LISCC U.S. firms with total assets $100 billion and greater||16||4.0|
|Large FBOs||Non-LISCC FBOs with combined U.S. assets $100 billion and greater||15||3.3|
|Small FBOs||FBOs with combined U.S. assets less than $100 billion||144||1.1|
|State member banks||SMBs within LFBO organizations||8||1.0|
|Regional banking organizations (RBOs)||Total assets between $10 billion and $100 billion||88||2.5|
|State member banks||SMBs within RBO organizations||40||0.8|
|Community banking organizations (CBOs)||Total assets less than $10 billion||3,734 *||2.7|
|State member banks||SMBs within CBO organizations||685||0.5|
|Insurance and commercial savings and loan holding companies (SLHCs)||SLHCs primarily engaged in insurance or commercial activities||8 insurance 4 commercial||1.1|
* Includes 3,673 holding companies and 61 state member banks that do not have holding companies.
Source: Call Report, FFIEC 002, FR 2320, FR Y-7Q, FR Y-9C, FR Y-9SP, and S&P Global Market Intelligence.
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. 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 106th Annual Report 2019.7 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.8
Federal Reserve supervision responded quickly to the current crisis.
The Federal Reserve promotes a safe, sound, and efficient banking system and a fair and transparent consumer financial services marketplace that supports the growth and financial stability of the U.S. economy. In response to the disruptions posed by the COVID event, Federal Reserve supervisors have focused on ensuring that financial institutions can meet the challenges faced by their customers and local communities.
In June 2020, the Federal Reserve, along with the FDIC, OCC, National Credit Union Administration, and Conference of State Bank Supervisors, issued guidance to promote consistency in the supervision and examination of financial institutions affected by the COVID event.9 The interagency guidance acknowledges that the stresses caused by the COVID event can affect a bank's financial condition and operational capabilities, even when the bank has appropriate governance and risk-management systems in place. The guidance instructs safety and soundness examiners to consider the unique, evolving, and potentially long-term nature of the issues confronting institutions and to exercise appropriate flexibility in their supervisory response. In assessing the safety and soundness of an institution, examiners will consider the institution's asset size, complexity, and risk profile, as well as the industry and business focus of its customers.
The Federal Reserve has resumed examinations following a pause.
Examination activities help the Federal Reserve understand the safety and soundness of each institution and assess its compliance with applicable laws and regulations, including those related to consumer protection.
At the start of the COVID event, the Federal Reserve temporarily adjusted its supervisory approach. From late-March to mid-June, examiners focused on monitoring and reduced examination activities, with the greatest reduction occurring at the smallest banks. The Federal Reserve's supervisory approach gave firms time to adapt to the COVID event and provide customers with needed assistance. Financial institutions implemented contingency operating plans and adapted operations to the new environment. In June, examination activities resumed for all firms. All examination activities, including full scope examinations, will be conducted off-site until local conditions improve to facilitate on-site examinations.
The Federal Reserve recognizes that the current situation significantly affects institutions and communities in different ways and will work with financial institutions to understand specific issues as it engages in supervisory activities. Financial institutions supervised by the Federal Reserve should work directly with their Reserve Bank and state banking agencies, as applicable, if they have questions on planned supervisory activities.
The Federal Reserve follows a risk-focused approach by scaling its supervisory work to the size and complexity of an institution. In supervising financial institutions, a risk-focused approach to supervision is more efficient and results in more rigorous oversight of firms that pose increased risk to the financial system.
Firms identified as posing elevated risk to U.S. financial stability are supervised by the Large Institution Supervision Coordinating Committee, or LISCC, program. The LISCC program is a national program that uses both cross-firm (horizontal) and firm-specific supervisory activities to assess the financial resiliency and risk-management practices of firms. The list of firms in the LISCC portfolio is updated from time to time in light of developments at firms and in the financial sector. During the period covered by this report, the LISCC portfolio included eight domestic firms and three foreign banking organizations.
The Large and Foreign Banking Organization, or LFBO, program supervises all other large financial institutions that are not included in the LISCC program. The LFBO program includes some cross-firm supervisory activities, but firm-specific teams at the local Reserve Bank conduct most of the supervisory work, subject to oversight by the Board.
Firms with assets less than $100 billion are supervised by the community banking organization, or CBO, and regional banking organization, or RBO, programs.10 For CBOs and RBOs, the supervision model is more decentralized than the LISCC and the LFBO programs, with greater decisionmaking flexibility provided to Reserve Banks; again, subject to oversight by Board staff.
Box 3. Supervision in a Remote Environment
Federal Reserve examiners have been conducting supervision using remote arrangements since the start of the COVID event and are well prepared to continue to operate in the remote environment. Over the past few years, the Federal Reserve has conducted much of its examination activity for smaller institutions from Federal Reserve offices, rather than on-site at the supervised institution. For instance, examiners can review loans through a secure transfer of an institution's loan files. In addition to saving travel time and expense, off-site examination activity reduces the impact on an institution's normal business operations that can occur when examiners are on-site. Therefore, when many institutions closed their offices because of the COVID event, examiners were still able to conduct work effectively and reach appropriate examination findings and conclusions.
Further, examination processes have been streamlined and adjusted to operate in a remote working environment and to provide greater agility and efficiency in conducting supervisory assessments. There have been minor logistical challenges reported when conducting entire examinations in an off-site format. In these few cases, the Reserve Banks provided flexibility and successfully worked through the technical issues with the supervised institutions.
Large Financial Institutions
This section of the report discusses the supervisory approach for large financial institutions, which are U.S. firms with assets of $100 billion or more and foreign banking organizations with combined U.S. assets of $100 billion or more. These firms are within either the LISCC portfolio or the LFBO portfolio. Large financial institutions are subject to regulatory requirements that are tailored to the risk profiles of these firms. Box 4 provides an overview of these regulatory requirements.
Large financial institutions remain well capitalized.
Federal Reserve supervision helps to ensure that large financial institutions remain financially resilient, so that they can meet their obligations to creditors and other counterparties and continue to lend through a range of conditions. Large financial institutions remain well capitalized and able to support lending, although the COVID event has introduced significant financial uncertainty for the banking industry. The aggregate CET1 capital ratio for large banks in the second quarter was 12.2 percent, a similar level to the end of 2019, despite rising provisions and a slowdown in economic activity.11 As discussed earlier in box 2, preliminary earnings data show an increase in the CET1 ratio in the third quarter of 2020. The improvement in capital ratios has been supported by the rebound in earnings, and in part by the capital conservation measures discussed below.
Stress testing is a cornerstone of Federal Reserve oversight.
Since the 2008 financial crisis, the Federal Reserve has taken action to improve the quantity and quality of capital in the banking system. Stress testing is a critical tool to assess overall financial resilience of large banks. For firms with $100 billion or more in total assets, the Federal Reserve conducts a stress test to measure the resiliency of their capital under hypothetical stress scenarios and to verify that banks are prepared to deal with severe economic and financial conditions.12 Starting this year, the results of the same stress test will also be used to set the stress capital buffer requirements for large banks.13
The unusual nature of the current crisis has made it particularly difficult to predict near-term trends. Given this ongoing uncertainty, the Board conducted a sensitivity analysis earlier this year, in addition to its normal stress test, to assess the resiliency of large banks under three hypothetical recessions, or downside scenarios, that could result from the COVID event.14 The scenarios included: a V-shaped recession and recovery; a slower, U-shaped recession and recovery; and a W-shaped, double-dip recession.
In the three downside scenarios, the unemployment rate peaked at between 15.6 percent and 19.5 percent, significantly more adverse than any of the Board's pre-coronavirus stress test scenarios.
The annual stress test and sensitivity analysis generally showed that large banks are well capitalized and would remain so under a V-shaped downside scenario or an economic downturn similar in severity and duration to the last crisis. However, a delay in the economic recovery could have measurable negative effects on capital levels at many banks. Given the uncertainty surrounding recovery, the Federal Reserve took several preemptive actions for large banks to help ensure that these firms remain sufficiently capitalized.
For large banks, the Federal Reserve suspended share repurchases, capped the growth of dividends, and imposed a limit that dividends cannot exceed recent income. The distribution limitations were initially applied for the third quarter of 2020. At the end of the third quarter, given continued economic uncertainty from the COVID event, the Board extended the limitations through the end of the year.
These capital conservation measures have resulted in a preservation of capital at large banks, further allowing them to support the economic recovery.
Box 4. Tailoring of Regulation
In October 2019, the Board adopted rules that tailor its regulations for domestic and foreign banks to more closely match their risk profiles.1 The rules establish a framework that sorts banks with $100 billion or more in total assets into four categories based on several factors, including asset size, cross-jurisdictional activity, reliance on weighted short-term wholesale funding (wSTWF), nonbank assets (NBA), and off-balance-sheet exposure (table A). (Some firms appear in the table twice as standards vary by legal entity.) Significant levels of these factors result in risk and complexity to a bank and can in turn bring risk to the financial system and broader economy. As the risk of a firm increases and it moves into a new risk category, its requirements will increase.
Table A. List of domestic and foreign firms, by category, as of 2020:Q2
≥$700b total assets or ≥$75b in cross-jurisdictional activity
≥$250b total assets or ≥$75b in NBA, wSTWF, or off-balance-sheet exposure
Other firms with $100b to $250b total assets
|U.S. domestic banking organization||Bank of America
Bank of New York Mellon
|Northern Trust||Capital One
|Foreign firms (standards vary by legal entity)|
|Intermediate holding company||Barclays US
Credit Suisse USA
Deutsche Bank USA
HSBC North America
TD Group US
BNP Paribas USA
Santander Holdings USA
|Combined U.S. operations||Barclays
|Bank of Montreal
Bank of Nova Scotia
Royal Bank of Canada
Note: NBA is nonbank assets, wSTWF is weighted short-term wholesale funding.
Source: FR Y-15, FR Y-9C, FR Y-7Q, 2019:Q3–2020:Q2.
1. Prudential Standards for Large Bank Holding Companies, Savings and Loan Holding Companies, and Foreign Banking Organizations, https://www.govinfo.gov/content/pkg/FR-2019-11-01/pdf/2019-23662.pdf. Return to text
The Federal Reserve is adapting its capital planning examinations.
In response to the current macroeconomic environment, the Federal Reserve modified its annual capital planning examinations—Comprehensive Capital Analysis and Review (CCAR) and the Horizontal Capital Review (HCR)—to focus on monitoring how firms' capital planning responded to the COVID event.15 In this year's CCAR and HCR, Federal Reserve examiners monitored how firms were managing their capital in the current environment, planning for contingencies, and positioning themselves to continue lending to creditworthy households and businesses.
The Federal Reserve's monitoring efforts have revealed certain differences in how firms adapted their capital planning to the COVID event. Firms used different forecasts of the COVID event on their capital positions. In some cases, firms relied exclusively on V-shaped scenarios rather than considering the potential for slower economic recovery. The severe macroeconomic conditions (such as the high unemployment rate arising from the crisis) and the effects of the economic stimulus and loan modification programs have been difficult for firms to incorporate into loss forecasting models. These challenges have prompted many firms to rely upon qualitative approaches, including the application of management judgment, to forecast losses and revenues. In addition, some firms have expedited their governance processes to respond to the rapidly changing situation.
Because of the economic uncertainty from the COVID event, the Federal Reserve is requiring large banks to update and resubmit their capital plans in the fourth quarter to reflect the current stresses, which will help firms reassess their capital needs and maintain strong capital positions. The resubmission will also allow the Board to conduct additional analysis to further assess the financial conditions and risks of these banks and to determine if further supervisory actions are necessary.
In addition, the Board is performing another round of stress tests in the fourth quarter because of the continued uncertainty from the COVID event. Large banks will be tested against two scenarios featuring severe recessions to assess their resiliency under a range of outcomes. The Board will release firm-specific results from banks' performance under both scenarios by the end of this year.
Supervisors are monitoring credit portfolios exposed to industries materially affected by the COVID event (such as transportation and hospitality) in recognition of heightened risks that may be material loss drivers under certain economic conditions.
Supervisors are also focused on assessing
- credit-risk-management practices and loss projections for the highest risk portfolios;
- the timeliness of credit loss recognition and whether loss projections properly account for uncertainty in the current environment; and
- whether risk identification, measurement, and mitigation measures are sufficient to maintain capital adequacy under a range of adverse scenarios.
The COVID event has led to unprecedented action to accommodate borrowers.
As discussed above, since the start of the COVID event, financial institutions—including large financial institutions—have accommodated borrowers in many ways, including payment deferrals, interest-only payment periods, fee waivers, forbearance, and temporary suspensions from credit reporting. The Federal Reserve and the other federal banking agencies have encouraged financial institutions to work in a prudent and safe and sound manner with borrowers who have been affected by the COVID event. Federal banking agencies view these accommodations as a positive response by institutions, which can help to manage or mitigate the adverse impact of the COVID event on their borrowers and communities.16
In response to the COVID event, large financial institutions have provided loan modifications on a sizable portion of their loan balances. Large financial institutions that reported on loan modification programs in their second-quarter public financial filings17 disclosed $330 billion of modified loans.18 This amount equates to approximately 6 percent of total loan balances for these firms as of the second quarter of 2020.
For consumer loans, there was an initial surge in loan modifications in March and April, followed by a significant decline, particularly for non-mortgage retail credit such as credit card loans and auto loans. The decline has been driven both by bank actions, such as tighter re-enrollment conditions, and actions by borrowers, many of whom have resumed payments on outstanding loans. Early in the COVID event, many borrowers enrolled in payment deferral programs as a precautionary measure but have exited those programs as economic conditions stabilized.
For commercial loans, loan modifications continued to increase in the third quarter. Industries more severely affected by the COVID event, such as hotels, hospitality, and retail, show the highest concentrations of modifications.
Box 5. Climate Change and Microprudential Risks
Federal Reserve supervisors are responsible for ensuring that supervised institutions operate in a safe and sound manner and can continue to provide financial services to their customers in the face of all types of risks, including those related to climate change.
The effects of climate change can manifest as traditional microprudential risks, including through credit, market, operational, legal, and reputational risk. For example, chronic flooding or wildfires may pose a risk to the value of the collateral that a bank has taken as security against its loans. Technological innovations in the production, storage, and transport of energy could decrease the value of assets dependent on older technologies, resulting in mark-to-market losses on bank's trading portfolios or reduced cash flow of certain borrowers. Severe weather events could damage a bank's own physical property and data centers, affecting its ability to provide financial services to its customers.
The industry is adapting governance, risk identification and management, and scenario analysis and disclosures to better account for climate-related risks. The assessment and management of climate-related risks, however, present several challenges. The time horizon used to consider the effects of climate change significantly exceeds the typical life span of bank exposures as well as typical control and planning horizons. Future relationships between climate, economic, and financial variables might differ significantly from those observed in the past. Finally, assessing the materiality of climate-related risk requires new, asset-specific or geo-spatial data that involve significant resources to acquire and process.
Supervisors will seek to better understand, measure, and mitigate climate-related financial risks, including through analysis of transmission channels of climate change risk to the banking sector, measurement methodologies, and data gaps and challenges. Supervisors will also continue to work closely with other agencies and authorities, including through the Basel Committee on Banking Supervision's Task Force on Climate-Related Financial Risks and the Financial Stability Board.
Large firms have shown operational resilience to the COVID event.
The Federal Reserve is conducting monitoring and examination activities to understand how large financial institutions have adapted their controls and operational risk management in light of the COVID event. As a whole, large firms have been resilient, leveraging their business continuity and business resumption strategies to enable remote work, with a few notable challenges. For example, firms were required to adjust practices that traditionally require an on-site presence, such as obtaining signatures or managing lockbox operations. Many firms and their third-party service providers rapidly modified processes and controls in light of these challenges, and the processes continue to evolve.
Firms are increasingly using remote endpoints, external networks, and collaboration tools to support remote work, heightening potential vulnerabilities related to cybersecurity attacks. Ransomware attacks, especially those targeting third-party service providers, are occurring with greater frequency and increasing effectiveness. The Federal Reserve's cybersecurity monitoring effort is designed to analyze the heightened risk environment, build supervisory knowledge of cyber risks, and take appropriate supervisory actions.
Supervisors have also engaged with large financial institutions to understand governance and control challenges. Among other topics, supervisors have been monitoring increased potential for internal and external fraud as a result of the work-from-home environment and assessing potential gaps in internal controls and internal audits created by the temporary movement of audit or control employees to assist with other activities.
Box 6. Current Large Financial Institution Supervisory Priorities
- Credit risk, including credit loss recognition; loan review; and accuracy of risk-weighted assets
- Review of November 2020 capital plan resubmissions
- Earnings pressures and the ability to preserve capital in the current environment
- Board effectiveness and engagement
- Internal liquidity stress testing assumptions, liquidity data quality, and contingency funding plans
- Liquidity risk limits and related governance processes
- Daily and short-term liquidity risk management monitoring programs
Governance and controls
- Risk management in response to the COVID event
- Operational resilience, including cyber-related and information technology risks
- Compliance risk management, including Bank Secrecy Act/anti-money-laundering programs and OFAC compliance
- LIBOR transition preparedness
Recovery and resolution planning
- Resolution plan and critical operations reviews
- Recovery planning (for LISCC firms)
- International coordination
Large financial institutions' supervisory priorities for 2020.
For the remainder of 2020, supervisors have tailored safety and soundness supervisory activities to those that are most relevant to understanding and assessing a firm's financial and operational resilience. Specifically, supervisory work is focused on three areas: (i) examinations to support the timely issuance of supervisory ratings, (ii) examinations and monitoring of areas of heightened risk for the firms, and (iii) monitoring emerging risks related to the COVID event. Examination processes have been streamlined and adjusted to reflect the remote working environment.
Community and Regional Banking Organizations
This section of the report discusses the supervisory approach for banking organizations with assets less than $100 billion, including CBOs, which have less than $10 billion in total assets, and RBOs, which have total assets between $10 billion and $100 billion.
Most CBOs and RBOs were in satisfactory condition prior to the COVID event.
Most CBOs and RBOs entered 2020 in sound financial condition with improved risk management, including management of credit concentrations. At the end of 2019, over 95 percent of CBOs and RBOs had a supervisory rating of satisfactory or higher. More than 99 percent of CBO and RBO insured depository institutions were considered well capitalized, and more than 96 percent of CBOs and all RBOs were profitable in 2019.19
The majority of CBOs and RBOs remain in satisfactory condition, though the COVID event has impacted financial performance.
Community and regional banking organizations remain in generally satisfactory financial condition, though the COVID event has introduced significant financial uncertainty for the banking industry. The aggregate tier 1 leverage ratio remains relatively robust, at 10.2 percent for CBOs and nearly 9.1 percent for RBOs as of the second quarter of 2020 (figure 10), although capital ratios for these categories of banks have declined since the beginning of the COVID event. The decrease in the tier 1 leverage ratio is largely the result of strong PPP lending, which increased the assets used in the denominator of the leverage ratio. Adjusting for PPP loans, the aggregate tier 1 leverage ratio would be 10.9 percent for CBOs and 9.5 percent for RBOs as of June 30. Less than 1 percent of organizations in these two portfolios report capital levels that do not meet the "well-capitalized" designation.
In an effort to build capital resiliency, most CBOs and RBOs took steps to reduce capital distributions or build capital in the first and second quarters of 2020. CBO-insured depository institutions reduced their dividends in the second quarter to $2.7 billion from $4.5 billion in the fourth quarter of 2019. RBOs reduced their dividends over the same period to $2.0 billion from $2.1 billion in the fourth quarter of 2019. To further preserve capital, most RBOs have suspended their share repurchase programs.
Profitability measures for CBOs and RBOs fell in the first half of 2020, after lockdowns and other measures were taken to control the spread of COVID-19 and as the COVID event began affecting businesses. Despite additional income from PPP loans, close to 4.6 percent of CBOs and 13.6 percent of RBOs were not profitable for the first half of 2020, as net interest income declined and provisions increased. A spike in first-quarter goodwill impairment losses also weighed on RBOs' profitability.
Box 7. Preliminary Third-Quarter Results for CBOs and RBOs
Based on recent examination findings, off-site monitoring activities, and preliminary regulatory reporting data, CBO and RBO state member banks have generally adapted to the changes in the economy and their operational environment. However, localized spikes in COVID-19 cases and related business closures have affected financial performance and operations of CBO and RBO state member banks.
From June 15, 2020, when examinations resumed, until October 1, 2020, the Federal Reserve examined 63 CBO and RBO state member banks. Based on preliminary examination results, Federal Reserve examiners did not uncover a greater number of supervisory issues compared with pre-COVID-event examinations. To date, none of these Federal Reserve-led examinations resulted in a downgrade from a satisfactory CAMELS composite rating to a less-than-satisfactory rating.
Most CBOs and RBOs expect positive net income for 2020, primarily because of income associated with PPP loans, mortgage origination fees, and securities gains. Liquidity conditions remain favorable, as CBOs and RBOs report generally stable or increasing liquidity levels and lower reliance on noncore funding. CBOs noted that a particular challenge is their inability to find attractive investment opportunities for excess funds. RBOs are using their excess liquidity to buy back bank debt, reduce brokered deposits, pay down commercial paper and borrowings, and grow their investment portfolios.
Although overall credit quality trends appear stable at this time, CBOs and RBOs remain vigilant in monitoring their loan portfolios because of the potential for future deterioration. Certain industries, including hospitality, restaurant, retail, and entertainment, continue to experience stress, though CBO and RBO bankers overall report only moderate and isolated credit quality concerns. Some banks have tightened underwriting standards and risk tolerances while economic conditions remain stressed.
Many CBOs and RBOs have maintained their dividend payments, and a number have either begun or are planning to resume share repurchase programs. Some institutions have indicated that economic conditions have generally stabilized or will be manageable, and their forecasts support these capital distributions. The Federal Reserve continues to encourage institutions to maintain capital resiliency while the COVID event is ongoing and uncertainty persists.
Box 8. Interagency Coordination on Examinations
The uncertainty in today's economy and the operational challenges faced by supervised financial institutions highlight the importance of interagency efforts to coordinate safety and soundness supervisory activities. The Federal Reserve shares supervisory and regulatory responsibility for domestic member banks with individual state banking departments. In its role as the holding company supervisor, the Federal Reserve also interacts with all of the federal banking agencies. Therefore, the Federal Reserve's consolidated supervisory program requires strong, cooperative relationships with the primary federal and state agencies for insured depository institutions.
To limit potential duplication of supervisory activities and undue burden on supervised institutions, the Federal Reserve tailors its supervisory activities to an institution's legal entity and regulatory structure, as well as the risks associated with its activities, and relies, to the greatest extent possible, on the assessments of the primary supervisor for the insured depository institution.
The agencies have several well-established avenues to promote interagency coordination and collaboration, which have proven valuable in coordinating the agencies' response to the COVID event. Under the auspices of the Federal Financial Institution Examination Council (FFIEC), the agencies develop and issue uniform principles, standards, and report forms for the examination of financial institutions.
In response to the COVID event, the financial regulatory agencies are meeting more frequently to discuss the condition of supervised institutions and the results from their examinations and monitoring activities. These interagency discussions aid the agencies in developing and executing their supervisory plans and in adjusting supervisory policies. For instance, in June 2020, the agencies and the states worked together to develop COVID-related guidance to promote consistency and flexibility in the supervision and examination of financial institutions.1 As noted in the guidance, safety and soundness examiners of all agencies were reminded that they should not criticize an institution's management that has managed risk appropriately by taking proper risk assessment and mitigation efforts in response to the stresses caused by the COVID event.
1. Refer to SR Letter 20-15, "Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions," https://www.federalreserve.gov/supervisionreg/srletters/sr2015.htm. Return to text
CBOs and RBOs made extraordinary efforts to work with their borrowers affected by the COVID event.
CBOs and RBOs have made substantial efforts to support their borrowers with loan modifications. CBO- and RBO- insured depository institutions reported $367 billion, or roughly 10.5 percent of outstanding loans and leases, as modifications under section 4013 of the CARES Act. Loan modifications can include payment deferrals, interest-only payment periods, fee waivers, forbearance, and temporary suspensions from credit reporting.
Federal Reserve supervisors have found that while both CBOs and RBOs had expected to receive additional requests for loan modifications after those provided at the beginning of the COVID event (i.e., initial or first-wave modifications), new or additional requests for modifications (i.e., the second wave) have been fewer than the first wave. CBO modifications in the second wave have generally been limited to short-term targeted changes, typically an interest-only loan for a set period, and primarily provided to commercial borrowers in the hospitality and retail sectors.
While many RBOs saw a temporary increase in the second wave of loan modifications in July, the level of modification requests was still lower than the first wave. While institutions continue to work with their borrowers, they have formalized their underwriting process for those borrowers requesting additional modifications or are requiring a borrower to demonstrate a financial need and the ability to perform under the terms of the new modification request.
Several actions taken by the Federal Reserve addressed the unique challenges and operating conditions faced by CBOs and RBOs.
To balance the responsibility to promote safety and soundness against institutions' operating challenges, the Federal Reserve has taken a number of actions:
- Extension of the filing deadline for the March financial regulatory reports: The federal banking agencies provided institutions with relief on the filing deadline for their March 31, 2020, Call Reports, as long as an institution submitted the report within 30 days of the official filing date. Roughly 20 percent of Call Report filers took advantage of this additional time, with all respondents reporting within the additional time allowed. The Federal Reserve provided similar relief to holding companies with $5 billion or less in total assets for submitting the March 30, 2020, financial regulator reports (i.e., FR Y-9C and FR Y-11). Roughly 21 percent of eligible holding companies took advantage of this additional time.
- Temporary relief on the community bank leverage ratio (CBLR): The Federal Reserve and the other federal banking agencies adopted interim final rules to lower the CBLR from 9 percent to 8 percent beginning in the second quarter of 2020 and for the remainder of calendar year 2020. The ratio moves to 8.5 percent for calendar year 2021, and 9 percent thereafter. Roughly 40 percent of eligible banks have adopted the CBLR as of June 30, 2020, and 9.4 percent of CBLR adopters benefited from this relief, as their CBLR fell between 8 percent and 9 percent as of June 30, 2020.
- Deferral of certain appraisal regulatory requirements: From April 17, 2020, through December 31, 2020, the federal banking agencies are deferring certain appraisals and evaluations for up to 120 days after closing of residential or commercial real estate loan transactions.
The supervisory approach has been adapted in response to the COVID event.
As a result of the COVID event, the Federal Reserve has shifted the focus of CBO and RBO supervisory activities to assessing the overall safety and soundness of an institution as well as the effectiveness of an institution's risk management and responsiveness to changing economic and market conditions. Stresses caused by the COVID event can adversely affect an institution's financial condition and operational capabilities, even when institution management has appropriate governance and risk-management systems in place to identify, monitor, and control risk. Therefore, in assessing safety and soundness, examiners will consider the unique, evolving, and potentially long-term nature of the challenges confronting institutions and exercise appropriate flexibility in their supervisory response.20
In mid-June, as operational conditions began to stabilize, the Federal Reserve resumed CBO and RBO examination activities and anticipates that examination activities, including full-scope examinations, will be conducted off-site until conditions improve to facilitate on-site examinations.21 In scheduling CBO and RBO examinations, the Federal Reserve is considering unique safety and soundness concerns of each banking organization and their operational capacity for an examination.
One of the primary goals of the Federal Reserve's supervisory approach is to ensure the resilience of financial institutions while not impeding the flow of credit that is vital for economic recovery. Therefore, where possible, the Federal Reserve will streamline the supervisory review of lower risk, well-managed institutions in sound financial condition while focusing its supervisory attention on high-risk institutions as warranted by facts and circumstances.
Examiners will continue to assess CBOs and RBOs in accordance with existing policies and procedures and may provide feedback, or possibly downgrade an institution's supervisory rating, if conditions at the institution deteriorate. For the remainder of the year, the Federal Reserve's focus for CBO and RBO supervisory activities will be on evaluating a supervised institution's capital resiliency, liquidity resiliency, and effectiveness of an institution's risk management and responsiveness to changing economic and market conditions.
The Federal Reserve will continue its off-site monitoring activities of CBOs and RBOs and will maintain contact with bank management and other regulators. Such efforts provide the Federal Reserve with information on emerging risks and market trends along with the identification of industry trends and the concerns of bankers.
Box 9. Current CBO and RBO Supervisory Priorities
- Assessing capital and liquidity resiliency without impeding the flow of credit
- Evaluating risk-identification and management practices
- Prioritizing examiner resources on high-risk institutions
- Capital planning, projections, needs, and vulnerabilities
- Capital actions
- Earnings assessment
- High-risk loan portfolios
- Credit concentrations
- Underwriting practices and asset growth
- Loan modifications
- Reserve practices and levels
- Continuity of operations
- Information technology and cybersecurity
Box 10. Partnership for Progress and Minority Depository Institutions
Section 308 of the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act), requires the Federal Reserve System to devote efforts toward preserving minority ownership of minority depository institutions (MDIs). The Federal Reserve supports these efforts and actively works with the FDIC and the OCC to leverage all perspectives and federal banking agency resources to implement the congressional mandates. The Federal Reserve recognizes that there is more to be done, especially as it relates to the decline in African American-owned banks. As such, the Federal Reserve remains strongly committed to providing support to MDIs.
MDIs are typically small community banks associated with Asian American, African American, Native American, or Hispanic American groups. In accordance with section 367 of the Dodd-Frank Act, the Board submits an annual report to the Congress detailing the actions taken to fulfill the FIRREA requirements.1
The Federal Reserve has primary supervisory responsibility for 14 state-member MDIs and provides direct technical assistance and outreach to these MDIs. However, the Federal Reserve views the congressional mandate to preserve and promote MDIs as more than simply supervising state-member MDIs. In this regard, the Federal Reserve actively works with the other federal banking agencies to coordinate interagency activities focused on supporting all MDIs.
The Federal Reserve established the System's Partnership for Progress (PFP) in 2008 to improve coordination of support to state-member MDIs.2 The PFP program, a national outreach effort, helps MDIs confront unique business-model challenges, cultivate safe banking practices, and compete more effectively in the marketplace. Board staff and PFP-dedicated staff at each of the 12 Federal Reserve Banks oversee and coordinate the PFP activities.
In response to the COVID event, the Federal Reserve conducted several PFP outreach events on a number of COVID-event-related topics. For example, in May 2020, Governors Michelle Bowman and Lael Brainard held a video conference call with senior management at state-member MDIs to hear about their experiences and challenges in dealing with the ramifications of the COVID event on their operations, customers, and communities. Additionally, the Federal Reserve held two webinars with MDIs to provide technical assistance on the discount window and on the Paycheck Protection Program Liquidity Facility (PPPLF). The Federal Reserve will continue to explore avenues for assisting MDIs as they face the challenges posed by the COVID event.
1. Refer to the Board's public website for the most recent report to Congress, "Preserving Minority Depository Institutions," May 2020, at https://www.federalreserve.gov/publications/files/preserving-minority-depository-institutions-2020.pdf with the details on the Federal Reserve's MDI assistance, as well as a listing of state-member MDIs by state and the FIRREA section 308 provisions. Return to text
7. See 106th Annual Report 2019, section 5, "Consumer and Community Affairs," at https://www.federalreserve.gov/publications/annual-report.htm. Return to text
8. See the Consumer Compliance Supervision Bulletin, December 2019 at https://www.federalreserve.gov/publications/2019-december-consumer-compliance-supervision-bulletin.htm. Return to text
9. SR Letter 20-15, "Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions," https://www.federalreserve.gov/supervisionreg/srletters/sr2015.htm. Return to text
10. Community banking organizations have less than $10 billion in total assets, and regional banking organizations have total assets between $10 billion and $100 billion. Return to text
11. Large banks include all bank holding companies and intermediate holding companies with $100 billion or more in assets. Return to text
12. The sensitivity analysis includes the 33 firms. It does not include all large financial institutions (LFI) firms. The list of participating firms is available here: https://www.federalreserve.gov/publications/files/2020-sensitivity-analysis-20200625.pdf. Return to text
13. In March, the Board adopted a final rule to integrate its capital planning and regulatory capital requirements through the establishment of a stress capital buffer requirement, creating a single, risk-sensitive capital framework for LBOs. The stress capital buffer requirement is calculated as the maximum decline in a firm's CET1 capital ratio over the supervisory stress test planning horizon plus four quarters of planned common stock dividends. See 85 Fed. Reg. 15,576 (March 18, 2020). Return to text
14. The scenarios are not predictions or forecasts of the likely path of the economy or financial markets. Return to text
15. In normal cycles, as compared to CCAR's assessment of capital planning practices, HCR is more limited in scope, includes targeted horizontal evaluations of specific areas of capital planning, and focuses on the more tailored expectations set forth in supervisory guidance specific to these firms. Return to text
16. Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus (Revised) (April 7, 2020); see also SR Letter 20-15 and SR Letter 20-18/ CA 20-13. Return to text
17. Firms that disclose loan modification figures in their second quarter 2020 10-Qs include: Bank of America Corporation; The Bank of New York Mellon Corporation; Capital One Financial Corporation; Citigroup Inc.; Citizens Financial Group, Inc.; Discover Financial Services; Fifth Third Bancorp; The Goldman Sachs Group, Inc.; Huntington Bancshares Incorporated; JPMorgan Chase & Co; KeyCorp; M&T Bank Corporation; Morgan Stanley; Northern Trust Corporation; The PNC Financial Services Group, Inc; Regions Financial Corporation; Truist Financial Corporation; and U.S. Bancorp. Return to text
18. There is not a standard definition of "loan modifications" within the banking industry, and the SEC has not provided guidance on how firms should report these balances on their 10-Qs. Accordingly, while publicly disclosed loan modifications indicate the magnitude of these balances, they do not provide comparable data across firms. Return to text
19. The term "CBO and RBO insured depository institutions" refers to state member banks, nonmember banks, and national banks in the CBO and RBO portfolios. Return to text
20. Refer to the Board press release on June 15, 2020, "Federal Reserve Statement on Supervisory Activities," https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200615a.htm. Return to text
21. From late-March to mid-June, the Federal Reserve paused most examination activities and shifted to off-site monitoring for CBOs and RBOs. Return to text