The Federal Reserve supervises financial institutions to assess their safety and soundness and compliance with laws and regulations. This section provides an overview of key supervisory developments related to supervised institutions. The section distinguishes between large financial institutions and community and regional banking organizations because supervisory approaches and priorities differ across these groups.
The Federal Reserve also conducts consumer-focused supervision 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 2019.10
Key Supervisory Priorities
In response to the disruptions posed by the COVID event, Federal Reserve supervisors have conducted examination and monitoring activities to assess whether financial institutions have the financial and operational strength to meet the challenges faced by their customers and local communities.
Since the start of the COVID event, supervisors have focused on the extent to which banking organizations understand their risks, estimate expected losses appropriately, and take action to conserve capital where prudent.11 The Federal Reserve has evaluated the actions that firms have taken to accommodate their borrowers, as described above in box 1.
In addition, Federal Reserve supervisors have focused on whether firms are able to withstand and recover from disruptions to their operations. Operational incidents can range in scope, severity, and impact to individual firms and the broader financial system. Supervisors also evaluate the ability of firms to adapt to changes in market standards and accounting rules. These changes include a firm's transition from using LIBOR to alternative reference rates (discussed in box 4) and a firm's implementation of CECL (as discussed in the November 2020 Supervision and Regulation Report).
Box 4: Ensuring Adequate Planning to Transition away from LIBOR
The Federal Reserve is increasing supervisory attention on banks' efforts to transition away from LIBOR. On March 9, 2021, the Federal Reserve issued supervisory guidance for examiners to use in assessing institutions' LIBOR transition plans.1 This guidance reinforces an interagency statement issued by the Federal Reserve, the FDIC, and the OCC on November 30, 2020, that encouraged firms to stop issuing new LIBOR contracts as soon as practicable, and in any event by December 31, 2021.2
Examiners will confirm that firms are adequately planning for the transition. Firms should be tracking the number of their LIBOR exposures, modifying IT systems and models that use LIBOR, and identifying contracts that refer to LIBOR. Examiners will share findings with banks and may issue recommendations for action if a firm is not making appropriate progress.
The transition away from LIBOR will require significant attention over the next year. Banks that write new LIBOR-based contracts should include robust fallback language and define an alternative reference rate in such contracts after LIBOR is no longer available. In addition, banks should identify other potential risks related to the change and work to mitigate those risks ahead of the anticipated end to LIBOR.
1. See SR letter 21-7, "Assessing Supervised Institutions' Plans to Transition Away from the Use of the LIBOR," at https://www.federalreserve.gov/supervisionreg/srletters/SR2107.htm. Return to text
2. See SR letter 20-27, "Interagency Statement on LIBOR Transition," at https://www.federalreserve.gov/supervisionreg/srletters/SR2027.htm. Return to text
Transparency in Supervision
The Federal Reserve continues to focus on increasing transparency, simplicity, and predictability in supervision.
In 2020, the Federal Reserve published additional information regarding the supervisory program for the largest, most complex firms—the LISCC supervisory program—and simplified the scope of the supervisory program to include U.S. global systemically important banks (G-SIBs) and other firms that pose similar risk to U.S. financial stability.12 Last month, the Federal Reserve provided clarity to foreign banking organizations, scoping in a foreign banking organization to the LISCC supervisory program if its U.S. operations have a risk profile similar to a U.S. G-SIB.13 The revised scope of the LISCC supervisory program increases transparency and aligns the Federal Reserve's supervisory program with the current risk-based categories in its regulatory framework.
The Federal Reserve provided additional transparency to all supervised institutions by updating the process that a supervised institution uses to appeal a material supervisory determination. It also published additional information about the Board's Ombudsman Office, which facilitates the fair and timely resolution of complaints related to the System's supervisory and regulatory activities. These updates are described in box 5.
The Federal Reserve is expanding its outreach efforts, with a particular emphasis on smaller institutions. Recently, the Federal Reserve joined the FDIC in publishing the examination procedures that are used for CBOs and RBOs.14 Through the Ask the Fed program, the Federal Reserve continues to host webinars with supervised institutions and senior Board officials and subject matter experts about new or important regulations and supervisory guidance. For CBOs and RBOs, the Federal Reserve issues the Community Banking Connections publication that addresses the challenges and concerns facing smaller institutions.15
In December 2020, the Federal Reserve initiated a public dialogue on the questions of transparency and due process through a public conference on bank supervision, co-hosted with Harvard Law School and the Wharton School of the University of Pennsylvania, as discussed in box 6.
Box 5: The Board's Ombudsman Office
The Office of the Ombudsman has three major functions. Primarily, the office resolves complaints related to the System's supervisory and regulatory activities. For example, financial institutions can contact the Office of the Ombudsman about supervisory component and composite ratings; findings in safety and soundness and consumer compliance examinations; and timing, process, or other concerns relating to examinations.
Second, the Office of the Ombudsman investigates any claim that System staff has retaliated against a supervised institution, which the Board strictly prohibits. The Board's Ombudsman Policy Statement defines retaliation as any action or decision by Board or Reserve Bank staff that causes a supervised institution to be treated differently or more harshly than other similarly situated institutions.1
Third, the Office of the Ombudsman provides feedback to Board members and senior staff about complaints raised by supervised institutions that are likely to have a significant effect on the Federal Reserve's missions, activities, or reputation.
The Office of the Ombudsman is also involved in a supervised institution's appeal of a material supervisory determination. See appendix A for a definition of "material supervisory determinations." In 2020, the Board amended these policies, drawing on its experience, to improve and expedite the appeals process.2
1. Refer to the Board's public website at https://www.federalreserve.gov/aboutthefed/ombpolicy.htm. Return to text
2. Refer to SR letter 20-28/CA letter 20-14, "Internal Appeals Process for Material Supervisory Determinations and Policy Statement Regarding the Ombudsman for the Federal Reserve System," at https://www.federalreserve.gov/supervisionreg/srletters/SR2028.htm. Return to text
Box 6: Conference on Bank Supervision: Theory and Practice in Supervision
On December 11, 2020, the Federal Reserve Board, the Harvard Law School, and the Wharton School of the University of Pennsylvania co-hosted a conference to discuss the theory and practice of bank supervision. This conference brought together academics, supervisors, bankers, and other stakeholders. Over 1,500 people watched the live virtual event.
The conference included four panel discussions. Federal Reserve Vice Chair for Supervision Randal K. Quarles and FDIC Chair Jelena McWilliams also gave remarks. The opening panel highlighted why supervision is important and how it adapts to the business cycle. Panelists argued that supervision differs from, and is complementary to, regulation. They also debated whether the discretion inherent in the supervisory process allows it to fill gaps that cannot be addressed through regulation. The second panel tackled the issue of transparency, focusing on disclosure of confidential supervisory information. Panelists noted that the desired balance between transparency and confidentiality may shift in times of stress.
In his keynote speech, Vice Chair Quarles highlighted the differences between supervision and regulation. He also emphasized the importance that both systems remain simple, predictable, and transparent.
The conference discussion also explored the tension between discretion and due process. Panelists noted that though bank supervision must be flexible to be effective, it should also include procedural safeguards to be fair. The conference concluded by considering future areas for research, including collaboration between academics and supervisory authorities.
Links to conference materials and video replays are available on the Board's public website at https://www.federalreserve.gov/conferences/conference-on-bank-supervision.htm.Return to text
The Federal Reserve supervises bank holding companies, savings and loan holding companies, and state member banks of varying size and complexity. The Federal Reserve follows a risk-focused approach by scaling its supervisory work to the size and complexity of an institution.16
- Firms identified as posing elevated risk to U.S. financial stability are supervised by the Large Institution Supervision Coordinating Committee, or LISCC, program.
- U.S. firms with $100 billion and greater in assets, and foreign banking organizations with combined U.S. assets of $100 billion and greater, that are not supervised within the LISCC program are supervised by the Large and Foreign Banking Organization, or LFBO program.17
- Regional banking organizations (RBOs)—firms with total assets between $10 billion and $100 billion—are supervised by the RBO program.
- Community banking organizations (CBOs)—firms with less than $10 billion in total assets—are supervised by the CBO program.
Table 2 provides an overview of the organizations supervised by the Federal Reserve, by portfolio, including the number of institutions and total assets in each portfolio.
Table 2. Supervised institutions (data as of Q4:2020) **
|Portfolio||Definition||Number of institutions||Total assets ($ trillions)|
|Large Institution Supervision Coordinating Committee (LISCC)||Eight U.S. global systematically important banks (G-SIBs)||8||13.5|
|State member banks (SMBs)||SMBs within LISCC organizations||4||1|
|Large and foreign banking organizations (LFBOs)||Non-LISCC U.S. firms with total assets $100 billion and greater and FBOs||174||9.1|
|Large banking organizations (LBOs)||Non-LISCC U.S. firms with total assets $100 billion and greater||16||4.2|
|Large FBOs||FBOs with combined assets $100 billion and greater||17||3.6|
|Small FBOs (excluding rep offices)||FBOs with combined assets less than $100 billion||110||1|
|Small FBOs (rep offices)||FBO U.S. representative offices||30||0|
|State member banks||SMBs within LFBO organizations||9||1.2|
|Regional banking organizations (RBOs)||Total assets between $10 billion and $100 billion||89||2.5|
|State member banks||SMBs within RBO organizations||39||0.9|
|Community banking organizations (CBOs)||Total assets less than $10 billion||3,696*||2.7|
|State member banks||SMBs within CBO organizations||682||0.6|
|Insurance and commercial savings and loan holding companies (SLHCs)||SLHCs primarily engaged in insurance or commercial activities||7 insurance
Note: The three LISCC FBOs transferred from the LISCC portfolio to the LFBO portfolio effective 1/1/2021. These three firms have been moved to the LFBO portfolio in the table above.
* Includes 3,638 holding companies and 58 state member banks that do not have holding companies.
**Note: The Federal Reserve revised this report on July 6, 2021, to reflect corrected data, including adjustments to revised regulatory filings. The following data were corrected for the number of large and foreign banking organizations from 175 to 174 and total assets (trillions of dollars) from $8.8 to $9.1. The total number of small FBOs (rep offices) was changed from 32 to 30. The total number of state member banks was changed from eight to nine and total assets (trillions of dollars) from $1.1 to $1.2.
Large Financial Institutions
This section of the report discusses the supervisory approach for large financial institutions supervised within the LISCC or LFBO portfolios, which are U.S. firms with assets of $100 billion and greater and foreign banking organizations with combined U.S. assets of $100 billion and greater. These firms are separated into categories used for applying regulatory requirements, as set forth in table 1.A in appendix A.
Supervisory efforts in this portfolio are organized to focus on four specific components: (1) capital planning and positions, (2) liquidity risk management and positions, (3) governance and controls, and (4) recovery and resolution planning.18 On the whole, firms are generally meeting or exceeding supervisory expectations with respect to capital planning and positions and liquidity risk management and positions. However, challenges continue to remain for some firms, particularly related to governance and controls.
Given the nature of issues presented by the COVID event, this report focuses on supervisory developments related to large financial institutions' capital planning and positions and their governance and controls.
Large financial institutions remain well capitalized on a current and post-stress basis.
Large financial institutions remain well capitalized and able to support lending. The aggregate CET1 capital ratio for large bank holding companies in the fourth quarter of 2020 was 12.8 percent, an increase compared to the end of 2019 despite the disruptions to economic activity during 2020.19
Stress testing has been an important supervisory tool during the COVID event to assess large banks' financial resilience. In December 2020, the Federal Reserve completed its second stress test of 2020, which showed that large bank holding companies would maintain strong capital levels under two separate hypothetical recessions. Under both scenarios, large banks would collectively have more than $600 billion in total losses. These losses are considerably higher than those in the first stress test of 2020, conducted six months earlier. However, bank capital ratios would remain well above the 4.5 percent minimum, declining from an average starting point of 12.2 percent to 9.6 percent in the more severe scenario.
In light of ongoing economic uncertainty and to preserve the strength of the banking sector, the Board imposed temporary and additional restrictions on bank holding company dividends and share repurchases. Through the first half of 2021, dividends and share repurchases, combined, are limited to an amount based on income over the past year. The temporary and additional restrictions will end for most firms after June 30, 2021, after completion of the upcoming round of stress tests. Firms with stress test results reflecting risk-based capital levels above their minimum requirements will no longer be subject to the additional restrictions after June 30. Instead, these firms will be subject to restrictions based on the Board's regular capital framework, the stress capital buffer. Firms with stress test results reflecting risk-based capital levels below their minimum requirements will remain subject to the restrictions.
The Federal Reserve has conducted several horizontal examinations in order to assess how firms were adapting their capital planning in response to the COVID event.20 In the coming year, the Federal Reserve will focus its supervisory efforts on risk identification and risk-management practices, such as the efforts of firms to identify risks and estimate losses in the current environment, the soundness of firms' internal risk-rating processes, and the adequacy of firms' credit loss recognition and loan review practices. For more detail on supervisory priorities for large financial institutions, see box 7.
Large financial institutions have shown operational resilience to the COVID event.
A firm's operational resilience—or its ability to withstand and recover from stressful events—is a key supervisory focus for large financial institutions (see box 8). In assessing a large firm's operational resilience, the Federal Reserve evaluates a firm's governance, resilience of its information systems, and recovery capabilities. In 2020, large firms have shown operational resilience to the COVID event, as they have continued to provide critical business services to their clients over the last year. Digitization of banking activities allowed firms to continue these operations in the remote work environment.
Effective management of cybersecurity risk is a key component of operational resiliency. In response to growing cybersecurity risks over the past few years, the Federal Reserve, along with the FDIC and the OCC, has established a program to partner on cybersecurity reviews at the largest and most complex financial institutions. These efforts are designed to reduce regulatory overlap while increasing supervisory efficacy, consistency, and efficiency. The interagency exams first began in 2020 and are continuing this year.
Box 7: Upcoming Large Financial Institution Supervisory Priorities
- Credit risk, including areas such as internal risk rating accuracy, credit loss recognition, loan review, and credit risk rating process
- Estimation of credit losses and identification of risks in the post-COVID environment
- Earnings pressures and the ability to sustain sound capital levels
- Board effectiveness and engagement, including risk identification and scenario design practices
- Internal liquidity stress testing scenarios, assumptions, and methodologies
- Liquidity risk limits and related governance processes
- Daily and short-term liquidity risk-management monitoring programs
Governance and controls
- Operational resilience, including cyber-related and information technology risks
- Compliance risk management, including Bank Secrecy Act/anti-money-laundering programs and Office of Foreign Assets Control compliance
- LIBOR transition preparedness
Recovery and resolution planning
- Resolution plan and critical operations reviews
- Recovery planning (for LISCC firms)
- International coordination
Box 8: Interagency Paper Outlines Sound Practices to Strengthen Operational Resilience
On October 30, 2020, the federal bank regulatory agencies released a paper outlining sound practices designed to help large banks increase their operational resilience.1 Examples of risks to operational resilience include cyberattacks, natural disasters, and pandemics.
The paper outlines practices to increase operational resilience at large banks that are drawn from existing regulations, guidance, statements, and common industry standards. The practices are grounded in effective governance and risk-management techniques, consider third-party risks, and include resilient information systems. The paper does not revise the agencies' existing rules or guidance. The agencies intend to hold discussions with the public on further steps to improve operational resilience.
1. See SR letter 20-24, "Interagency Paper on Sound Practices to Strengthen Operational Resilience," at https://www.federalreserve.gov/supervisionreg/srletters/SR2024.htm. Return to text
Community and Regional Banking Organizations
This section of the report discusses the supervisory approach for banking organizations with assets less than $100 billion. These institutions include 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 remain in stable condition as of the end of 2020.
CBOs and RBOs generally report stable operational and credit conditions. However, they acknowledge continued uncertainty about the future performance of loans to industries and businesses most affected by the COVID event. While the aggregate tier 1 leverage ratio for CBOs and RBOs has declined since the beginning of 2020, this ratio remained relatively robust as of year-end 2020. As noted in figure 9, the aggregate tier 1 leverage is 10 percent for CBOs and nearly 9 percent for RBOs.
In addition, the number of CBOs and RBOs reporting losses has declined throughout the year. While roughly 5 percent of CBOs and 13 percent of RBOs were reporting net losses as of mid-year 2020, only 3.5 percent of CBOs and 7.5 percent of RBOs have reported losses as of year-end 2020. Further, CBOs and RBOs report generally stable or increasing liquidity levels and lower reliance on noncore funding.
Based on recent supervisory activities, the Federal Reserve has found that CBOs and RBOs are generally addressing the risks arising from the COVID event within their loan portfolios and operations. In these activities, the Federal Reserve has found that many CBOs and RBOs have increased their reliance on technology to help their customers and communities through the COVID event. The Federal Reserve expects institutions to monitor and mitigate cyber threats and remain vigilant, including maintaining preventive and detective controls. As CBOs and RBOs increase their reliance on third parties for technology services, the Federal Reserve has emphasized the importance of sound risk management for an institution's third-party risk exposure.
Most CBOs and RBOs project flat or minimal loan growth in 2021. Increasing credit risks are evident in those borrowers adversely affected by the COVID event. As many CBOs and RBOs are commercial real estate lenders, the Federal Reserve is closely monitoring the condition of banks with concentrations of commercial real estate loans.
The Federal Reserve continues to focus on high-risk CBOs and RBOs.
The Federal Reserve resumed examinations of CBO and RBO firms in June 2020 and remains focused on assessing the overall safety and soundness of CBOs and RBOs and the effectiveness of their risk management.21 In particular, the Federal Reserve is placing a priority on the examination of high-risk CBOs and RBOs and assessing their financial resiliency. Since resuming examinations, state member bank ratings have remained relatively stable.
The Federal Reserve is also closely monitoring asset quality measures of CBOs and RBOs and their processes for credit loss recognition. To aid in prioritizing supervisory activities, the Federal Reserve continues to regularly engage with CBOs and RBOs to understand their operational capacity and challenges. Refer to box 9 for CBO and RBO Supervisory Priorities for the remainder of 2021.
Box 9: CBO and RBO Supervisory Priorities
- Capital and liquidity resiliency
- Risk-identification and management practices
- Loan modifications
High-risk loan portfolios
- commercial real estate loan portfolios
- loans to borrowers in industries affected by the COVID event
- Underwriting practices and asset growth
- Reserve practices and levels
- Capital planning, projections, needs, and vulnerabilities
- Capital actions
- Earnings assessment
- Continuity of operations
- Information technology and cybersecurity
10. See 106th Annual Report 2019, section 5, "Consumer and Community Affairs," at https://www.federalreserve.gov/publications/annual-report.htm. Return to text
11. For more information on the Federal Reserve's approach to evaluating resiliency in light of the COVID event, see SR letter 20-15, "Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions," at https://www.federalreserve.gov/supervisionreg/srletters/sr2015.htm. Return to text
12. Specifically, these institutions include savings and loan holding companies with a risk profile similar to a U.S. G-SIB and nonbank financial companies supervised by the Board. Return to text
13. See SR letter 20-30, "Firms Subject to the LISCC Supervisory Program," at https://www.federalreserve.gov/supervisionreg/large-institution-supervision.htm. Return to text
14. Refer to the Board's public website for the Examination Documentation modules at https://www.federalreserve.gov/publications/examination-documentation-modules.htm. Return to text
16. Federal Reserve examiners work with staff in the Board's Division of Consumer and Community Affairs to review a state member bank's performance under the Community Reinvestment Act (CRA) as well as assessment of compliance with and enforcement of a wide range of consumer protection laws and regulations, for example, those related to fair lending, unfair or deceptive acts or practices (UDAP), and flood insurance. Return to text
17. The LFBO program also supervises foreign banking organizations with combined U.S. assets of less than $100 billion. Return to text
18. The Federal Reserve focuses on recovery planning for LISCC firms only. For more information regarding the framework for supervision of large financial institutions, see SR letter12-17/ CA letter 12-14, "Consolidated Supervision Framework for Large Financial Institutions," at https://www.federalreserve.gov/supervisionreg/srletters/sr1217.htm; and box 4 of the November 2018 Supervision and Regulation Report at https://www.federalreserve.gov/publications/2018-november-supervision-and-regulation-report-preface.htm. Return to text
19. Large banks include all bank holding companies and intermediate holding companies with $100 billion and greater in total consolidated assets. Return to text
20. For more information on supervisory observations from these exercises, see the November 2020 Supervision and Regulation Report at https://www.federalreserve.gov/publications/2020-november-supervision-and-regulation-report.htm. Return to text
21. For a discussion on the resumption of examinations following the examination pause from March 2020 to June 2020, see the November 2020 Supervision and Regulation Report at https://www.federalreserve.gov/publications/2020-november-supervision-and-regulation-report.htm. Return to text