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 of institutions.
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 consumer 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 supervised institutions 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 107th Annual Report 2020.5
Supervisory Activities Are Returning to Pre-COVID Approaches
As conditions in the industry have stabilized, Federal Reserve supervisory activities are migrating back to pre-COVID approaches. When the COVID event began, supervisory activities were adjusted to allow banks to focus on their customers while allowing the Federal Reserve to monitor risks. Bank examinations were paused or replaced with monitoring activities. Additional information was collected from institutions on a real-time basis to track conditions. As the industry continues to remain in strong condition, most of these measures have been discontinued.
The Federal Reserve is reviewing which supervisory processes worked well during the COVID event and could be valuable to maintain. One area of this review has been on the use of off-site examinations. Off-site exams were used prior to the COVID event but became the only option during the height of the event. Banks have provided positive feedback on the use of off-site exams and activities during the COVID event. However, they have also expressed that they find value in having some on-site examiner presence. Once conditions allow, the Federal Reserve will resume using on-site exams as it has in the past. Based on experiences and feedback, the Federal Reserve intends to adopt an on-site and off-site "hybrid" approach.
Key Supervisory Priorities
While supervisory activities are adjusting back to pre-COVID approaches, priorities continue to focus on the uncertainty that the COVID event may have on the safety and soundness of supervised institutions. Examples of the lingering impact of the COVID event include the potential long-term impact on various credit segments, with a specific focus on CRE portfolios and consumer loan portfolios as forbearance and foreclosure moratoriums end. As mentioned earlier in this report, operational and cybersecurity resilience are ongoing supervisory priorities.
Box 5. Federal Reserve Outreach Spotlight: "Ask the Fed"
The Federal Reserve has an outreach program supporting its supervision function to provide information on proposed and new regulations, supervisory expectations, and economic conditions. This program—referred to as Ask the Fed®—is intended for bankers, financial institutions, and other public stakeholders.1 Launched in 2008, Ask the Fed® has served as an effective outreach program for Federal Reserve subject matter experts to reach these stakeholders on specific topics and allows participants to pose questions. The reach of this program has increased significantly over the past five years. The average attendance per session was 1,800 individuals in 2018, and in 2021, the average has been 3,200 attendees.
As an Ask the Fed® session requires only a phone for an individual to access, the Federal Reserve has been able to reach bankers and others who are working remotely. In a typical year, the Federal Reserve offers an average of 16 Ask the Fed® sessions. During the past 18 months, Ask the Fed® has proved to be a valuable outreach program, enabling the Federal Reserve to provide timely and detailed information on COVID-event-related topics. The Federal Reserve has held 46 sessions on pandemic-related topics over this time, with 92 percent of all participants indicating that a session was a good investment of their time. These sessions covered topics on the Federal Reserve's supervisory posture, supervisory and accounting considerations for loan modifications, the Emergency Capital Investment Program, the Main Street Lending Program, the Paycheck Protection Program (PPP), and the PPP Liquidity Facility.
This technology platform is also used to host Ask the Regulator sessions that cover topics with other federal or state banking agencies or other federal agencies. For instance, the Federal Reserve hosted several presentations by the Small Business Administration (SBA) on the PPP so that the SBA could explain the program to banks and encourage their participation.
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.
- 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 assets of $100 billion or more that are not supervised by the LISCC program and all foreign banking organizations are supervised by the Large and Foreign Banking Organization, or LFBO, program.
- Regional banking organizations (RBOs)—U.S. firms with total assets between $10 billion and $100 billion—are supervised by the RBO program.
- Community banking organizations (CBOs)—U.S. firms with less than $10 billion in total assets—are supervised by the CBO program.
Table 2 provides an overview of the organizations supervised by the Federal Reserve, by portfolio, including the number of institutions and total assets in each portfolio.
Table 2. Summary of organizations supervised by the Federal Reserve (as of 6/30/2021)
|Firm description||Definition||Number of institutions||Total assets ($ trillions)|
|Large Institution Supervision Coordinating Committee (LISCC) firms||U.S. global systematically important banks (G-SIBs)||8||14.3|
|LISCC State member banks (SMBs)||SMBs within LISCC organizations||4||1.1|
|Large and foreign banking organizations (LFBOs)||Non-LISCC U.S. firms with total assets $100 billion and greater and foreign banking organizations (FBOs)||174||9.6|
|Large banking organizations (LBOs)||Non-LISCC U.S. firms with total assets $100 billion and greater||17||4.6|
|Large FBOs (with IHC)||FBOs with combined U.S. assets $100 billion and greater||11||3.0|
|Large FBOs (without IHC)||FBOs with combined U.S. assets $100 billion and greater||7||0.9|
|Small FBOs (excluding rep offices)||FBOs with combined U.S. assets less than $100 billion||109||1.2|
|Small FBOs (U.S. rep offices)||FBO U.S. representative offices||30||0.0|
|State member banks||SMBs within LFBO organizations||10||1.3|
|Regional banking organizations (RBOs)||Total assets between $10 billion and $100 billion||87||2.5|
|State member banks||SMBs within RBO organizations||39||0.9|
|Community banking organizations (CBOs)||Total assets less than $10 billion*||3,671||2.9|
|State member banks||SMBs within CBO organizations||677||0.6|
|Insurance and commercial savings and loan holding companies (SLHCs)||SLHCs primarily engaged in insurance or commercial activities||6 insurance
* Includes 3,613 holding companies and 58 state member banks that do not have holding companies.
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. Appendix A, table 1.A provides an overview of these regulatory requirements.
Supervisory efforts for large financial institutions 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.6 The Federal Reserve's assessment of a firm is reflected in the firm's supervisory rating under the large financial institution rating system.7 As of the third quarter of 2021, over half of the large financial institutions are considered to be in satisfactory condition. Federal Reserve supervisors have observed that firms are generally meeting supervisory expectations with respect to capital planning and positions and liquidity risk management and positions. However, some firms continue to face challenges, particularly related to governance and controls.
Large financial institutions continue to report strong capital and liquidity positions.
Large financial institutions have remained well capitalized and able to support lending through the COVID event. (See Box 2, Third-Quarter 2021 Earnings at a Sample of Large Banks.) The aggregate common equity tier 1 capital ratio for large financial institutions in the second quarter of 2021 was 12.8 percent, higher than the ratio reported prior to the COVID event. As discussed below, recent stress test results show large financial institutions have sufficient capital levels to continue lending to households and businesses during a severe recession.
Liquidity is at historic highs at large financial institutions, driven by strong deposit growth. Bank deposits and liquid assets have continued to grow through the second quarter of 2021, albeit at a much slower pace than the early stages of the COVID event. As of the second quarter of 2021, large financial institutions fund approximately 60 percent of their assets in deposits, and liquid assets account for 30 percent of their total assets. Consequently, large financial institutions continue to maintain sufficient liquid assets to meet liquidity needs for a 30–day stress scenario.
Capital restrictions end as stress tests indicate sufficient capital.
The Federal Reserve released the results of its annual bank stress tests in late June, which showed that the 23 large financial institutions subject to this year's test continue to have strong capital levels and could continue lending to households and businesses during a severe recession.8
As a result, the additional capital distribution restrictions put in place during the COVID event ended in July 2021. Those restrictions had constrained share repurchases and dividends based on recent income and previous payouts. Although the additional restrictions have ended, large banks remain subject to the normal restrictions of the Board's capital rules, including the stress capital buffer framework.
This test was the latest of three stress tests run by the Federal Reserve since the onset of the COVID event to evaluate the ability of the banking system to support the ongoing recovery.
Operational resilience and cybersecurity remain a high priority.
Operational resilience is defined as a firm's ability to withstand and recover from disruptive events. This continues to be an area of focus for firms and supervisors. In assessing a large firm's operational resilience, the Federal Reserve evaluates the following:
- the effectiveness of the board of directors in overseeing—and senior management in implementing—sound practices to manage operational resilience;
- the resilience of the firm's information systems for the firm's critical operations and core business lines; and
- the effectiveness of the firm's business continuity and disaster recovery plans, processes, and procedures to support timely restoration of systems or assets affected by incidents.
Cybersecurity is a critical component of operational resilience and remains the top risk identified at supervised firms. Cyber threats and attacks have increased significantly since the onset of the COVID event. Ransomware attacks continue to be a concern in the financial sector.
The Federal Reserve expects firms to implement an effective cybersecurity posture. Supervisory expectations include basic cyber hygiene, such as IT asset management, vulnerability management, and patch management. Supervisors also expect firms to proactively identify and mitigate cyber threats and remain vigilant to strengthen their operational resilience. The Federal Reserve continues to monitor and evaluate cybersecurity risk-management practices across large financial institutions.
For the largest and most complex financial institutions, the Federal Reserve, along with the FDIC and OCC, has established a program to partner on cybersecurity reviews. The program will improve cybersecurity examination coverage, build an understanding of firms' cybersecurity posture, and reduce regulatory overlap while increasing efficiency and consistency. The program was established in 2020, and the first cycle of examinations was recently completed. For large financial institutions not assessed through the interagency program, the Federal Reserve reviews cybersecurity capabilities and coordinates in a less formal way with other agencies.
Box 6. Upcoming Large Financial Institution Supervisory Priorities
- trading and counterparty credit risk management, including areas such as concentrations, hedging, and client leverage
- risks associated with the evolving interest rate environment and the expiration of pandemic era relief measures, including interest rate risk and credit risk
- readiness for recent updates to the capital framework and reviews of risk-weighted assets under the capital rule
- internal liquidity stress testing scenarios, assumptions, and methodologies
- independent risk management
- nonbank liquidity risk
- collateral management
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 operation reviews
- international coordination
Box 7. Archegos Supervisory Assessment
Archegos Capital Management, an investment firm heavily concentrated in a small number of U.S. and Chinese technology and media companies, defaulted on March 26, 2021, causing over $10 billion in losses across several large banks, principally outside the United States. The Federal Reserve, along with other U.S. and foreign regulators, initiated a supervisory assessment to understand the actions that led to Archegos's failure and assess any risk-management shortcomings at supervised firms.
The supervisory assessment covered firms that had material exposure to Archegos. The agencies looked at onboarding and due diligence practices on prime brokerage clients, counterparty credit risk-management and margining practices, and the processes to unwind positions in the event of a counterparty default, among other areas.
Upon conclusion of the assessment, supervisors will provide feedback to firms on areas of weak practices. The event has so far revealed weaknesses in margin practices and counterparty risk management at some firms. The assessment also highlights the importance of continued global coordination in the supervision of cross-jurisdictional activities.
Community and Regional Banking Organizations
This section discusses the financial condition and 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 have remained in stable financial condition throughout the COVID event.
CBOs and RBOs have exhibited resilience throughout the COVID event. The aggregate leverage ratio for both CBOs and RBOs declined somewhat from the fourth quarter of 2019 to the second quarter of 2021, as bank assets increased, driven by PPP lending and deposit growth. More than 99 percent of CBOs and RBOs have capital ratios above well-capitalized minimums. Profitability of CBOs and RBOs has also recovered to pre-COVID-event levels.
Traditional asset quality metrics appear sound. The balance of loans modified due to the COVID event, in accordance with section 4013 of the CARES Act, has fallen significantly. For CBOs, these balances fell from $205 billion as of the second quarter of 2020 to $45 billion as of the second quarter of 2021. Over the same period, RBOs' balances went from $163 billion to $21 billion. However, asset quality could decline when loan accommodations and public-sector stimulus programs expire. While the data from the third-quarter 2021 regulatory financial report are not yet available, earlier indications are that financial conditions of CBOs and RBOs are trending in the same direction as the second quarter.
The majority of CBOs and RBOs report improving credit conditions.
Based on discussions between Federal Reserve supervisors and supervised institutions, most CBOs and RBOs are not expecting changes in their lending strategies, except for loans to borrowers in certain industries that were adversely affected by the COVID event. Most CBOs and RBOs have indicated that they have limited concerns that falling collateral valuations are affecting credit conditions. Many firms noted that recent appraisals have shown stable or a minimal decline in property values, except for certain CRE segments.
Generally, CBOs report stable or improving credit conditions. A few community banks noted some downgrades in certain segments of their commercial loan portfolios. For borrowers still facing challenges from the COVID event, CBOs noted that these borrowers have sought additional loan accommodations. Most RBOs report no material change in credit conditions, with several noting upgrades of loan risk ratings as commercial borrowers return to normalized operations.
CBOs and RBOs generally fared well in terms of operational resilience in response to the COVID event, though challenges persist. The Federal Reserve and the other federal financial regulatory agencies recently reminded financial institutions about the risks arising from cybersecurity attacks and the need to effectively authenticate users and customers to protect information systems, accounts, and data.9
The Federal Reserve has refined CBO and RBO supervisory activities, incorporating lessons learned from the COVID event.
During the past year, off-site monitoring enabled the Federal Reserve to assess the implications of the COVID event for CBOs and RBOs and to provide the necessary assistance to these institutions as they responded to these events.
CBO and RBO supervisory activities continue to be focused on high-risk institutions, including regular engagement between Federal Reserve examiners and bank management. For low- and moderate-risk institutions, the Federal Reserve has recently returned to pre-COVID-event practices for establishing the scope and schedule for CBO and RBO examinations, either once every 12- or 18-month period.10 The Federal Reserve will continue to assess the adequacy of an institution's risk-management practices for capital and liquidity resilience. Examiners will rely on existing guidance to assess how bank management assigns asset classifications and downgrades credits. Further, the Federal Reserve has stated that examiners will not criticize management's actions for prudent efforts to work with borrowers or support their communities throughout the COVID event.11
Since the onset of the COVID event, 1 percent of CBO state member bank exams resulted in a downgrade from a satisfactory to a less-than-satisfactory CAMELS composite rating, while the same percentage of CBO state member bank exams resulted in an upgrade from a less-than-satisfactory to a satisfactory rating during that same period.12 As of the third quarter of 2021, 96 percent of CBOs and RBOs are rated satisfactory or better, and 97 percent of CBO and RBO state member banks are rated satisfactory or better.
Box 8. CBO and RBO Supervisory Priorities
- refining the risk-focused supervisory approach, incorporating lessons learned from the COVID event
- assessing capital preservation and liquidity resilience
- evaluating risk-identification and management practices
- prioritizing examiner resources on high-risk institutions
- loan modifications
- credit concentrations, including commercial real estate loan concentrations
high-risk loan portfolios
- commercial real estate loan portfolios
- loans to borrowers in pandemic-affected industries
- 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
Box 9. CECL Tool—SCALE
On July 15, 2021, the Federal Reserve introduced a method and tool to aid community banks with less than $1 billion in total assets in implementing the Current Expected Credit Losses (CECL) accounting standard. Federal Reserve staff developed the Scaled CECL Allowance for Losses Estimator (SCALE) method and tool for smaller community banks to use in estimating their allowances for credit losses under CECL.1
The SCALE tool is a simple, spreadsheet-based method to calculate CECL-compliant allowances for credit losses. The tool uses publicly available data from the Call Report to derive the initial proxy for expected lifetime loss rates. If a bank decides to use the SCALE tool, the bank still needs to apply qualitative adjustments, reflecting the bank's unique facts and circumstances. Bank management remains responsible for ensuring that the bank's allowances accurately reflect the credit risk in its portfolio and loss history.
The SCALE method is one of many potentially acceptable CECL methods that a bank may use to estimate its allowances for credit losses. The SCALE method is not a regulator-preferred method and does not ensure compliance with U.S. generally accepted accounting principles (GAAP) or any other regulatory requirement.
5. Board of Governors of the Federal Reserve System, 107th Annual Report (Washington: Board of Governors, 2021), https://www.federalreserve.gov/publications/files/2020-annual-report.pdf. Return to text
6. The Federal Reserve focuses on recovery planning for LISCC firms only. For more information regarding the framework for supervision of large financial institutions, see Board of Governors of the Federal Reserve System, SR Letter 12-17/ 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
7. See Board of Governors of the Federal Reserve System, SR Letter 19-3/CA Letter 19-2, "Large Financial Institution (LFI) Rating System," at https://www.federalreserve.gov/supervisionreg/srletters/sr1903.htmThe Federal Reserve's and FDIC's assessment of resolution planning is communicated to the firm in connection with the agencies' review of the Title I resolution plans. Return to text
8. Board of Governors of the Federal Reserve System, news release, "Federal Reserve Board releases results of annual bank stress tests, which show that large banks continue to have strong capital levels and could continue lending to households and businesses during a severe recession," June 24, 2021, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210624a.htm. Return to text
9. Board of Governors of the Federal Reserve System, SR Letter 21-14, "Authentication and Access to Financial Institution Services and Systems," August 11, 2021, https://www.federalreserve.gov/supervisionreg/srletters/sr2114.htm. Return to text
10. An examination of every insured state member bank is conducted at least once during each 12-month period. For certain small institutions, the examination frequency is once during each 18-month period. Refer to the Federal Reserve's Commercial Bank Examination Manual at https://www.federalreserve.gov/publications/files/cbem.pdf. Return to text
11. Board of Governors of the Federal Reserve System, 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