Supervisory Developments
This section provides an overview of recent supervisory efforts to assess firms' safety and soundness and compliance with laws and regulations. There are separate subsections for large financial institutions (LFIs) with assets of $100 billion or more and community and regional banking organizations. Supervisory approaches and priorities differ across these groups.
The Federal Reserve is responsible for overseeing the implementation of 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 marketplace for financial services 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 108th Annual Report 2021.9
Supervisors are focusing on remediation of outstanding supervisory findings and evolving risks.
Supervisory priorities are focused on both previously identified supervisory findings and emerging concerns arising from changing economic conditions. Examiners will be monitoring and assessing a supervised institution's remediation of supervisory findings in areas such as independent risk management and controls, compliance, operational and cyber resilience, and information technology. Supervisors also recognize that financial risks may be heightened in the uncertain economic environment, including higher credit and interest rate risks.
As economic conditions evolve, supervisors will be monitoring the potential effect on the operations and financial condition of supervised institutions, including
- exposure to leveraged positions in interest rate-sensitive markets,
- changes in liquidity and capital,
- changes in the stability of customer deposits,
- investment securities valuations,
- increases in bank and customer borrowing costs,
- potential declines in collateral values,
- impacts to the financial condition of customers, and
- availability of credit and financial services.
The Federal Reserve announced changes to bank application filing.
The Federal Reserve recently announced the replacement of the bank application filing system with a new and upgraded system known as FedEZFile (box 9). FedEZFile will provide real-time status tracking, two-way messaging, and digitally signed documents for applications.
Box 9. Federal Reserve Replaces Electronic Applications System (E-Apps) with FedEZFile
On October 17, 2022, the Federal Reserve released FedEZFile TM and FedEZFile Fluent TM to replace the Electronic Applications System (E-Apps) that previously facilitated the Federal Reserve's application filing process.1 FedEZFile provides an intuitive and transparent application filing experience, while minimizing paper forms and communications. FedEZFile Fluent is a companion learning resource that provides written and video guidance for registering, accessing, and using the system.
All pending applications filed prior to October 17, 2022, have been transferred to FedEZFile for continued processing.
Answers to frequently asked questions related to FedEZFile and the transition from E-Apps are available on the Federal Reserve's public website.2
1. Refer to SR Letter 22-9/CA Letter 22-8, "FedEZFile TM and FedEZFile Fluent TM to Be Released for Filing Applications with the Federal Reserve," at https://www.federalreserve.gov/supervisionreg/srletters/sr2209.htm. Return to text
2. Refer to SR 22-9 Letter/CA Letter 22-8, "Answers to Frequently Asked Questions on FedEZFile TM," at https://www.federalreserve.gov/supervisionreg/srletters/sr2209a1.pdf. Return to text
Supervised Institutions
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 supervisory work to the size and complexity of an institution.
- The Large Institution Supervision Coordinating Committee (LISCC) program supervises firms that pose elevated risk to U.S. financial stability.
- The Large and Foreign Banking Organization (LFBO) program supervises U.S. firms with total assets of $100 billion or more and all foreign banking organizations operating in the U.S. regardless of size.
- 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 $10 billion in total assets—are supervised by the CBO program.
Table 2 provides an overview of the organizations supervised by the Federal Reserve, by portfolio, including the number of institutions and total assets in each portfolio.
Table 2. Summary of organizations supervised by the Federal Reserve, as of 2022:Q2
| Portfolio | Definition | Number of institutions | Total assets ($ trillions) |
|---|---|---|---|
| Large Institution Supervision Coordinating Committee (LISCC) | Eight U.S. global systemically,important banks (G-SIBs) | 8 | 14.7 |
| State member banks (SMBs) | SMBs within LISCC organizations | 4 | 1.2 |
| Large and foreign banking organizations (LFBOs) | Non-LISCC U.S. firms with total assets $100 billion and greater and FBOs | 173 | 10.3 |
| Large banking organizations (LBOs) | Non-LISCC U.S. firms with total assets $100 billion and greater | 18 | 5.0 |
| Large FBOs (with IHC) | FBOs with combined U.S. assets $100 billion and greater | 11 | 3.1 |
| Large FBOs (without IHC) | FBOs with combined U.S. assets $100 billion and greater | 7 | 1.0 |
| Small FBOs (excluding rep offices) | FBOs with combined assets less than $100 billion | 106 | 1.1 |
| Small FBOs (rep offices) | FBO U.S. representative offices | 31 | 0 |
| State member banks | SMBs within LFBO organizations | 9 | 1.4 |
| Regional banking organizations (RBOs) | Total assets between $10 billion and $100 billion | 99* | 2.7 |
| State member banks | SMBs within RBO organizations | 32 | 1.0 |
| Community banking organizations (CBOs) | Total assets less than $10 billion | 3,544** | 2.8 |
| State member banks | SMBs within CBO organizations | 654 | 0.6 |
| Insurance and commercial savings and loan holding companies (SLHCs) | SLHCs primarily engaged in insurance or commercial activities | 6 insurance 4 commercial | 0.9 |
* Includes 98 holding companies and 1 state member bank without a holding company.
** Includes 3,490 holding companies and 54 state member banks without holding companies.
Large Financial Institutions
This section of the report discusses the supervisory approach for LFIs, U.S. firms with total assets of $100 billion or more and foreign banking organizations with combined U.S. assets of $100 billion or more. These firms are either within the LISCC portfolio or the LFBO portfolio. Large financial institutions are subject to regulatory requirements that are tiered to the risk profiles of these firms. Appendix A provides an overview of key regulatory requirements.
Supervisory efforts for large financial institutions focus on four components:
- capital planning and positions,
- liquidity risk management and positions,
- governance and controls, and
- recovery and resolution planning.10
For large financial institutions, the Federal Reserve's assessment of a firm's condition is reflected in the firm's supervisory rating under the LFI rating system.11 The LFI rating system represents a supervisory evaluation of whether a firm possesses sufficient financial and operational strength and resilience to maintain safe-and-sound operations and comply with laws and regulations, including those related to consumer protection, through a range of conditions.12 The LFI rating system comprises the following three components:
- capital planning and positions,
- liquidity risk management and positions, and
- governance and controls.
For the first quarter of 2022, just under half of these firms have satisfactory ratings across all three LFI rating components. Most 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 related to governance and controls. Overall, the percentage of large financial institutions rated satisfactory has been stable, with a slight decrease since 2021 (figure 9).
Figure 9. Ratings for large financial institutions
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Note: Financial institutions are rated on a composite basis from components based upon risk management, operational controls, regulatory compliance, and asset quality. The 2022 value is as of the end of 2022:Q2.
Source: Internal Federal Reserve supervisory databases.
Large financial institutions have remained well capitalized. Their aggregate CET1 capital ratio in the second quarter of 2022 was 11.9 percent. While capital ratios have declined from the end of 2021, recent stress test results suggest that these firms remain sufficiently capitalized to continue lending to households and businesses in a simulated period of stress.
Liquidity positions remain generally adequate, and these firms generally continued to maintain sufficient liquid assets to meet liquidity needs for a 30-day stress scenario.
At the same time, many of these firms have multiple unresolved supervisory findings on governance and controls that are under remediation, including weaknesses in operational resilience, information technology, third-party risk management, and Bank Secrecy Act/anti-money-laundering compliance. Additionally, some firms are addressing weaknesses in data quality programs, risk-weighted asset calculations, and liquidity management.
Large financial institutions are generally meeting supervisory expectations for capital, but some weaknesses were noted.
The supervision of large financial institutions' capital planning and positions includes a supervisory stress test, the stress capital buffer requirement, and a review of firms' annual capital plan submissions. The Federal Reserve released the results of its 2022 annual stress test in June. The test assesses whether large financial institutions are sufficiently capitalized to absorb losses and continue to lend to households and businesses during a hypothetical recession. The June results showed that these firms would experience substantial losses but would maintain capital ratios well above minimum risk-based requirements under the severely adverse scenario simulated by the stress test.13
The Federal Reserve uses the stress test results to set the stress capital buffer requirement, which integrates the stress test with the non-stress capital requirements into one forward-looking and risk-sensitive capital requirement. In the 2022 stress test, aggregate losses at larger banks were $50 billion more than that of the 2021 stress test. Additionally, the aggregate 2.7 percentage point decline in capital was slightly larger than the 2.4 percentage point decline from the 2021 stress test but is comparable with recent years. All banks in the 2022 stress test remained above their minimum capital requirements, despite total projected losses of $612 billion.
The Federal Reserve's capital plan rule requires large financial institutions to submit capital plans to the Federal Reserve annually. Federal Reserve examiners perform a firm-specific, qualitative review of each firm's submission. For the eight largest and most complex firms, this included
- an assessment of firms' methodologies for projecting allowances for credit losses in stress under the current expected credit loss (CECL) accounting standard,
- trading and counterparty stress loss practices,
- interest rate risk management,
- stress scenario design practices, and
- interpretations of the capital rule and related governance processes.
While most firms' capital planning practices met supervisory expectations, some weaknesses were identified. Identified weaknesses include insufficient rigor in loss estimation approaches and market stress scenarios. In addition, supervisors found some errors in risk-weighted assets calculations in implementing the capital rule.
Box 10. Capital Requirements
On August 4, 2022, the Federal Reserve Board announced the individual capital requirements for all large banks, ranging from 7.0 percent to 13.5 percent, effective on October 1, 2022. If a bank's capital falls below its total requirement, the bank is subject to automatic restrictions on capital distributions and discretionary bonus payments. Each bank's total common equity tier 1 capital requirement is made up of several components, including the minimum capital requirement, which is 4.5 percent; the stress capital buffer requirement, which is determined from the stress test results and is at least 2.5 percent; and if applicable, a capital surcharge for global systemically important banks (G-SIBs), which is updated in the first quarter of each year to account for the overall systemic risk of each G-SIB.1
1. See Board of Governors of the Federal Reserve System, Large Bank Capital Requirements (Washington: Board of Governors, August 2022), https://www.federalreserve.gov/publications/files/large-bank-capital-requirements-20220804.pdf. Return to text
The number of supervisory findings at large financial institutions increased during the first half of 2022.
Supervisory findings—such as matters requiring attention (MRAs) or matters requiring immediate attention (MRIAs)—are used to identify and communicate areas where banks do not meet supervisory expectations. Supervisory findings are communicated to a banking organization's management and board of directors, generally in an exam or inspection report. Outstanding MRAs at large financial institutions have decreased substantially in the years since the financial crisis of 2007–08 but increased slightly during the first half of 2022 (figure 10).
Figure 10. Outstanding number of supervisory findings, large financial institutions*
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Note: Values prior to 2022 are as of year-end. The 2022 value is as of the end of 2022:Q2. The findings count data are subject to revisions as issues are reviewed, updated, and finalized; this could result in minor historical count fluctuations.
Source: Internal Federal Reserve supervisory databases.
*Note: On August 15, 2023, Figure 10 was updated on the HTML page to reflect the correct image. The PDF was unchanged.
While many firms have broadly met expectations in capital planning and liquidity risk management, they still have work to do to meet supervisory expectations for governance and controls (figure 11).Governance and controls findings represent over 75 percent of the outstanding issues at large financial institutions. Governance and controls findings include deficiencies related to operational resilience, information technology, third-party risk management, and compliance.
Figure 11. Outstanding supervisory findings by category, large financial institutions
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Note: As of 2022:Q2, total supervisory findings, by portfolio, were: LISCC—194; LBO—157; and FBO > $100B—392. Chart key shows bars in order from top to bottom.
Source: Internal Federal Reserve supervisory databases.
Remediation of issues around technology infrastructure, data, and operational resilience often take longer to address than issues in other business and risk-management areas. Many require a firm to develop a multiyear remediation plan. When reviewing these plans, supervisors expect firms to make the needed investments in systems and risk management to ensure adequate controls. Supervisors also expect firms to remediate findings in a timely manner.
Deficiencies for foreign firms are generally consistent with those highlighted for domestic institutions; however, a key difference is foreign firms' compliance with Bank Secrecy Act/anti-money-laundering expectations. As noted in previous reports, some foreign firms have a number of Bank Secrecy Act/anti-money-laundering findings and enforcement actions. In some cases, these issues result in less-than-satisfactory supervisory ratings for governance and controls.
Box 11. Large Financial Institution Supervisory Priorities for 2023
Capital
-
Financial risks impacted by economic changes, including
- interest rate risk
- market and counterparty credit risk
- consumer and commercial credit risk
- Risk management practices in credit, market, and interest rate risk
- Implementation of regulatory phase-ins (e.g., counterparty rules)
- LIBOR transition
Liquidity
- Intraday liquidity risk management
- Changes in deposits and the effect on funding mix asset
- Asset/liability management and stress testing
Governance and controls
- Operational resilience, including cybersecurity and information technology risks
- Third-party risk management
- Compliance, internal loan review, and audit
- Firm remediation efforts on previously identified MRAs
Recovery and resolution planning
- Recovery planning and preparedness
Community and Regional Banking Organizations
This section of the report discusses the financial condition and supervisory approach for banking organizations with assets less than $100 billion, including community banking organizations (CBOs), which have less than $10 billion in total assets, and regional banking organizations (RBOs), which have total assets between $10 billion and $100 billion.
CBOs and RBOs have generally remained in stable financial condition.
Most community and regional banking organizations are in stable financial condition and have addressed pandemic-related conditions. Although capital ratios are slightly below pre-pandemic levels, more than 99 percent of CBOs and all RBOs report capital ratios above well-capitalized minimums as of the second quarter of 2022. Liquidity levels are sufficient. Core deposits as a share of total assets remain above pre-pandemic levels. More recently, these firms have begun deploying deposits to new lending activity or securities purchases. The ratio of loans to deposits remains well below pre-pandemic levels.
Credit risk remains a focus for the supervision of CBOs and RBOs. Current problem loan rates remain low, and these firms hold allowances for potential credit deterioration. A number of these banks, however, are highly concentrated in CRE lending and have higher CRE concentrations than larger banks. Banks with high CRE concentrations can be exposed to higher risk of credit deterioration. In evaluating a bank's CRE concentration risk, examiners consider the loan composition of and risk diversification in its CRE loan portfolio.14 Some types of CRE loans such as land development and construction loans can pose a greater level of risk than owner-occupied CRE loans. The Federal Reserve is closely monitoring banks reporting significant CRE concentrations, further described in box 12.
Most community and regional banking organizations' earnings are driven by net interest margin. Most small banks are well-positioned for a rising rate environment and should see improvements in earnings. For these firms, second-quarter 2022 earnings have improved over the first quarter because of an increased net interest margin.
Box 12. Outlook on Commercial Real Estate Credit Conditions and Concentration Risk
As discussed in the November 2021 Supervision and Regulation Report, banks are a critical funding source of CRE debt. Through the second quarter 2022, CRE lending and performance remained strong. CRE loans continued to grow, and delinquency rates declined to a historic low and remained below other major loan categories; however, there were some signs of deterioration as CRE loans 30–89 days past due increased for the second consecutive quarter in 2022 (figure A). In addition, the outlook for some CRE properties is being affected by changing economic conditions and greater reliance on remote work. As a result, Federal Reserve supervisors remain focused on monitoring banks with concentrations in CRE loans because these banks could be adversely affected by stress in the CRE sector. Supervisors are particularly focused on assessing whether risk management at these banks is commensurate with the level of concentration and the loan composition of a bank's CRE loan portfolio.
Figure A. Commercial real estate loans 30–89 days past due
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Note: A bank is considered concentrated if its construction & land development loans to tier 1 capital plus reserves is greater than or equal to 100 percent or its total CRE loans (including owner-occupied loans) to tier 1 capital plus reserves is greater than or equal to 300 percent. This is a more conservative measure than the SR 07-1 measure because it includes owner-occupied, and it does not consider the 50 percent growth rate during the prior 36 months.
Source: Call Report.
As of June 30, 2022, approximately 28 percent of insured depository institutions reported a concentration in CRE lending. This figure is lower than during the financial crisis of 2007–08 but has been increasing over the past year (figure B). In the second quarter of 2022, most CRE-concentrated banks were primarily regional and community banks.
Figure B. Commercial real estate-concentrated banks
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Note: A bank is considered concentrated if its construction & land development loans to tier 1 capital plus reserves is greater than or equal to 100 percent or its total CRE loans (including owner-occupied loans) to tier 1 capital plus reserves is greater than or equal to 300 percent. This is a more conservative measure than the SR 07-1 measure because it includes owner-occupied, and it does not consider the 50 percent growth rate during the prior 36 months. See SR Letter 07-1 at https://www.federalreserve.gov/boarddocs/srletters/2007/sr0701.htm.
Source: Call Report.
CBOs and RBOs continue to face operational risks, with credit and market risks increasing.
Cybersecurity remains a notable issue for CBOs and RBOs, which continue to face cyberattacks. Reliance on third-party service providers and other technology solutions also presents operational risks. Moreover, these banks face challenges in attracting and retaining qualified staff to maintain their cyber risk-management programs.
Rising interest rates may begin to affect some borrowers' ability to make loan payments, particularly for borrowers with floating rate loans. As described in box 3, for some financial institutions, current market conditions have also led to unrealized losses on securities. As these conditions evolve, CBOs and RBOs may be less inclined to sell these securities to meet liquidity needs.
After trending down in recent years, supervisory findings at CBOs have increased slightly and have remained flat at RBOs.
Outstanding supervisory findings for CBOs and RBOs increased modestly in 2022 after declining in recent years (figure 12). This trend reflects a recent increase in the number of supervisory ratings downgrades as well as findings from the examinations that were postponed in 2020 and 2021. Outstanding CBO findings increased slightly from the end of 2021 to June 2022. For RBOs, the total outstanding findings remained flat from the end of 2021 to June 2022.
Figure 12. Outstanding supervisory findings, CBO and RBO firms
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Note: Values prior to 2022 are as of year-end. The 2022 value is as of the end of 2022:Q2. The findings count data are subject to revisions as issues are reviewed, updated, and finalized; this could result in minor historical count fluctuations.
Source: Internal Federal Reserve supervisory databases.
The most cited supervisory findings at CBOs continue to pertain to information technology and operational risk, at 32 percent of outstanding CBO findings. For RBOs, weaknesses in management, risk management, and internal controls are the most cited category, at 33 percent.
Nearly all CBOs and RBOs remain in satisfactory condition.
As of June 2022, nearly 97 percent of top-tier CBOs and RBOs are rated satisfactory or stronger. More than 97 percent of CBO and RBO state member banks are rated satisfactory.15 Both levels are relatively unchanged from the prior report (figure 13).
Figure 13. Top tier ratings for firms < $100 billion
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Note: Includes composite ratings for consolidated top-tier holding companies and SMBs without HCs for CBO and RBO firms. The 2022 value is as of the end of 2022:Q2.
Source: Internal Federal Reserve supervisory databases.
The 2022–23 supervisory activities will be hybrid with a focus on assessing credit and operational risks.
Federal Reserve examiners are using a hybrid approach for examinations, conducting in-person activities when examiners deem an in-person exam necessary or when requested by the bank. Reflecting increased credit risk concerns, the Federal Reserve has enhanced procedures for monitoring credit concentrations, including CRE loans. Additionally, the Federal Reserve will continue to prioritize the supervisory assessment of CBOs' and RBOs' ability to manage credit risk, interest rate risk, and operational risk (box 13).16
Many CBOs will implement the CECL methodology in 2023. Therefore, the Federal Reserve is prioritizing the review of CBOs' implementation of CECL, including the calculation of their allowances for credit losses (ACL). The Federal Reserve developed two tools to aid CBOs in implementing CECL, as further described in box 14.17
Box 13. CBO and RBO Supervisory Priorities for 2022 and 2023
Credit risk
- High-risk loan portfolios and debt service coverage capacity in changing interest rate environment
- Credit concentrations, particularly in commercial real estate
- Implementation of Current Expected Credit Losses for CBOs in 2023
Other financial risks
- Interest rate risk
- Securities risk
Operational risk
- Information technology and cybersecurity
- Fintech and crypto-related activities
Box 14. New Current Expected Credit Losses Tool for Community Banks
On June 7, 2022, the Federal Reserve announced a second tool to support larger community banks (those between $1 billion and $10 billion in total assets) in implementing the current expected credit losses (CECL) methodology.1 This tool is known as the Expected Loss Estimator, or ELE, and is an Excel-based automation of the weighted-average remaining maturity (WARM) methodology.2 The ELE tool relies on a bank's own loan data to calculate the allowance for credit losses (ACL) and has fully viewable code and formulas. This transparency allows a bank to independently understand the tool and provides the bank the capability of adjusting the tool as bank management deems necessary. Ultimately, a bank's management is responsible for determining the appropriateness of the WARM methodology for calculating its ACL and the data and assumptions used in the calculation.
1. Board of Governors of the Federal Reserve System, "Federal Reserve Announces It Will Soon Release Second Tool to Help Community Financial Institutions Implement the Current Expected Credit Losses (CECL) Accounting Standard," news release, June 7, 2022, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220607a.htm. Return to text
2. Refer to the Federal Reserve System's CECL Resource Center at https://www.supervisionoutreach.org/cecl. Return to text
References
9. See Board of Governors of the Federal Reserve System, 108th Annual Report (Washington: Board of Governors, July 2022), https://www.federalreserve.gov/publications/files/2021-annual-report.pdf. Return to text
10. For more information regarding the framework for supervision of large financial institutions, see 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 in Board of Governors of the Federal Reserve System, Supervision and Regulation Report (Washington: Board of Governors, November 2018), https://www.federalreserve.gov/publications/files/201811-supervision-and-regulation-report.pdf. Return to text
11. See SR Letter 19-3/CA Letter 19-2, "Large Financial Institution (LFI) Rating System," at https://www.federalreserve.gov/supervisionreg/srletters/sr1903.htm. Return to text
12. See Board of Governors of the Federal Reserve System, Supervision and Regulation Report (Washington: Board of Governors, November 2019), https://www.federalreserve.gov/publications/files/201911-supervision-and-regulation-report.pdf. Return to text
13. See Board of Governors of the Federal Reserve System, "Federal Reserve Board Releases Results of Annual Bank Stress Test, which Show that Banks Continue to Have Strong Capital Levels, Allowing Them to Continue Lending to Households and Businesses during a Severe Recession," news release, June 23, 2022, https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220623a.htm. Return to text
14. Refer to SR Letter 07-01, "Interagency Guidance on Concentrations in Commercial Real Estate," at https://www.federalreserve.gov/boarddocs/srletters/2007/SR0701.htm. Return to text
15. Refer to the CAMELS definition in appendix A for an explanation of the supervisory ratings framework for state member banks. Return to text
16. Supervision of community banks that are state member banks is primarily through a point-in-time, full-scope examination. Supervision of regional banks is slightly more intensive and consists of a limited number of risk-focused examinations and continuous monitoring. For more background on supervision of community and regional banks, refer to Board of Governors of the Federal Reserve System, The Fed Explained: What the Central Bank Does (Washington: Board of Governors, August 2021), https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf#page=66. Return to text
17. Refer to the Federal Reserve System's CECL Resource Center at https://www.supervisionoutreach.org/cecl. Return to text