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Board of Governors of the Federal Reserve System
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Annual Performance Report 2014

Strategic Theme 1: Supervision, Regulation, and Financial Stability

Continue building a robust interdisciplinary infrastructure for regulation, supervision, and monitoring risks to financial stability.


Objective 1.1: Strengthen the stability of the financial sector through the development of policies, tools, and standards.

In this Section:

Under the direction of the Board, Board staff will continue contributing to regulatory reform activities that enhance the resilience of the financial sector and coordinate with other federal supervisory agencies regarding related regulatory efforts. Staff will also develop and implement a wide array of policies and guidance to supervisory programs that address legislative mandates and changes in economic environments.

In addition, staff will collaborate with financial stability groups to incorporate a multidisciplinary approach to emerging financial stability risks. These efforts will include steps to develop and implement macroprudential policies that will limit the probability of, and adverse consequences from, financial crisis.

Finally, under the direction of the Board and the Federal Open Market Committee (FOMC), staff will engage in designing potential crisis-management tools to respond as appropriate to various contingencies that could threaten financial stability. As part of ongoing activities, staff will monitor and analyze the effect of such regulations, policies, and tools on financial institutions, financial markets, and more generally on the macroeconomy.

Accomplishments
  • Develop additional policies and tools to strengthen financial stability and develop work programs that support these initiatives.
    • Issued Supervision and Regulation Letter (SR) 14-1, which clarifies supervisory expectations for recovery and resolution preparedness for the eight domestic bank holding companies that may pose elevated risk to U.S. financial stability, and SR 14-8, which provides additional guidance regarding recovery planning for domestic Large Institution Supervision Coordinating Committee (LISCC) firms.
    • Issued SR 14-3, which provides supervisory guidance on company-run stress testing for banking organizations with total consolidated assets of more than $10 billion but less than $50 billion.
    • Requested public comment on a proposal to repeal Regulation AA (Unfair or Deceptive Acts or Practices).
    • Acted under section 619 of the Dodd-Frank Act, commonly known as the Volcker rule, to give banking entities until July 21, 2016, to conform investments in and relationships with covered funds and foreign funds that were in place prior to December 31, 2013, ("legacy covered funds"), www.federalreserve.gov/newsevents/press/bcreg/20141218a.htm.
    • Proposed a rule to further strengthen the capital positions of the largest, most systemically important U.S. bank holding companies, including a proposal that establishes a methodology to identify whether a U.S. bank holding company is a global systemically important banking organization, www.federalreserve.gov/newsevents/press/bcreg/20141209a.htm.
  • Support the Chair, as a member of the Financial Stability Oversight Council (FSOC), in identifying and monitoring threats to financial stability and to propose actions to mitigate them.
    • Staff supported the Chair's participation in a wide range of FSOC activities, including regular periodic reviews of financial market developments and review of the FSOC's annual report.
  • Develop and implement new policy proposals and amend supervisory programs as needed to address legislative mandates and changes in the economic and international environments.
    • Approved a final rule strengthening supervision and regulation of large U.S. bank holding companies and foreign banking organizations, www.federalreserve.gov/newsevents/press/bcreg/20140218a.htm.
    • Established a council to provide a forum for risk experts to analyze System risk information and develop recommendations for policy or supervision, where applicable.
    • Completed Reserve Bank training and outreach initiatives for implementation of the Community Bank Risk-Focused Consumer Compliance Supervision Program.
    • Issued a final rule that amends the Regulation HH risk-management standards for financial market utilities (FMUs) that have been designated as systemically important by the FSOC and for which the Board has standard-setting authority pursuant to Title VIII of the Dodd-Frank Act, www.federalreserve.gov/newsevents/press/other/20141028a.htm.
    • Issued a final rule to implement section 622 of the Dodd-Frank Act, which generally prohibits a financial company from combining with another company if the ratio of the resulting company's liabilities exceeds 10 percent of the aggregate consolidated liabilities of all financial companies, www.federalreserve.gov/newsevents/press/bcreg/20141105a.htm.
    • The Board and the Office of the Comptroller of the Currency (OCC) issued an interim final rule to ensure that the treatment of over-the-counter derivatives, eligible margin loans, and repo-style transactions under the two agencies' regulatory capital and liquidity coverage ratio rules would be unaffected by the implementation of certain foreign special resolution regimes for financial companies or by a banking organization's adherence to the International Swaps and Derivatives Association's Resolution Stay Protocol, www.federalreserve.gov/newsevents/press/bcreg/20141216a.htm.
  • Collaborate with groups inside and outside the System that are engaged in financial stability assessments to identify macroprudential and emerging risks and to determine actions to be taken in response; communicate the identified risks and the associated responses to key stakeholders.
    • The Board, the Federal Deposit Insurance Corporation (FDIC), the OCC, the Commodity Futures Trading Commission, and the Securities and Exchange Commission (SEC) approved an interim final rule to permit banking entities to retain interests in certain collateralized debt obligations backed primarily by trust preferred securities from the investment prohibitions of section 619 of the Dodd-Frank Act, www.federalreserve.gov/newsevents/press/bcreg/20140114b.htm.
    • Developed a Systemic Risk Integration Forum to ensure discussions around the risks to financial stability and related policy action consistently reflect the insights coming from supervisory activities and analysis, and to promote integration of financial stability research and analysis into the supervisory planning process.
    • The Board, the Department of Housing and Urban Development, the FDIC, the Federal Housing Finance Agency, the OCC, and the SEC jointly issued a final rule requiring sponsors of securitization transactions to retain risk in those transactions. The final rule implements the risk retention requirements in the Dodd-Frank Act, www.federalreserve.gov/newsevents/press/bcreg/20141022a.htm.

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Objective 1.2: Monitor financial markets and industry practices and structures.

In this Section:

Staff will develop analytical tools and conduct monitoring activities that enhance the Board's understanding of evolving market structures and practices, including changes in global financial intermediation and capital allocation, risks and risk-management practices, and regulatory and other incentives for financial institutions to appropriately manage risk exposures. Ongoing communications will inform the staff about financial market developments that bear on financial stability and U.S. monetary policy. Staff will engage in ongoing communications with the Board and the FOMC about financial market developments that bear on financial stability and U.S. monetary policy.

Accomplishments
  • Develop and implement a forward-looking and proactive approach to the identification and mitigation of risk with potential systemic implications within and across supervisory portfolios.
    • Published Consumer Affairs Letter (CA) 14-4 "Interagency Guidance on Home Equity Lines of Credit Nearing Their End-of-Draw Periods" and CA 14-5 "Interagency Guidance Regarding Unfair or Deceptive Credit Practices."
    • Completed major enhancements to supervisory interest rate risk models.
  • Develop analytical tools, conduct monitoring activities, and use horizontal reviews of multiple financial institutions to enhance the Board's understanding of evolving market structures and practices and incorporate the results into the policy and supervisory process.
    • Performed detailed analysis of auto lending and its possible systemic importance, the unique liabilities used as sources of funding by insurance companies, and bond market liquidity.
  • Continue to provide analysis to the Board and the FOMC about financial market developments that bear on financial stability and U.S. monetary policy.
    • Completed four quarterly Quantitative Surveillance Assessment of Financial Stability reports highlighting various topics during the year.
    • Briefed Board members on the effects of monetary policy on other countries, including emerging market nations, with emphasis on implications for financial stability abroad.

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Objective 1.3: Monitor and supervise individual institutions and infrastructures.

In this Section:

Staff will continue to monitor, on an ongoing basis, individual institutions and infrastructures, particularly those that have broader consequences for the financial system and the macroeconomy. Board staff will continue implementing forward-looking risk-identification aspects to supervisory programs across all portfolios. Board staff will seek comment on a number of proposed rules and revisions covering various financial entities and sectors as outlined in the Dodd-Frank Act.

Accomplishments
  • Implement forward-looking aspects to supervisory programs focused on banks and bank holding companies to incorporate data analytics and a fully integrated process to respond to risks at the institution level and at the portfolio and industry level; clarify and communicate expectations for reliance on other supervisors.
    • Began publishing FR Y-15 data on the systemic footprint of the 33 largest bank holding companies.
    • Finalized the U.S. liquidity coverage ratio with the final rule effective on January 1, 2015.
    • Completed background memos and briefed Board members on the effects of the 2013 supervisory guidance regarding leveraged lending and the evolution of liquidity in corporate bond markets.

  • Implement a supervisory data and technology strategy in collaboration and consistent with the framework established under strategic theme 2 of this document.

    • See theme 2, objective 2.3.

  • Seek comment on rules and revisions covering various financial entities and sectors as outlined in the Dodd-Frank Act.

  • Execute effectively the Federal Reserve's supervisory programs for FMUs.
    • Conducted examinations, in conjunction with the Commodity Futures Trading Commission and the SEC as appropriate, and related oversight activities for FMUs that have been designated as systemically important by the FSOC and for which the Board has standard-setting authority pursuant to Title VIII of the Dodd-Frank Act, www.federalreserve.gov/newsevents/press/other/20141028a.htm.
  • Support the Chair as a member of the FSOC with respect to monitoring systemic risk, coordinating interagency dialogue, and issues related to systemically important financial institutions (SIFIs) and designated FMUs.
    • The FSOC designated MetLife as a SIFI in December 2014. Under Section 113 of the Dodd-Frank Act, the FSOC is authorized to determine that a nonbank financial company's material financial distress--or the nature, scope, size, scale, concentration, interconnectedness, or mix of its activities--could pose a threat to U.S. financial stability. Such companies are subject to consolidated supervision by the Federal Reserve and enhanced prudential standards.

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Objective 1.4: Ensure that sufficient crisis-management tools are in place.

In this Section:

Board staff will use a broad research agenda to assess the macroeconomic and financial market effectiveness of crisis-management tools, such as the discount window, and work to build the capacity to assess quickly the nature of financial stresses that might threaten financial stability in a crisis.

Accomplishments
  • Continue to improve the effectiveness of the discount window as a crisis-management tool.
    • Analyzed and refined options to use the discount window and other liquidity tools.
  • Contribute to domestic and international efforts to improve the quality of financial data that can better inform crisis-management decisions.
    • Began submitting to the Bank of International Settlements enhanced FR 009 data on exposures to foreign residents, with a more detailed breakdown of counterparty sectors.

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Objective 1.5: Analyze for the Board and the FOMC the role that financial stability policy should play in the setting of monetary policy.

In this Section:

Under the direction of the Board, staff will continue to assess the effectiveness of various macroprudential policies and their interactions with monetary policy. Staff will contribute to supervisory exercises to increase the resilience of financial institutions through financial stability assessments from the Quantitative Surveillance (QS) process. Staff will monitor risks to financial stability, analyze linkages between the financial and real sectors, and evaluate alternative policies to contain building systemic risks. Staff will continue briefing the Chair, other Board members, and the FOMC, as appropriate.

Accomplishments
  • Assess the effectiveness of macroprudential policies and their interaction with monetary policy.
    • Provided Board members with a comprehensive analysis and review of the macroprudential tools available to the Board and other regulatory authorities.
  • Monitor risks to financial stability, analyze linkages between the financial and real sectors, and evaluate alternative policy options to potentially address building systemic risks.
    • Evaluated potential policy responses to ongoing financial interdependencies and potential emerging systemic risks and assessed the economic effects of proposed macroprudential policies on financial institutions.

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Objective 1.6: Pursue research on stress tests, macroprudential regulation and tools, and other financial stability topics.

In this Section:

Staff will continue to undertake research to assess the economic effects of proposed macroprudential policies on financial institutions in the United States and abroad throughout the year, including in response to changes to the structure of internationally active institutions and changes in the regulatory environment.

Accomplishments
  • Contribute to basic research on financial stability and macroprudential tools through publication of working papers, academic journal articles, other publications, and participation in professional conferences.
  • Promote research on related topics through Federal Reserve System efforts, including long-term research projects integrated with the QS process.
    • Completed four quarterly Quantitative Surveillance Assessment of Financial Stability reports and briefed Board members.
  • Integrate, as appropriate, research results into ongoing policy discussions at the Board through briefings and participation in associated work streams.
    • Conducted studies on the implications of regulatory changes for monetary policy implementation, asset-management, financial stability, and the monitoring of potential financial imbalances.
  • Continue work identifying and analyzing crossborder linkages among financial institutions and financial sectors, particularly with respect to their implications for financial stability.
    • Evaluated potential policy responses to financial globalization and increased interdependencies and assessed the economic effects of proposed macroprudential policies on financial institutions in the United States and abroad.

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Last update: June 3, 2015

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