Approaches to Bank Supervision
While all bank supervision focuses on risk management and financial condition—the amount of financial resources a bank has, the quality of its loans, the strength of its earnings—the frequency and scope of supervision differs significantly for smaller, simpler banks versus larger, more complex banks.
How are banks supervised?
Bank supervision also differs for banks, based on their risks. Smaller banks typically have one exam every 12 to 18 months. Larger, more complex banks are subject to examinations and monitoring activities continuously throughout the year.
The Federal Reserve approaches supervision by categorizing banks into four different groups:
- Community banking organizations (CBOs)
- Regional banking organizations (RBOs)
- Large and foreign banking organizations (LFBOs)
- Large Institution Supervision Coordinating Committee organizations (LISCC)
Table 1 has more on each category and a comparison of how bank supervision is organized.
Table 1. Characteristics of Bank Supervisory Groups
|Federal Reserve Supervisory Groups|
|Community Banking Organizations (CBOs)||Regional Banking Organizations (RBOs)||Large and Foreign Banking Organizations (LFBOs)1||Large Institution Supervision Coordinating Committee (LISCC) Organizations|
|Number of banks2 (12/31/2022)||655||102||35||8|
|Category of banks by total assets (12/31/2022)||Under $10 billion||Between $10 billion and $100 billion||$100 billion or more and not identified as a Global Systemically Important Bank (GSIB)||Identified as a Global Systemically Important Bank (GSIB)3|
|Total bank assets (12/31/2022)||Approximately $2.9 trillion||Approximately $2.8 trillion||Approximately $10 trillion||Approximately $14 trillion|
|Federal Reserve staff4 (4Q2021)||Approximately 825||Approximately 250||Approximately 700||Approximately 550|
Note: Table is for illustrative purposes. The information may vary over time. The Board will consider revising the information at its discretion.
1. These numbers include foreign banking organizations with assets in the United States (U.S.) totaling $100 billion or more. These numbers do not include other foreign banking organizations with U.S. assets less than $100 billion. Return to table
2. With respect to the RBO, LFBO and LISCC supervisory groups, these numbers refer to U.S. bank holding companies. In the case of CBOs, these numbers refer to state member banks supervised by the Federal Reserve. Return to table
3. A GSIB is a bank whose failure would pose elevated risk to the global financial system, as determined by a specific methodology set forth in the Federal Reserve’s capital rules. Return to table
4. Staffing numbers per portfolio in this table include staff participating on examinations in that portfolio. There are a significant number of additional staff assigned to, for example, supervision support functions that would not be included in the portfolio specific counts. The total number of employees in supervision across the Federal Reserve System was approximately 3,700 as of year-end 2022. Approximately 90 percent or 3,300 employees work at the Reserve Banks and the remainder, approximately 400 work at the Board. Return to table
How is a bank in the CBO portfolio supervised?
A CBO typically has one examination every 12 to 18 months. During this examination, examiners assess the bank's financial condition, management of risks, and progress on fixing previously identified issues. This examination serves as the basis for the bank's supervisory rating.
If a CBO is found to be in satisfactory condition, examiners monitor the financial information it provides quarterly via required public reporting, but otherwise do not usually contact the bank between examinations.3
How many examiners are assigned to a CBO?
Examiners are not typically assigned to a specific CBO. Instead, a pool of examiners within a Reserve Bank are assigned to examinations at a CBO on a rotating basis.
There are approximately 825 examiners in the CBO supervisory group across the Federal Reserve. Other examiners not included in that number also provide additional support to the program on a part-time basis.
How is a bank in the RBO portfolio supervised?
While a typical CBO has one Federal Reserve examination in a 12-to-18-month period, an RBO typically undergoes more than one examination within a given year. This difference reflects the typically smaller, less complex nature of a CBO as compared to an RBO. For RBOs, examiners divide the areas of risk to be examined into separate examinations. The results of those examinations are used to develop the annual supervisory rating. In some cases, examiners are assigned throughout the year to a specific RBO and in other cases, examiners work at various RBOs across a Reserve Bank's jurisdiction.
Examiners monitor financial information the RBOs provide quarterly, through required public reporting as well as through their internal reporting, such as reports prepared for their boards of directors. Examiners meet with RBO management at several points during the year to discuss these reports.
How many examiners are assigned to an RBO?
RBO examiners are generally organized into small teams that typically range from one to ten examiners—depending on an RBO's size and activities—and these teams cover one or more RBOs on an ongoing basis. There are approximately 250 examiners in the RBO supervisory group across the Federal Reserve. Other examiners not included in that number also provide additional support to the program on a part-time basis.
How is a bank in the LFBO portfolio supervised?
Like an RBO, an LFBO is subject to multiple bank-specific examinations each year. An LFBO has a dedicated supervisory team (DST) fully dedicated to its year-round supervision. In addition, an LFBO is subject to a series of "horizontal" examinations throughout the year. Those horizontal examinations involve a similar coordinated examination across several banks in the LFBO portfolio (see "What is a horizontal examination?").
LFBO DSTs are also in continuous contact with bank management throughout the year to monitor developments. An LFBO also must provide a high volume of information to examiners that is reviewed and analyzed. The information is used to monitor changes in the bank's activities, risks, and financial condition. The information is also used to inform or scope future examinations (see figure 1).
Examiners assign supervisory ratings to an LFBO each year based on examination results, progress on addressing supervisory findings and enforcement action provisions, and information about the LFBO's risks and activities gathered during the year.
How many examiners are assigned to an LFBO?
Most examiners in the LFBO program are assigned to a DST. These teams tend to range in number from 15 to 30 examiners. There are about 700 examiners supervising LFBOs across the Federal Reserve. Horizontal examinations are mostly staffed by examiners from these teams. Other Federal Reserve examiners provide additional support to the LFBO program on a part-time basis and are not part of the official count noted in table 1.
With larger banks, examiners conduct horizontal examinations on a single topic across a number of banks at the same time. The purpose of a horizontal examination is to provide perspective on the level of risk at an individual bank and the appropriateness of its related risk-management practices and financial resources while also identifying similar risks and common trends across several banks. Horizontal examinations occur every year, but do not always cover each major risk area each year. These horizontal examinations may be conducted by a team of examiners that specializes in horizontal examinations in a particular area or through a horizontal examination program executed by DSTs separately but in a similar manner.
What is continuous monitoring?
Meetings with bank management are often referred to as "continuous monitoring". In preparing for these meetings, examiners review and analyze bank reports that are based on the bank's own data, audit reports, and regulatory reports. Examiners also meet and coordinate with other regulatory agencies.
The purpose of continuous monitoring is to maintain an understanding of a bank's activities, management or organizational changes, and associated policies and practices. Continuous monitoring helps examiners determine if they need to change planned examinations or the focus of examinations planned. As noted in table 2, the intensity of continuous monitoring depends on the bank's size and activities.
Table 2. Differences in “Supervisory Intensity”, by bank supervisory group
|Community Banking Organizations (CBOs)||Regional Banking Organizations (RBOs)||Large and Foreign Banking Organizations (LFBOs)||Large Institution Supervision Coordinating Committee (LISCC) Organizations|
|Bank-specific examinations||Approximately 1 examination every 12 to 18 months1||Approximately 4 bank-specific examinations a year||Approximately 12 bank-specific examinations a year||Approximately 27 bank-specific examinations a year|
|Horizontal examinations||Average 5 horizontal examinations a year||Average 20 horizontal examinations a year|
|Meetings with management||Periodic/quarterly meetings with management||Regular/monthly meetings with management throughout a year||Frequent/daily meetings with management throughout a year|
Note: Table is illustrative only, and not representative of every bank experience. The information may vary over time and by bank depending on its business activities and risks. The Board will consider revising the information at its discretion.
1. If a CBO is identified as higher risk or has unsatisfactory supervisory ratings it is subject to more frequent examination than every 12 or 18 months. Return to table
How is a bank in the LISCC group supervised?
Similar to an LFBO, a LISCC firm undergoes multiple examinations each year on a horizontal and bank-specific basis and has continuous contact with Federal Reserve examiners. Because of the regulations applicable to LISCC firms as well as their more complex activities, a typical LISCC firm is subject to more bank-specific and horizontal examinations than a typical LFBO.
Like LFBO examiners, LISCC examiners assign supervisory ratings to a LISCC firm each year based on the bank-specific and horizontal examination results since the previous year; progress on addressing supervisory findings and enforcement action provisions; and information about the bank's risks and activities that examiners gathered during the year.
How many examiners are assigned to a LISCC firm?
LISCC supervision includes examiners that examine banks on a horizontal basis throughout the year and a DST that examines only one bank. There are about 550 examiners in the LISCC program altogether across the Reserve Banks and at the Board. The number of examiners on a DST tends to range from 15 to 20. Other examiners not included in these numbers also provide additional support to the program on a part-time basis.
How often are supervisory ratings assigned?
Examiners assign ratings to a CBO about every 12 to 18 months as part of the bank's examination (see table 2). If the bank is rated less than satisfactory, ratings may be assigned on a more frequent basis.
In the other portfolios, supervisory ratings are assigned at least annually, considering all the examinations carried out during the year as well as through other supervisory information provided. Examiners can assign ratings more often if there is a change in circumstances or new information warrants a rating's change sooner than one year from the last rating's assignment.
How does supervision change when a bank has an unsatisfactory rating?
In all the groups, supervisory intensity generally increases when a bank has a less-than-satisfactory rating or there are weaknesses that might warrant a change in supervisory ratings. An increase in supervisory intensity typically involves more bank-specific examinations and meetings with bank management as well as, in many cases, the bank's board of directors. As noted above, in the CBO portfolio, an unsatisfactory rating generally results in examination and ratings shifting from a 12- or 18-month cycle to, for example, a 6-month cycle.
What is the difference between what examiners do at Reserve Banks and staff do at the Board?
Supervision is a function of the Board, with Reserve Banks conducting supervision under the Board's delegated authority.
The Board and Reserve Bank staff both play a critical role in carrying out the function of supervision, but the role varies by the supervisory group in which a bank is designated. LISCC supervision is run by the Board, with examiners employed by the Board and the Reserve Banks. For all other programs, examinations are conducted by Reserve Bank staff, with involvement of Board staff on horizontal exercises and key decisions. For banks in supervisory groups other than LISCC, Board staff set expectations for how Reserve Bank staff conduct examinations and, in turn, conduct oversight of Reserve Bank supervision to determine how well supervision is executed.
3. If a bank is already identified as higher risk or already has unsatisfactory supervisory ratings, it is subject to more frequent examination than every 12 or 18 months. Return to text