About Bank Supervision

Bank supervision is government oversight of banks. Examiners do not run or manage banks. Rather, they work to understand banks' operations, major risks, how well banks manage those risks and whether banks have sufficient financial and managerial resources. When a bank does not manage its risk well or have sufficient financial resources, examiners require the bank to take corrective action.

Bank supervision at the federal level is carried out by three agencies: the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC). State banking agencies also supervise certain banks. Each agency supervises banks organized under different types of legal charters.

Why is bank supervision necessary?

Banks take deposits and put those deposits to work in the economy by offering financial services like mortgage loans and credit cards. In providing financial services, banks take risks. Bank examiners—employees of the Federal Reserve and other bank regulators—monitor and assess how well banks manage and control their risks as well as the strength of their financial and managerial resources. This is what is referred to as "safety and soundness" of banks.

A Supervision Analogy—Sports and Referees

In supervision, banks are more like the sports team and supervisors in many ways resemble the referees. Games have rules that all players are expected to follow to keep the game safe and fair. Supervisors, like referees, do not play the game—their role is to monitor play to ensure that the game is played fairly and safely. Supervisors also establish expectations to help ensure that banks do not violate the rules in the first place. Players that violate the rules receive warnings from the referee—warnings that can escalate based on the infraction.

What kinds of risks do banks take?

There are many types of banking risk. Examples of the most common types include (but are not limited to)

  • credit risk: for example, the risk that, when making loans, a borrower fails to repay.
  • market (including interest rate) risk: the risk that an asset a bank owns, like a bond, is worth less than what the bank paid for it.
  • liquidity risk: the risk that a bank will not have enough cash to meet its obligations.
  • operational risk: for example, the risk that cybersecurity or some other disruption affects adversely a bank's services.
  • legal and compliance risk: for example, the risk of a bank incurring fines if it breaks the law.

How does a bank manage risk?

Risk management involves recognizing risks and analyzing their impact or potential impact and taking action to address large risks. For example, a bank may have an internal rule that limits the size of loans to a certain industry. That way, if there is a downturn in that industry, the bank would have minimized its potential losses.

What is the difference between supervision and regulation?

Regulation sets the rules that banks must follow. Many rules are about making sure banks do not take on too much risk and that they manage the risks they do take. Bank examiners monitor banks' compliance with these rules.

Rules are helpful in creating clear requirements for banks. However, no set of rules can anticipate every possible risk and failure to manage that risk. This is especially true in the complicated world of banking. "Safety and soundness" supervision, which assesses the bank's ability to manage its risks, seeks to fill this gap.

How are the varying levels of bank regulation determined?

By law, the Federal Reserve issues regulations that must be appropriate for different types of banks. Accordingly, the Federal Reserve's regulations differ in content and stringency based on a bank's activities. Federal Reserve regulations are published on the Federal Reserve Board's website.1

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Last Update: April 27, 2023