About Supervision and Regulation

Mission Statement

The Federal Reserve Bank of San Francisco's Division of Banking Supervision and Regulation's mission is to promote the safety and soundness of the banking system, foster stability in financial markets, and ensure compliance with applicable laws and regulations, as well as to encourage banking institutions to responsibly meet the financial needs of their communities. This will be accomplished through:

• timely and effective supervision;
• early identification of emerging issues;
• prompt and appropriate regulatory responses; and
• efficient allocation of resources.

General Description

The Federal Reserve Bank of San Francisco's Division of Banking Supervision and Regulation (BS&R) is responsible for executing the Federal Reserve System's supervisory policies within the District. These policies are designed to promote the safety and soundness of the banking system, to ensure compliance with statutes and regulations, and to encourage bankers to meet the needs of their communities.

BS&R management and staff believe that the manner in which these policies are implemented is critical to the vitality of the banking system. For this reason, the division has adopted eight Operating Principles to guide its processes.

BS&R is headquartered in San Francisco and maintains offices in Los Angeles and Salt Lake City. Staff is available to meet with supervised institutions and others throughout the District.

Operating Principles

In fulfillment of its Mission, the Division of Banking Supervision and Regulation adheres to the following key operating principles.

• Risk-Focused Supervision
  Risk-focused supervision is a process by which the risks facing each supervised institution are analyzed and an appropriate supervisory strategy is developed. The supervisory strategy is unique to each institution, thereby avoiding the rigid structures long associated with examination and other supervisory processes. Risk-focused supervision relies heavily on internal risk management processes. Those institutions with a demonstrated ability to identify, measure, monitor and control the risk of financial loss will receive a reduced level of regulatory scrutiny during onsite examination and application review. Reduced regulatory scrutiny may include infrequent examinations and minimal or no transaction testing and reduced application information and processing time requirements.
• Integrated Overall Supervision
  Integrated supervision is the coordinated execution of supervisory activities among all supervisory agencies in order to make the best possible decisions and to provide efficient service which minimizes regulatory burden. Integrated supervision is particularly important with respect to multi-state organizations; accordingly, the supervision of these institutions has been the subject of several supervisory initiatives related to BS&R work.
• Coordinated Supervision within BS&R
  Each organization under BS&R supervision is assigned to a portfolio manager. This individual is a senior-level examiner who prepares and executes supervisory strategies on a portfolio of institutions, and coordinates all BS&R communications with those institutions. Through the assigned portfolio manager, institutions can explore questions and issues related to any aspect of the supervisory process. The elements of the supervisory process encompassed in this objective include examination and analysis, application review, supervisory action implementation and off-site monitoring.
• Customer Service and Outreach
  BS&R management and staff are committed to providing the highest quality customer service possible. One means by which we will pursue this goal is by making BS&R resources available to the banking industry in as many ways as possible: through participation in industry gatherings and presentations offered to industry representatives, and by making Division staff available on a consulting basis. We recognize customer service as a key in our ultimate goal of excellence in supervision.
• Open and Honest Communications
  Management and staff of BS&R believe that open and honest communications are an important part of the supervisory process. As part of these communications, we are committed to providing institutions with the best professional guidance and assistance possible. Informal contacts with institutions and industry associations are encouraged as a means by which to respond promptly to issues and developments. Communications are centralized in BS&R's portfolio managers, who coordinate all activities related to an institution.
• Reduced Regulatory Burden
  Management and staff of BS&R believe that the public interest in a stable and efficient financial system is best served by minimizing the regulatory burden that is placed on the industry, consistent with the safety and soundness of each individual institution.
• Use and Understanding of Technology
  BS&R management and staff recognize the value of technology as applied in the supervisory framework. Among other applications, management and staff are committed to employing technology to monitor the condition and operations of supervised institutions off-site to the greatest extent possible. This may include the observation of general economic conditions and the analysis of reported periodic financial performance using screens and threshold values.
     BS&R staff also recognize that the quality of an organization's information systems will affect the risks the organization faces. Accordingly, all examination staff have been trained to recognize and evaluate these risks and to assist financial institutions in managing them. Specialized information systems staff are also available for consultation and on-site work as necessary.
• Professional and Technical Competence
  BS&R management actively encourages the development of professionalism and technical competence among its staff.

Risk Framework

The Federal Reserve evaluates risk using six risk factors.

• Credit Risk arises from the potential that a borrower or counterparty will fail to perform an obligation.
• Market Risk is the risk to a financial institution's condition resulting from adverse movements in market rates or prices, such as interest rates, foreign exchange rates, or equity prices.
• Liquidity Risk is the potential that an institution will be unable to meet its obligations as they come due because of an inability to liquidate assets or obtain adequate funding (referred to as "funding liquidity risk") or that it cannot easily unwind or offset specific exposures without significantly lowering market prices because of inadequate market depth or market disruptions ("market liquidity risk").
• Operational Risk arises from the potential that inadequate information systems, operational problems, breaches in internal controls, fraud, or unforeseen catastrophes will result in unexpected losses.
• Reputational Risk is the potential that negative publicity regarding an institution's business practices, whether true or not, will cause a decline in the customer base, costly litigation, or revenue reductions.
• Legal Risk arises from the potential that unenforceable contracts, lawsuits, or adverse judgments can disrupt or otherwise negatively affect the operations or condition of a banking organization.