The Federal Reserve has made tremendous strides since the 2008 financial crisis to ensure the safety and soundness of our financial system. Today, the U.S. banking system is much more robust and resilient than it was before the financial crisis, in large part due to both ongoing and enhanced supervisory and regulatory efforts. Here are ten examples of how the Federal Reserve, often working with other regulators, has helped to ensure the safety and soundness of our financial system.
1. Resolution Planning
Banking organizations with total consolidated assets of $50 billion or more are required to submit resolution plans to the Federal Reserve and the FDIC. Each plan must describe the organization’s strategy for rapid and orderly resolution in the event of material financial distress or failure. The Federal Reserve and the FDIC completed reviews of the second round of resolution plans submitted by 11 U.S. bank holding companies and foreign banks, noting certain shortcomings that the firms must address to improve their resolvability in bankruptcy and indicating their expectation that the firms make significant progress in addressing these issues in their 2015 resolution plans. (Tarullo, 9/9/14)
2. Comprehensive Stress Tests
The introduction of macroeconomic supervisory stress tests for banks and holding companies with total consolidated assets of $50 billion or more has added a forward-looking approach to assessing capital adequacy, as firms are required to hold a capital buffer sufficient to withstand a several-year period of severe economic and financial stress. (Fisher 8/11/14)
The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to assess whether the largest bank holding companies operating in the United States have sufficient capital to continue operations throughout times of economic and financial stress and that they have robust, forward-looking capital-planning processes that account for their unique risks. As part of this exercise, the Federal Reserve evaluates institutions’ capital adequacy, internal capital adequacy assessment processes, and their individual plans to make capital distributions, such as dividend payments or stock repurchases.
Dodd-Frank Act stress testing (DFAST), a complementary exercise to CCAR, is a forward-looking component conducted by the Federal Reserve and financial companies supervised by the Federal Reserve to help assess whether institutions have sufficient capital to absorb losses and support operations during adverse economic conditions. DFAST applies to institutions with assets over $10 billion.
The requirements, expectations, and activities relating to DFAST and CCAR do not apply to any banking organizations with assets of $10 billion or less. (Stress Tests and Capital Planning)
3. New Liquidity Requirements
In 2012 the Federal Reserve launched the Comprehensive Liquidity Assessment and Review (CLAR) for firms in the Large Institution Supervision Coordinating Committee (LISCC) portfolio. Like the Comprehensive Capital Analysis and Review (CCAR), CLAR is an annual horizontal assessment, with quantitative and qualitative elements, overseen by a multidisciplinary committee of liquidity experts from across the Federal Reserve. In CLAR, supervisors assess the adequacy of LISCC portfolio firms’ liquidity positions relative to their unique risks and test the reliability of these firms’ approaches to managing liquidity risk. CLAR provides a regular opportunity for supervisors to respond to evolving liquidity risks and firm practices over time. (Tarullo, 11/20/14)
4. Enhanced Risk Management Standards
The Federal Reserve issued rules creating enhanced risk management standards for the larger U.S. bank holding companies. These rules are in addition to the rules that address capital planning, liquidity risk management, and stress testing. Some of the rules apply to companies with $10 billion or more in assets, while other aspects apply only to companies with $50 billion or more in assets. (Press release 2/18/14)
5. Stronger Capital Requirements
The stronger capital requirements for institutions of all sizes have improved the capacity of financial markets, infrastructures, and individual institutions to absorb shocks. The new capital rules strengthen the safety and soundness of banking organizations both by improving the quality of what constitutes regulatory capital and by requiring banking organizations to hold more capital. Many of the new capital requirements will not apply to smaller banks–including the countercyclical capital buffer, supplementary leverage ratio, trading book reforms, accumulated other comprehensive income flow through, higher capital requirements for counterparty credit risk on derivatives, and disclosure requirements. (Alvarez, 4/8/14) With higher levels of capital, banks of all sizes are healthier and are better able to absorb future shocks. (See First Glance 12L for current capital levels of Twelfth District financial institutions.)
6. Enhanced Large Bank Supervisory Processes
The Federal Reserve now makes its most consequential supervisory decisions on a system-wide level through the Large Institution Supervision Coordinating Committee or “LISCC.” The committee comprises representatives across professional disciplines from several Reserve Banks and the Board of Governors. LISCC sets supervisory policy for the 16 largest, most systemically important financial institutions in our country and develops innovative, objective, and quantitative methods for assessing these firms on a comparative basis. LISCC also coordinates the supervision of the largest supervised institutions through its Operating Committee, which reviews and approves supervisory plans for exams, receives regular updates on major supervisory issues, and makes material supervisory decisions regarding matters that affect the firms’ safety and soundness. In this respect, the Operating Committee provides an important safeguard against regulatory capture by ensuring that no one person or Reserve Bank has the power to make a final decision on a matter of significance. (Dudley 11/21/14)
7. Supervision of Systemically Important Nonbanks
Section 113 of the Dodd-Frank Act requires that the Federal Reserve supervise certain nonbank financial companies designated by the Financial Stability Oversight Council (Council) as systemically important. The Council has determined that material financial distress at the following four companies would pose a threat to U.S. financial stability and has determined that they are subject to Federal Reserve supervision: American International Group, Inc., General Electric Capital Corporation, Inc., Prudential Financial, Inc., and MetLife, Inc.
Section 165 of the Dodd-Frank Act directs the Federal Reserve to establish enhanced prudential standards for the companies designated by FSOC as systemically important nonbank financial companies. In considering the application of enhanced prudential standards to these nonbank financial companies, the Federal Reserve intends to thoroughly assess the business model, capital structure, risk profile, and systemic footprint of a designated company to determine how the enhanced prudential standards would apply. (See the request for public comment on the application of enhanced prudential standards and reporting requirements to General Electric Capital Corporation)
8. Increased Reliance on Forward Looking Supervison and Data Analytics
The Federal Reserve is pursuing an active program of financial monitoring, supported by expanded research and data collection, which is often undertaken in conjunction with other U.S. financial regulatory agencies. Our stepped-up monitoring and analysis is already providing important information for the Board and the Federal Open Market Committee as well as for the broader regulatory community. (Bernanke, 5/10/13)
9. Volcker Rule
On December 10, 2013, the Federal Reserve and four other federal agencies approved a common final rule to implement section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule. The final rule requires banking entities with significant trading operations to report to the appropriate regulatory agency a variety of metrics. These data will be an important tool to help firms and regulators monitor and identify prohibited proprietary trading and high-risk trading strategies. In order to minimize burden and give full effect to the conformance period provisions of section 619, the reporting requirements are applied in a graduated manner, with only the firms with the largest trading books required to report metrics. Banking entities will need to be in conformance with the Volcker Rule by July 21, 2016, with conformance expectations for July 21, 2015 limited to post-December 31, 2013 purchases and activities. This conformance period provides banking entities with additional time to develop appropriate compliance programs as well as to identify and conform activities and investments to the requirements of the final rule. (Tarullo, 2/5/14)
10. Expanded Distinctions Between Large and Small Banks
The Federal Reserve continues to make distinctions between the risks posed by large, systemically important firms and those posed by the nation’s community banks. For example, all of the banking regulators have taken many steps to try to avoid unnecessary regulatory costs for community banks, such as fashioning more basic supervisory expectations for smaller, less complex banks and identifying which provisions of new regulations are relevant to smaller banks. We also are piloting approaches that strike the appropriate balance of off-site and on-site supervisory activities to ensure that the quality of community bank supervision is maintained without creating an overly burdensome process. (Tarullo, 9/9/14; Hunter, 4/23/15)