Bank Supervision by Federal Regulators: Overview and Policy Issues

Bank Supervision by Federal Regulators: Overview and Policy Issues. Congressional Research Service. David W. Perkins. December 28, 2020

To identify and mitigate risks, bank regulators have the authority to monitor bank activities, condition, and performance. Bank supervision creates certain benefits, including safer banks, a more stable financial system, compliance with consumer protection and fair lending laws, and safeguards against money laundering and cyberattacks. However, it imposes certain costs on banks, including the fees they pay to their supervisors and compliance costs, which can reduce credit availability through the banking system.

All banks are supervised by a primary federal prudential regulator for “safety and soundness,” which is determined by a bank’s charter type and whether the bank is a member of the Federal Reserve System. The federal prudential regulators are the Federal Reserve (Fed), the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corporation (FDIC). Banks are also supervised for compliance with consumer protection and fair lending laws. The Consumer Financial Protection Bureau (CFPB) is generally the primary supervisor for consumer compliance for banks with more than $10 billion, and the bank’s prudential supervisor is also the consumer compliance supervisor for banks with less than $10 billion. Banks chartered at the state level are also supervised by state-level bank regulatory agencies. Parent companies that own banks, called bank-holding companies, are supervised by the Federal Reserve. In addition, companies that perform certain activities for banks by contract are also subject to bank regulator supervision.

[PDF format, 29 pages].

Understanding the Effects of the US Stress Tests

Understanding the Effects of the US Stress Tests. Brookings Institution. Donald Kohn and Nellie Liang.  July 11, 2019

Concurrent stress tests—testing all major banks with the same macroeconomic and market scenarios at the same time—were a key innovation growing out of the financial crisis of 2007-09. Their original intent in 2009 was to identify the capital needed by banks to continue functioning in a deep recession and require them to raise the capital, from private sources or the government, to support the economy. The stress tests have evolved considerably since 2009, but the underlying rationale remains to assure that major banks can continue to supply credit to households and businesses in circumstances of deep economic and financial distress. The tests allow policymakers to assess the adequacy of capital buffers and to require remediation when necessary through modifications to institutions’ capital plans. They are a strong microprudential tool, with important macroprudential elements.

In this paper, Donald Kohn and Nellie Liang of the Hutchins Center on Fiscal and Monetary Policy at Brookings focused on assessing some of the effects of this new prudential tool as implemented in the United States, and contributing to the Federal Reserve Board’s review of its supervisory stress tests. They analyzed the data that are publicly disclosed about the stress tests for their implications for bank capital requirements and risk management, and marshaled the evidence from existing studies on the effects of stress tests on credit rather than undertaking new efforts. In addition, they interviewed a number of people knowledgeable about the stress tests to get their views on their effects. These included current and former supervisors and Federal Reserve economists (some of whom are now at consultancies advising banks on stress tests or at interest groups), current and former bankers involved in the stress tests at the banks, and other interested observers. [Note: contains copyrighted material].

[PDF format, 30 pages].

Management and Resolution of Banking Crises: Lessons from Recent European Experience

Management and Resolution of Banking Crises: Lessons from Recent European Experience. Peterson Institute for International Economics. Patrick Honohan. January 2017

Several European countries endured severe and costly banking collapses in the past decade. Central banks (both within the euro area and outside) provided extensive liquidity to keep the payments system running smoothly in most—but not all—of these countries. The policy approaches to resolve the banking crises across European countries were remarkably different, reflecting the lack of administrative and legislative preparation for bank resolution. As banking systems that had been allowed to enlarge suffered in the face of the global downturn, the scale of bank failures that swept Europe overwhelmed existing policy structures. Not all the policy choices made seem wise in retrospect; a new policy approach was clearly needed. Along with new institutional arrangements for early warning of systemic instability and a single bank supervisor in the euro area, the European Union has adopted a new policy framework for managing and resolving banking crises in euro area countries. Honohan examines the new regime, which has been in operation since the beginning of 2016, and concludes that despite improvements, more needs to be done to ensure the safety of European financial institutions and prevent future banking crises. [Note: contains copyrighted material].

[PDF format, 11 pages, 135.93 KB].

“Regulatory Relief” for Banking: Selected Legislation in the 114th Congress

“Regulatory Relief” for Banking: Selected Legislation in the 114th Congress. Congressional Research Service, Library of Congress. Sean M. Hoskins et al. November 10, 2016.

The 114th Congress is considering legislation to provide “regulatory relief” for banks. The need for this relief, some argue, results from new regulations introduced in response to vulnerabilities
that were identified during the financial crisis that began in 2007. Some have contended that the increased regulatory burden—the cost associated with government regulation and its implementation—is resulting in significant costs that restrain economic growth and consumers’ access to credit. Others, however, believe the current regulatory structure strengthens financial stability and increases protections for consumers, and they are concerned that regulatory relief for banks could negatively affect consumers and market stability. Regulatory relief proposals, therefore, may involve a trade-off between reducing costs associated with regulatory burden and reducing benefits of regulation.
This report discusses regulatory relief legislation for banks in the 114th Congress that, at the time this report was published, has seen legislative action. Many, but not all, of the bills would make changes to the Dodd-Frank Act (P.L. 111-203), wide-ranging financial reform enacted in response to the financial crisis.

[PDF format, 74 pages, 1.18 MB].