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The activities of the Federal Reserve as the umbrella supervisor fall into three broad categories: information gathering and assessment, ongoing supervision, and promotion of sound practices and improved disclosure. The Federal Reserve will interact closely with, and obtain information from, the primary bank and thrift supervisors and the functional regulators as well as from FHC senior management and boards of directors.
Examiners may conduct targeted transaction testing, to verify that risk-management systems are adequately and appropriately measuring and managing areas of risk for the organization and to confirm that laws and regulations within the jurisdiction of the Federal Reserve are being followed. There will also be periodic discussions with FHC senior management and boards of directors and with personnel responsible for centralized management and control functions such as heads of business lines, risk management, internal audit and internal control.
2. Mutual coordination of different supervisors
The Federal Reserve Board, FDIC, Department of Justice, SEC , CFTC , OTS, NCUA and FT , even FBI regulate and supervise commercial banks from their respective responsibilities, among which The Fed and FDIC are the main supervisory institutions.
All the national banks are members of Federal Reserve System, whereas state banks have the options to be the member or not and those who choose to join are called state member banks. The Fed is responsible directly and basically for all the member banks. Meanwhile, the Fed acts as the supervisor for bank holding companies and financial holding companies, granting business charters. Up to now, more than 1,500 financial holding banks have been set up in US. Because of the vastness of objects to be supervised, in actual practice, the Fed focuses its supervision mainly on big commercial banks and institutions, for instance, Citigroup has routine meeting with the Federal Reserve examiners every other week. However, the supervision on small banks is mostly from the perspective of liquidation and capital circulation and on-site test of their detailed activities.
The vast number of bank failures in the Great Depression spurred the Congress into creating into an institution which would guarantee banks. The FDIC provides deposit insurance which currently guarantees checking and savings deposits in member banks up to $100,000 per depositor. In order to absorb deposits, the banks in U.S. should firstly join the federal deposit insurance, therefore all the commercial banks are insurant of the FDIC. For the safety and soundness of the whole financial system, except insuring the deposits, FDIC is also responsible for financial surveillance and early warning, as well implementing strict and direct supervision on insured banks. Insured banks should report forms to FDIC periodically, receive examinations unconditionally.
There were two separate FDIC funds; one was the Bank Insurance Fund (BIF), and the other was the Savings Association Insurance Fund (SAIF). The latter was established after the savings & loans crisis of the 1980s. The existence of two separate funds for the same purpose led to banks attempting to shift from one fund to another, depending on the benefits each could provide.
In order to receive this benefit, member banks must follow certain liquidity and reserve requirements. Banks are classified in 5 groups according to their risk-based capital ratio: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, critically undercapitalized. When a bank becomes undercapitalized the FDIC issues a warning to the bank. When the number drops below 6% the FDIC can change management and force the bank to take other corrective action. When the bank becomes critically undercapitalized the FDIC declares the bank insolvent.
The Federal Reserve need to coordinate its activities with those of other regulators and to work with them to understand the risk profiles of the individual regulated entities and their relation and importance to the FHC''s overall risk profile. The Federal Reserve shall review and discuss the examination findings of primary bank, thrift, and functional regulators, together with other relevant information, to arrive at a consolidated assessment of an FHC''s financial condition and risk profile, the effectiveness of its risk management, and the implications of its activities for affiliated depository institutions. The Federal Reserve will also make available to other supervisors pertinent information regarding the financial condition, risk-management policies, and operations of an FHC that will have a direct effect on individual regulated subsidiaries within the organization. In addition, the Federal Reserve will participate in the sharing of information among international supervisors to ensure the consolidated supervision of an FHC''s global activities and to minimize material gaps in supervision.
General limitations similar to those on the Federal Reserve''s ability to obtain reports also apply to defining when the Federal Reserve may or may not directly examine a functionally regulated subsidiary. Federal Reserve will first seek to obtain the needed information from the appropriate functional regulator. If the information is not provided or an examination is still determined to be necessary, Federal Reserve will coordinate such actions with the functional regulator. It may also be appropriate, when working with a functional regulator or with another associated supervisor, to participate in joint examinations so as to minimize regulatory burden. Information flows and effective communication will be critical for all these relationships.
OCC mission is to ensure a safe and sound and competitive national banking system, OCC charters and is the primary federal regulator of national banks. It is responsible for examining the financial records of banks and for maintaining the integrity of FDIC deposit insurance. It is not unique in that other agencies, including OTS, FDIC, NCUA and Federal Reserve Bank, perform similar types of regulatory functions in the banking industry.
Therefore, federal banking regulatory agencies, including the OCC, the OTS, the NCUA, the Fed, and the FDIC, will work together to align outcome goals and related measures to allow for greater comparison of program performance in the industry.
Main Characteristics of U.S. banking supervision
1. Strict concession of entry into banking
The first step of bank supervision procedure in U.S. is banking concession. Federal government requires banks to get particular grant for entry into banking business. To be granted the concession, there are usually two measures: firstly, from federal government, submit application to OCC according to National Banking Act . Secondly, apply to state governments according to state banking regulations. No matter from which measure the application is granted, the regulatory requirements for entry into banking are: adequacy of capital structure, $ 1 million as minimum; applicant should submit clear business plan; illuminating the bank’s capability to meet customers’ need of commercial and credit services and to keep earning benefits; reputable board of directors.
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