The Federal Reserve Bank of New York has released a couple of
documents that discuss how it supervises the smallest to largest banks in the
Second Federal Reserve District.
The first document consisted of remarks given by F. Christopher Calabia, Senior Vice President, at the Community Bankers’ Conference in New York City. The second document was a staff report that described the Federal Reserve’s supervisory approach for large, complex financial companies.
In his remarks, Calabia touched on three areas: the importance of community banking from the Federal Reserve’s perspectives as both supervisor and central banker; initiatives launched by the New York Fed to tailor its supervisory approach to the actual risks that community banks present; and the performance of community banks—institutions with less than $10 billion in assets, and larger regional banks—institutions with between $10 and $50 billion in assets.
Importance. Calabia
noted that community banks have a competitive advantage since they know the
local business conditions and their customers better than anyone else. He added
this is something that “larger firms may tend to overlook.”
Supervisory initiatives.
Noting that community banks do not generally pose a systemic threat to the
stability of the U.S. financial system, Calabia discussed the steps the New
York Fed has taken “to differentiate and distinguish our supervisory programs
for the largest firms versus those of our smaller community banks.”
Alluding to Benjamin Franklin’s adage that fish and visitors stink
in three days, Calabia discussed the initiatives that the New York Fed has
started to limit the length of examinations and the period of time that
community bank staff must devote to them. He noted that the examination staff
is “doing more homework in advance of arriving at your front door to evaluate
your firms’ financial condition and performance with regard to capital
adequacy, earnings, and liquidity.” Another initiative is the use of automation
tools to simplify the examination process and make it more efficient. The result
of these initiatives reduced the time the New York Fed staff spent at one bank;
namely 32 days in 2011 to 18 days in 2013, or a 40 percent reduction.
Calabia also cited changes to the scope of consumer compliance examinations.
He noted, “By adjusting our scope to focus on the higher risk lending and
deposit areas, we’ve found efficiencies in terms of the numbers of examiners
sent onsite and the number of weeks spent onsite.” Calabia continued, “In one
case, we sent eight examiners for four weeks to a community bank under our
former approach, yet more recently we were able to scale that back to about
half the number of examiners and one week less onsite at that particular firm.”
He did stress, however, “when risks are higher or problems have been
identified, we will devote the appropriate time and resources to understand
those challenges.”
Bank performance. With
regard to the financial condition of community and regional banks, Calabia
noted, “it’s been our sense that many have experienced gradual stabilization in
their financial health over the past two years. Challenges do remain in the
District, as evidenced by the fact that some firms continue to have somewhat
lower capital ratios. Interestingly, capital ratios on average for our
community and regional banks remain slightly below those of national peer group
averages; the good news is that we’ve seen few signs of deterioration in the
solvency of supervised firms in our District over the past two years. This more
stable performance contrasts with a more volatile period prior to two years
ago.” He added that the credit risk profiles of community and regional banks
“tend to compare slightly more favorably than those of peer banks nationwide.”
Calabia considered this “slightly stronger risk profile” as a reason why some
regional and community banks hold a little less capital.
Larger bank supervision.
In the staff report entitled, “Supervising Large, Complex Financial Companies: What Do Supervisors Do?”, the authors,
Thomas Eisenbach, Andrew Haughwout, Beverly Hirtle, Anna Kovner, David Lucca,
and Matthew Plosser, describe the Federal Reserve’s supervisory approach for
large, complex financial companies. The authors noted that the aim of the
report was to help fill a “knowledge gap” regarding the supervisory approach
for large, complex financial companies. They also stressed that the report does
not assess whether the supervisory approaches taken with these large institutions
“are efficient or meet specific objectives.”
The report specifically examines the supervision of large, complex
bank holding companies and the largest foreign banking organizations and
non-bank financial companies designated by the Financial Stability Oversight
Council for supervision by the Federal Reserve Board. The authors noted that
these firms are the most systemically important banking and financial companies
and “thus prudential supervision of them is especially consequential.”
The report is divided into four sections. The first section
provided an overview and background. The second section describes the broad
goals of prudential supervision and the primary strategies adopted to achieve
those goals, as outlined in various Federal Reserve System and New York Fed
documents; describes the structure of supervision in the Federal Reserve System;
and provides an overview of the Financial Institution Supervision Group at the New
York Fed. The third section discusses the organizational structure of prudential
supervision at the New York Fed. The final section describes the day-to-day
activities of these supervisory teams, including monitoring, examinations, and
broader supervisory programs, as well as the outcomes of that work.
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