The Federal Reserve has announced a new framework for the consolidated supervision of large financial institutions. The updated guidance published in Supervision and Regulation Letter No. SR 12-17 on December 17 is intended to provide greater clarity about supervisory objectives and expectations so that the public and banking organizations with more than $10 billion in assets that are subject to Federal Reserve regulation (i.e., bank holding companies and member banks) can better understand the Federal Reserve’s focus in supervising large institutions. According to the guidance, the new supervisory program has two primary objectives: enhancing the resiliency of the institution to lower the probability of its failure or inability to serve as a financial intermediary, and reducing the impact on the financial system and the economy in the event of a large institution’s failure or material weakness. The resiliency aspects of the new supervisory approach focus on capital and liquidity planning and positions, corporate governance, recovery planning and management of core business lines. In terms of reducing the impact of an institution’s failure, the new approach will focus on management of critical operations, support for banking offices, resolution planning and additional macro-prudential supervisory approaches to address risks to financial stability. The Federal Reserve may periodically identify additional priorities beyond the core areas of focus to enhance institution-specific supervision and develop industry-wide perspectives, according to the guidance. The new supervisory framework will be implemented in a multi-stage approach, with additional supervisory and operational guidance developed to support implementation and assess progress.
Nutter Notes: The Federal Reserve’s new supervisory approach for large institutions generally applies when a consolidated organization and its banking offices are in at least satisfactory condition and there are no material weaknesses or risks across the core areas of supervisory focus described above. The Federal Reserve said that it will apply additional supervisory expectations, and undertake related supervisory activities, to address identified concerns including areas subject to formal or informal enforcement action. According to the guidance, each large institution is expected to ensure that the consolidated organization (or the combined U.S. operations in the case of foreign banking organizations) and its core business lines have the financial and operational resilience to survive under a broad range of internal or external stresses. Core business lines are those that, in the institution’s view, upon failure would result in a material loss of revenue, profit or franchise value. Each large institution also is expected to ensure the sustainability of its critical operations and banking offices under a broad range of internal or external stresses. Critical operations are those operations that, if they were to fail or be discontinued, could pose a threat to the financial stability of the United States.