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Cogrsioa Reea1 Servc
December 20, 2018
Introduction to Bank Regulation: Supervision
To identity and mitigate risks, bank regulators have the
authority to monitor bank activities and, if necessary, direct
a bank to change its behavior. Bank supervision creates
certain benefits (e.g., fewer bank failures, more systemic
stability) but imposes certain costs (e.g., bank compliance
costs, reduced credit availability). Congress often faces
policy questions about whether these benefits and costs are
appropriately balanced. This In Focus provides a brief
overview of bank supervision and related policy issues.
Who Supervises Banks?
Banks are supervised by a primary regulator, which is
determined by a bank's charter type and whether the bank is
a member of the Federal Reserve System. The federal
primary regulators are the Federal Reserve (the Fed), the
Office of the Comptroller of the Currency (OCC), and the
Federal Deposit Insurance Corporation (FDIC). (The
National Credit Union Administration [NCUA] supervises
credit unions.) Banks chartered at the state level also are
supervised by state-level bank regulatory agencies.
Banks above a certain asset size also are subject to
supervision for compliance with consumer protection laws
and regulations by the Consumer Financial Protection
Bureau (CFPB). For banks with more than $10 billion in
assets, the CFPB is generally the primary supervisor for
consumer compliance. For banks with $10 billion or less in
assets, the primary regulator generally remains the primary
supervisory authority for consumer compliance. (CFPB
rules may apply to all banks, regardless of which agency is
a bank's supervisor).
Before the Dodd-Frank Act (P.L. 111-203), the Fed, OCC,
and FDIC supervised banks for both safety and soundness
and consumer compliance. Congress created the CFPB in
response to assertions that this dual mandate restricted bank
regulators' incentive or ability to monitor and curtail
questionable consumer lending practices leading up to the
2008 financial crisis. Critics of the CFPB assert that certain
banks subject to its supervision (e.g., those over but near
the $10 billion threshold) face overly burdensome
examinations; these critics call for raising the $10 billion
threshold or returning consumer compliance supervision to
the primary regulator. Proponents of the CFPB argue that
making such changes could lead to inappropriately lax
consumer compliance supervision, similar to what was in
place during the run-up to the financial crisis.
How Are Banks Supervised?
Bank regulators have three main tools to regulate banks:
they can promulgate rules implementing banking law that
banks must follow, they can supervise banks to ensure
banks are complying with those rules, and they have
enforcement powers to reprimand banks that are not
complying with the rules.
Supervision refers to certain regulators' authority to
monitor and examine banks, impose reporting requirements,
and instruct banks to modify behavior. Supervision enables
regulators to evaluate and promote the safety and soundness
of individual banks (known as micro-prudential
supervision) and the banking system as a whole (macro-
prudential supervision). In addition, regulators evaluate
bank compliance with other statutory requirements,
including consumer protection and fair lending laws
(consumer compliance supervision), anti-money laundering
laws, cybersecurity requirements, and compliance with the
Community Reinvestment Act (P.L. 95-128).
Regulators have complementary tools to achieve their
supervisory goals (see Figure 1). They continuously
monitor banks, often using information banks are required
to report or that was gathered during previous
examinations. Supervision is an iterative process, and
examiners can use information gathered through monitoring
to determine the scope and areas of focus for upcoming
exams.
Figure I. The Bank Examination Cycle
Source: Consumer Financial Protection Bureau.
Note: Certain large banks may have examiners continuously on-site.
Reporting. Banks submit a Report of Condition and
Income-referred to as the call report-to regulators
quarterly. The call report is comprised of schedules
containing multiple line items related to bank operations for
which a value must be reported. These data are reported
using standard definitions so that regulators and the public
can compare banks. To lower the burden on small banks
relative to big banks, the number of items that a bank must
report depends on its size and other considerations. The
Economic Growth, Regulatory Relief, and Consumer
Protection Act of 2018 (P.L. 115-174) mandated further
simplification (expected to be implemented in 2019),
requiring banks with under $5 billion in assets to file a
shorter call report every other quarter. In addition, current
statute requires the regulators to review call reports every](ViewImageLocal?handle=hein.crs/govywy0001&div=1&collection=&method=preview&ext=.png&size=3)