January 17, 2018
Financial Reform: Bank Supervision
Reforms to the bank supervision framework have been
proposed as part of the broader financial reform debate,
including in H.R. 10, which passed the House on June 8,
2017, and S. 2155, which was reported by committee on
December 18, 2017.
Figure 1. The Bank Examination Cycle
Bank regulation has three distinct components: rulemaking
(the authority to implement rules with which banks must
comply); enforcement (the authority to take certain legal
actions, such as imposing fines, against an institution that
fails to comply with rules and laws); and supervision.
Supervision refers to the authority of certain regulators—
the Federal Reserve (the Fed), the Office of the Comptroller
of the Currency (OCC), the Federal Deposit Insurance
Corporation (FDIC), the National Credit Union
Administration (NCUA), and the Consumer Financial
Protection Bureau (CFPB)—to monitor and examine banks,
impose reporting requirements, and instruct banks to
modify behavior. Supervision enables regulators to ensure
banks are in compliance with applicable laws and
regulation and to evaluate and promote the safety and
soundness of individual banks (known as micro-prudential
supervision) and the banking or financial system as a whole
(macro-prudential supervision). In addition, regulators
evaluate bank compliance with consumer protection and
fair lending laws (consumer compliance supervision).
Subjecting banks to a supervisory program may also
promote public and market confidence in the banking
Regulators have complementary tools to achieve their
supervisory goals, as shown in Figure 1. They continuously
monitor banks, often using data banks are required to report
and information gathered during previous examinations.
Examiners can use information gathered through
monitoring to determine the scope and areas of focus for
upcoming exams. Periodic examinations (often on-site at
bank offices) involve an evaluation of bank practices and
performance. Examiners may either objectively confirm
whether banks meet quantitative requirements set by
regulation, or they may have discretion to qualitatively
interpret whether a bank satisfies the goals of a regulation.
In addition, regulators are permanently placed on-site at
offices of certain large banks.
Bank examiners rate a bank based on the Uniform Financial
Institutions Ratings System, wherein the banks receive a
rating from 1 (best) to 5 (worst) across six “CAMELS”
components—capital adequacy, asset quality, management,
earnings, liquidity, and sensitivity to market risk—and a
composite rating based on all those components. Examiners
communicate findings and ratings to bank management, and
(if necessary) prescribe required corrective actions.
Source: Consumer Financial Protection Bureau.
The 115th Congress is considering legislation to provide
“regulatory relief” for banks. Regulatory relief proposals,
may involve a trade-off between reducing costs associated
with regulatory burden and reducing benefits of regulation.
Proponents of regulatory relief argue that certain
regulations (including ones introduced in response to the
2007-2009 financial crisis) are unduly burdensome,
meaning their costs do not justify the benefits. In the case of
supervision, they contend the time and resources banks
dedicate to complying with various examinations and
reporting requirements hinder banks’ ability to provide
credit, restraining economic growth.
Opponents of relief generally believe the current regulatory
structure strengthens financial stability and consumer
protections, which encourages economic growth. They
generally view supervisory actions as striking the
appropriate balances ensuring banks are well managed and
consumers are protected on one hand, while minimizing
regulatory burden on the other hand.
Legislation in the 115th Congress
CFPB Supervision. H.R. 10 would eliminate the CFPB’s
consumer compliance supervisory authority over large
banks, shifting that authority back to the Fed, OCC, FDIC,
and NCUA. H.R. 3072 would raise the asset threshold at
which the CFPB becomes a bank’s supervisor from $10
billion to $50 billion.
Before 2010, the federal bank regulators were charged with
regulating for both safety and soundness and consumer
compliance. Pursuant to the Dodd-Frank Act, the CFPB
acquired certain consumer compliance powers over banks
and credit unions that vary based on their asset size. For
institutions with more than $10 billion in assets, the CFPB
is generally the primary supervisor for consumer
compliance. For institutions with $10 billion or less in
assets, the prudential regulator generally remains the
primary supervisory authority for consumer protection.
Financial Reform: Bank Supervision
Critics of the CFPB argue that certain banks subject to
CFPB supervision face overly burdensome examinations.
They assert that raising the threshold at which the CFPB
becomes the primary supervisor or eliminating CFPB bank
supervisory authority would still provide appropriate
consumer protection, because banks would still be
examined by their primary regulators.
Proponents of the CFPB argue that certain banks subject to
CFPB supervision are similar in size to certain institutions
that were arguably among some of the worst violators of
consumer protections during the housing bubble. They
contend that raising the threshold or eliminating CFPB bank
supervision could lead to those entities being subject to
inappropriately lax consumer compliance supervision.
Examination Cycle. S. 2155 would raise the size
thresholds for banks eligible for an 18-month exam cycle
from $1 billion in assets to $3 billion in assets, provided the
banks met certain other criteria.
Regulators generally conduct a full-scope, on-site
examination of banks at least once every 12 months.
However, banks that (1) have less than $1 billion in total
assets, (2) meet the capital requirements necessary to be
considered well-capitalized, and (3) were found to be well
managed and given an exam rating of “outstanding” (banks
under $200 million in assets must receive only a “good
rating”) on the most recent examination are examined once
every 18 months. (These statutory thresholds were raised in
2015.) Thus, the supervisory burden is lower for banks that
meet those conditions.
Small bank proponents argue that there are economies of
scale to compliance—in other words, compliance costs rise
less than proportionately with size. If true, this would mean
compliance costs on small banks are disproportionately
high compared with larger banks. By contrast, the existence
of supervisory costs does not necessarily mean the
supervision is unduly burdensome; benefits such as greater
safety and soundness among banks or stronger consumer
protection could justify those supervisory costs.
Call Reports. Banks submit a Report of Condition and
Income—referred to as the call report—to their regulator
quarterly. H.R. 4725 and S. 2155 would require the
regulators to develop a shorter call report to be filed in the
first and third quarters for banks that have less than $5
billion in assets and satisfy other criteria. H.R. 10 would
require regulators to do the same, but for institutions of any
size that qualify as well capitalized and satisfy other
The call report is made up of various “schedules,” each
containing multiple line items related to bank operations
that must be given a value. These data are reported using
standard definitions so that banks can be compared by
regulators and the public. 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 activities. In addition,
current statute requires the regulators to review call reports
every five years to eliminate any information or schedule
that “is no longer necessary or appropriate.” Recent burdenreducing revisions are set to take effect in the second
quarter 2018 call report.
Proponents of the legislation contend the current tailoring
does not go far enough and that call reports are currently
unduly complex and burdensome for community banks.
Opponents argue that call reports can provide an early
indication that a bank’s risks or industry risks are changing
and removing too many items could mute the early warning
signal the call report provides.
Appeals Process. H.R. 10 and H.R. 4545 would establish
an ombudsman (called the Office of Independent
Examination Review) within the Federal Financial
Institutions Examination Council (FFIEC), an interagency
forum for bank regulators, to investigate complaints from
banks about supervisory exams; give banks the right to
appeal exam results to the ombudsman or an administrative
law judge; and prohibit specific supervisory actions in
retaliation for appealing. The bills would also make other
changes empowering banks in the exam appeal process.
Bank regulators have established a number of processes for
a bank to appeal its examination results. Although
regulators often resolve disputes informally through
discussion between the bank and the examiner, they are
required to maintain a formal independent appeals process
for supervisory findings, appoint an independent
ombudsman, and create safeguards to prevent retaliation
against a bank that disputes the examination findings. Each
agency ombudsman’s exact role varies, but they generally
serve as a facilitator for the resolution of complaints. Only
the OCC currently allows banks to appeal an examination
directly to the agency’s ombudsman.
Proponents of altering the appeals process argue that the
supervisor currently plays the role of prosecutor, judge, and
jury, and is unlikely to admit a mistake had been made in
the original exam. Thus, they assert that the proposed
ombudsman—being more independent—would be better
positioned to appropriately adjudicate disputes.
Opponents view the creation of an additional ombudsman
for all banking agencies as redundant, because each agency
already has its own. In addition, they argue the new
ombudsman would not have “inside knowledge” of the
supervisory process (which inherently involves examiner
discretion on a bank-by-bank basis), and so may not be
better positioned to make accurate assessments regarding
the condition of and appropriate corrective actions for
individual banks. If true, and if shifting the appeals process
to an ombudsman results in more overturned supervisory
decisions, the new ombudsman could potentially undermine
supervisors’ ability to promote the safety and soundness of
banks and systemic stability, putting taxpayer funds at risk.
Marc Labonte, Specialist in Macroeconomic Policy
David W. Perkins, Analyst in Macroeconomic Policy
Financial Reform: Bank Supervision
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