Issues in Financial Regulation

Supervision

 

Charlotte Office Building

What the Fed does and why

The Issue

The Federal Reserve's responsibility for the examination and inspection of banking institutions to ensure their safety and soundness is vital to its functions as the nation’s central bank, especially monetary policy and lending to financial institutions.

The Fed's supervision of state-member banks and bank holding companies helps it fulfill its central banking responsibilities. The Fed’s ability to make accurate and timely decisions about the extension of credit to financial institutions is dependent on its having first-hand information and insights that come from actively assessing institutions’ condition and compliance.

Addressing safety-and-soundness risks requires the traditional skills of bank supervisors, including expertise in examinations and surveillance of small community banking organizations and large, complex ones. The Fed has depth and breadth of experience and expertise that comes from supervising banks and bank holding companies of all sizes. This experience and expertise allows Federal Reserve Banks to carry out their lender-of-last-resort function and provide backstop liquidity to the banking system.

The Fed's expertise, experience and broader mission also make it uniquely qualified to bring a macroeconomic or system-wide perspective to financial supervision. For example, of all the federal financial regulatory agencies the Fed was best positioned to conduct the "stress tests" of major banks in 2009 because it already had expertise and in-depth knowledge in this area. Recent experience has shown that economic and financial disruptions can occur in any part of the financial system and are not restricted to large financial institutions, so a systemic perspective, one the Fed is best positioned to offer, is important.

Consumer protection is intertwined with financial safety and soundness. The recent crisis revealed significant shortcomings in consumer mortgage lending and credit lending in general and showed how inappropriate financial instruments and weak enforcement of consumer protection laws can lead to bad results for both consumers and the stability of the financial sector.

To better protect consumers, the Fed has overhauled regulations under the Truth in Lending Act and the Home Ownership and Equity Protection Act, which aim to ensure fair treatment of borrowers. Most recently, the Fed instituted new credit card rules that ban unfair practices designed to inflate interest and fees, like unexpected rate increases and multi-cycle billing, and require card companies to explain their terms and conditions more clearly. In the area of mortgage foreclosure, the Fed has provided data, analysis and detailed, dynamic maps to help communities identify neighborhoods at high risk of foreclosure. It also has co-sponsored foreclosure prevention events to bring homeowners and mortgage servicers together.

The Bureau of Consumer Financial Protection

Title X of the Dodd-Frank Act establishes the Bureau of Consumer Financial Protection to regulate the offering and provision of consumer financial products or services under Federal consumer financial laws. The Bureau will host several offices: Fair Lending and Equal Opportunity, Financial Education, Service Member Affairs, and Financial Protection for Older Americans. In addition, a Consumer Advisory Board will be established to serve as a consultant to the Bureau.

Authority

The Bureau will have rulemaking authority and responsibility for supervising certain financial entities. It will also be responsible for taking appropriate enforcement actions to address violations of laws. The Bureau will supervise insured depository institutions or credit unions with total assets of more than $10 billion. The Bureau’s work will not involve the Community Reinvestment Act. Supervision, regulation and enforcement of the CRA for all insured depository institutions and credit unions will not change.

Further Reading

Speech by Jeffrey Lacker, March 1, 2010
Real Regulatory Reform 

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The Richmond Fed is the region's connection to the nation's Central Bank.