A Peek behind the Curtain of Bank Supervision
Since the financial crisis, bank regulatory and supervisory policies have changed dramatically both in the United States (Dodd-Frank Wall Street Reform and Consumer Protection Act) and abroad (Third Basel Accord). While these shifts have occasioned much debate, the discussion surrounding supervision remains limited because most supervisory activity? both the amount of supervisory attention and the demands for corrective action by supervisors?is confidential. Drawing on our recent staff report ?Parsing the Content of Bank Supervision,? this post provides a peek behind the scenes of bank ...
The return to retail and the performance of U.S. banks
The U.S. banking industry is experiencing a renewed focus on retail banking, a trend often attributed to the stability and profitability of retail activities. This paper examines the impact of banks' retail intensity on performance from 1997 to 2004 by developing three complementary definitions of retail intensity (retail loan share, retail deposit share, and branches per dollar of assets) and comparing these measures with both equity market and accounting measures of performance. We find that an increased focus on retail banking across U.S. banks is linked to significantly lower equity ...
The Banking Industry and COVID-19: Lifeline or Life Support?
By many measures the U.S. banking industry entered 2020 in good health. But the widespread outbreak of the COVID-19 virus and the associated economic disruptions have caused unemployment to skyrocket and many businesses to suspend or significantly reduce operations. In this post, we consider the implications of the pandemic for the stability of the banking sector, including the potential impact of dividend suspensions on bank capital ratios and the use of banks’ regulatory capital buffers.
Banking Supervision: The Perspective from Economics
Economists have extensively analyzed the regulation of banks and the banking industry, but have devoted considerably less attention to bank supervision as a distinct activity. Indeed, much of the banking literature has used the terms “supervision” and “regulation” interchangeably. This paper provides a heuristic review of the economics literature on microprudential bank supervision, highlighting broad findings and existing gaps, especially those related to work on supervision’s theoretical underpinnings. The theoretical literature examining the motivation for supervision (monitoring ...
Supervising large, complex financial institutions: what do supervisors do?
The supervision of large, complex financial institutions is one of the most important, but least understood, activities of the Federal Reserve. Supervision entails monitoring and oversight to assess whether firms are engaged in unsafe or unsound practices, and to ensure that firms take appropriate action to correct such practices. It is distinct from regulation, which involves the development and promulgation of the rules under which firms operate. This article brings greater transparency to the Federal Reserve?s supervisory activities by considering how they are structured, staffed, and ...
Supervising Large, Complex Financial Institutions: Defining Objectives and Measuring Effectiveness
Last month the New York Fed held a conference on supervising large, complex financial institutions. The event featured presentations of empirical and theoretical research by economists here, commentary by academic researchers, and panel discussions with policymakers and senior supervisors. The conference was motivated by the recognition that supervision is distinct from regulation, but that the difference between them is often not well understood. The discussion focused on defining objectives for supervising the large, complex financial companies that figure so prominently in our financial ...
Supervisory information and the frequency of bank examinations
Bank supervisors need timely and reliable information about the financial condition and risk profile of banks. A key source of this information is the on-site, full-scope bank examination. This article evaluates the frequency with which supervisors examine banks by assessing the decay rate of the private supervisory information gathered during examinations. The analysis suggests that this information ceases to provide a useful picture of a bank's current condition after six to twelve quarters. The decay rate appears to be faster in years when the banking industry experiences financial ...