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Safety and Soundness

The two major focuses of banking supervision and regulation are the safety and soundness of financial institutions and compliance with consumer protection laws. To assess the safety and soundness aspect, supervisory team periodically conducts an examination of the bank's performance based on its financial condition, operational controls, risk management practices, and compliance with banking regulations.

Bank Examinations

Federal Reserve examinations are carried out in accordance with regulatory mandates that establish the frequency and type of supervisory work to assess the overall condition and performance of a state member bank. For smaller community banks in sound condition, the examination work is typically conducted using an alternating exam schedule with the state banking agency, whereas joint examinations are conducted for larger and/or problem banks. The results are factored into an institution's confidential supervisory rating consistent with the Uniform Financial Institutions Rating System used by all of the banking agencies.

Risk-Focused Approach

We use a risk-focused approach to consolidated supervision with a goal to identify the areas of greatest risks to a supervised institution, and assess the ability of the management team to identify, measure, monitor, and control those risks. For each risk area, the exam team will risk tier based on the inherent risk identified during the scoping process and adjust the examination expectations accordingly.

The risk assessment process is further enhanced for community banks through the development of the Bank Exams Tailored to Risk (BETR) program, which better combines forward-looking metrics with examiner judgment to designate the levels of risk at member banks within individual risk dimensions, such as credit, liquidity, and operational risk. The enhanced scoping process is then adjusted to reflect the levels of risk present by tailoring examination request information, depth of review, corresponding work programs, assigned work hours, and report comment requirements. For many low risk banks, this implementation will streamline their reviews and minimize supervisory disruption.

Functional Area Reviews

In addition to the traditional safety and soundness components, Federal Reserve exams also focus on specific functional area within a regulated entity, such as fiduciary activities, compliance with Bank Secrecy Act requirements, information technology activities, or securities dealing. Supervisory work for those institutions less than $10 billion in assets is usually handled using an integrated supervisory approach with the work conducted under a single supervisory event to minimize business disruptions.

Offsite Examination Work

Significant technology advancements have considerably altered our ability to conduct offsite examination work. As a result, the majority of examination work is conducted offsite, including the loan review process. The major benefit of this program is to minimize onsite disruption for bank staff. Communication challenges can be mitigated through greater utilization of videoconference or traditional communication methods, such as by secure email or phone. Its usage is not appropriate for all situations and bankers can opt out of this process if they prefer in-person interactions. 

Supervisory Teams

Supervisory work at this Reserve Bank is split into three separate distinct teamscommunity, regional, and largegiven the uniqueness within these portfolios and to ensure consistency of expectations. The community bank group oversees state member banks, bank holding companies, and savings and loan holding companies with assets below $10 billion. Assigned examiners tend to work on a portfolio of geographic-based banking organizations and conduct point-in-time examination work. The local supervision manager maintains the ongoing relationships with the supervised firm and coordinates all exam work.

The regional and large bank groups supervise larger banking organizations with total assets exceeding $10 billion. The process for these organizations relies more heavily on a dedicated supervisory team with central points of contact and supervisory plans consisting of various activities throughout the year, such as continuous monitoring activities, target reviews, or horizontal supervisory activities. Additional information on the Large Bank Group supervision program can be found on the Federal Reserve Board of Governors' website.

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Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, Illinois 60604-1413, USA. Tel. (312) 322-5322

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