Publications
November 2006
The Federal Reserve System is one of several banking regulatory authorities. The Federal Reserve regulates state-chartered member banks, bank holding companies, foreign branches of U.S. national and state member banks, Edge Act Corporations, and state-chartered U.S. branches and agencies of foreign banks. National banks must be members of the Federal Reserve System; however, they are regulated by the Office of the Comptroller of the Currency (OCC).
The Federal Reserve supervises and regulates many large banking institutions because it is the federal regulator for bank holding companies (BHCs). A listing of the Top 50 BHCs is available online through the Federal Reserve System’s National Information Center. In addition, under the Gramm-Leach-Bliley Act of 1999, the Federal Reserve has the authority to regulate financial holding companies.
Complex U.S. Banking and Regulatory System
The banking and regulatory structure in the United States is complicated. There are federal and state regulators and institutions that may have either
a federal or a state charter. In addition, different regulators may have different regulatory responsibilities for the various types of financial institutions. And, some types of banking institutions may be regulated by federal and state regulators.
At the federal level, there are five financial industry regulators:
- Comptroller of the Currency (OCC)
- Federal Deposit Insurance Corporation (FDIC)
- Federal Reserve System (FRS)
- National Credit Union Administration (NCUA)
- Office of Thrift Supervision (OTS)
At the state level, each state has an agency or agencies that are charged with supervising and regulating state-chartered banks and thrifts. For example, in California, financial institutions are regulated by:
- Department of Financial Institutions
A listing of state bank supervisors for all states is available at:
- Conference of State Bank Supervisors
These federal and state banking regulators have oversight over a wide array of banking institutions and activities. If you are interested in an overview of the regulatory authority for a specific type of banking institution by key types of regulatory activities, let me recommend the Federal Reserve Bank of New York’s online matrix of Banking Institutions and Their Regulators. This publication allows you to view a list of banking institutions and see their primary regulator(s) for several types of regulatory activities:
Selected Banking Institutions:
- National Banks
- State Member Banks
- FDIC-Insured State Nonmember Banks
- Non-FDIC Insured State Banks
- Insured Federal Savings Associations
- Insured State Savings Associations
- Non-FDIC Insured State Savings Associations
- Federal Credit Unions
- State Credit Unions
- Bank Holding Companies
- Savings Association Holding Companies
- Foreign Branches of U.S. Banks
- Edge Act Corporation
- U.S. Branches and Agencies of Foreign Banks
Selected Regulatory Activities:
- Chartering & Licensing
- Branching
- Mergers, Acquisitions & Consolidations
- Reserve Requirements
- Access to the Discount Window
- Deposit Insurance
- Supervision & Examination
- Prudential Limits, Safety & Soundness
- Consumer Protection
NOTE: For information on regulatory changes arising from the 2010 Financial Regulatory Reforms (Dodd-Frank) please see the following:
Regulatory
Reform
Implementing the Dodd-Frank Act: The Federal Reserve Board's Role - The Federal Reserve Board of Governors
Financial Regulatory Reform
The Implications of Financial Regulatory Reform: A Series of Discussions on the Dodd-Frank Act - Federal Reserve Bank of St. Louis
References
Ask Dr. Econ (October 2003)
Conference of State Bank Supervisors State Banking Department
Federal Reserve Bank of New York (2003). Banking Institutions and Their Regulators.
Furlong, Fred. (2000) “The Gramm-Leach-Bliley Act and Financial Integration.” FRBSF Economic Letter, Federal Reserve Bank of San Francisco, 2000-10, March 31, 2000.
Harshman, Ellen, Fred C. Yeager, and Timothy J. Yeager. (2005) “The Door Is Open, but Banks Are Slow To Enter Insurance and Investment Arenas.” The Regional Economist, Federal Reserve Bank of St. Louis, October 2005.
Understanding Federal Reserve Supervision and Becoming a State Member Bank
by Kerri Allen, Examiner, Examinations & Inspections, Federal Reserve Bank of Kansas City, and Jeff Legette, Assistant Vice President, Examinations & Inspections, Federal Reserve Bank of Kansas City
For nearly 200 years, the dual federal and state banking system has existed as part of constitutional law.1 State-chartered institutions are primarily supervised by a state regulator and operate under state laws and regulations. Additionally, the Federal Reserve or the Federal Deposit Insurance Corporation (FDIC) supervises state-chartered institutions. The Federal Reserve supervises, among other entities, state-chartered banks that are members of the Federal Reserve System (state member banks). Further, the Federal Reserve has supervisory and regulatory authority for all bank holding companies (BHCs) and savings and loan holding companies. The Office of the Comptroller of the Currency (OCC) supervises national banks, which generally operate under federal laws and regulations.
The decision to apply for a state or federal charter largely dictates a bank’s primary federal regulator. The choice between a federal or state banking charter can often be a complex decision for bank management and other stakeholders. In deciding on a state or federal charter, either as a new institution or through a conversion, bank management or other institutional decision-makers consider the key activities and primary goals of the institution, as well as the supervisory approaches of the primary state and federal regulators. This article provides an overview of being a state member bank and receiving oversight from the Federal Reserve.
Risk-Focused, Tailored Supervisory Approach
Since the mid-1990s, the Federal Reserve has applied a risk-focused approach to supervision of community state member banks, emphasizing the assessment of prudent risk management practices and internal controls. The Federal Reserve executes a consistent approach to risk-focused safety and soundness supervision, in part, by leveraging an automated surveillance tool, referred to as the Bank Exams Tailored to Risk (BETR)2 model. The BETR model helps examiners objectively identify risks at a bank through aggregated data metrics. Results of this model are combined with examiner judgment and knowledge about a bank to develop an examination scope that aligns with a bank’s risk profile. By focusing examiner resources on the areas of highest risk and streamlining examination work programs on lower-risk areas, the Federal Reserve can reduce the supervisory burden on banks. For example, the BETR model aids examiners in assessing the level of a bank’s credit risk. For banks that are designated as low or moderate risk, Federal Reserve examiners generally complete 50 to 75 percent of the loan coverage expectations as they would for banks with high credit risk.
Similarly, consumer compliance examiners employ the Community Bank Risk-Focused Consumer Compliance Supervision Program to tailor consumer examinations at banks with less than $10 billion in total consolidated assets. This Federal Reserve program is designed to ensure consumer compliance examinations are appropriately tailored to a bank’s compliance risk, with resources focused on those bank activities with the greatest risk. Under this program, compliance examinations for low-risk banks require about half the time and resources as examinations for higher-risk banks.3
In addition to the BETR model and other examination scoping mechanisms, the Federal Reserve’s supervisory process incorporates various automated tools and advanced data analytics technologies to support and enhance the quality of ongoing monitoring activities. For example, Reserve Banks create and leverage a variety of surveillance reports and models that provide aggregate data on both a District- and System-wide basis. Through such analytics, supervisory staff can identify and analyze risk for banks with similar risk characteristics. In turn, examiners use this information to discuss relevant risk trends or emerging risks with bankers between scheduled examinations.
Supervisory Coordination and Consolidated Oversight
The Federal Reserve assigns a dedicated safety and soundness and/or consumer compliance examiner as a primary point of contact to each supervised institution. These contacts provide technical assistance and can connect bankers to key Federal Reserve resources, including subject matter experts and outreach activities. The Federal Reserve point of contact allows for efficient, consistent, and responsive communications between a supervised bank and Federal Reserve staff and promotes transparent supervision. From scoping and planning to the exit meeting and ongoing monitoring, the Federal Reserve prioritizes effective communications with bankers across all aspects of the examination process.4
The Reserve Banks also work closely with state supervisory counterparts to ensure proper coordination and efficiency of supervisory activities. In addition to coordinating with state counterparts for supervisory purposes, as the sole supervisor of BHCs, Federal Reserve examiners provide a broad view of the entire banking organization as well as the relationship between entities under the consolidated organization. Similar to its approach to state member bank supervision, the Federal Reserve tailors the supervision of holding companies based on the asset size and complexity of the organization.
Federal Reserve Supervision Staff
Federal Reserve safety and soundness and consumer compliance management teams have broad knowledge and significant subject matter expertise. Before being commissioned as examiners, individuals undergo a rigorous, multiyear training program, which includes on the job training. The Federal Reserve’s training program is centralized to promote consistent supervisory assessments. Post-commissioning, examiners are provided with ongoing training and professional development opportunities to ensure skill sets are maintained regarding new guidance, regulations, and banking trends and risks.
The Reserve Banks hire examiners with a broad spectrum of backgrounds, certifications, education, and experience. Federal Reserve examiners are accustomed to navigating a wide range of banking complexities specific to the markets served by supervised banks. Also, many examiners have industry expertise in key lending areas such as agriculture, commercial real estate, and energy.
The Federal Reserve hires, trains, and develops a variety of “specialty” examiners who possess deep subject matter expertise in the areas of Bank Secrecy Act/anti-money laundering, information technology, and trust. These experts examine a broad range of institutions and use this horizontal perspective to support their discussions with bank management. In the area of consumer compliance, many examiners have specialized knowledge about fair lending, the Community Reinvestment Act, and other consumer-related topics.
Outreach Resources and Other Federal Reserve Services
The Federal Reserve, at both the System and local levels, creates and contributes to many publications, resources, and other materials that can provide useful information and analyses to banks and the public. Many of the outreach materials produced by the Federal Reserve highlight local, regional, and national economic and industry trends, as well as current events that could potentially affect the banking industry. In addition, various outreach mechanisms are in place to ensure that regulatory updates, including new or revised supervisory guidance, are disseminated and explained to the appropriate audience.
One such mechanism is the Supervisory Contact System, which allows local Reserve Banks to provide state member banks with timely communications on regulatory updates and other relevant supervisory information. Such resources allow bank management to remain informed about changes in banking laws and regulations that may have implications on the bank’s operations. The local Reserve Banks also regularly hold open conferences and seminars on salient topics such as bank supervision, economic research and trends, and emerging issues and trends in the banking industry. On the national level, the Federal Reserve sponsors outreach events and forums for collecting or sharing data on market and economic conditions and for communicating supervisory updates and emerging issues.
The Federal Reserve offers multiple training opportunities and informational sessions for state member banks and the public, including Ask the Fed sessions and other resources. The Ask the Fed outreach forum allows subject matter experts from the Federal Reserve to deliver information on regulatory updates, supervisory guidance and priorities, and economic conditions to bankers and other stakeholders.5 In 2021, the average attendance for an Ask the Fed session was 3,200 individuals, demonstrating that this is a popular resource for bankers.
In addition to cultivating highly trained examiners who are familiar with local economic and banking conditions, the Federal Reserve employs experts in other areas and functions that can assist supervised institutions. For example, bankers can speak directly with Reserve Bank applications experts who have experience in evaluating expansionary proposals, such as branch openings and mergers and acquisitions. The Reserve Bank staff can guide state member banks and holding companies through the filing process. Additionally, bankers may have opportunities to engage with subject matter experts in emerging payments technologies, fintech firms, and the discount window and master account administration, as well as cash services or other financial services areas. State member banks may also contact their local Reserve Bank for any questions relating to regulatory reporting preparation.
Federal Reserve Structure
The Federal Reserve Board is responsible for setting the regulatory framework that applies to state member banks. However, the execution of supervisory activities generally is delegated to the local Reserve Banks. Reserve Bank board members bring a deep understanding of the challenges faced by the banking industry and knowledge about local and regional economic and market conditions. The Federal Reserve’s decentralized structure also includes Reserve Bank branches. A regional branch structure ensures sufficient supervisory coverage of state member banks across the entirety of the United States, including more remote areas. Some Reserve Banks have multiple branches (up to five, in the case of Atlanta), with local management and staff who are highly knowledgeable of their respective region’s unique economic characteristics. As Governor Michelle W. Bowman stated, “This structure gives our examiners deep insights into thousands of local economies across the U.S. and helps us understand the local industries that are vital to the long-term health and success of these communities.”6
State member banks provide invaluable input to regional discussions on economic and banking conditions, helping Reserve Bank presidents formulate their overall views of regional conditions. By participating in discussions and data-gathering exercises such as periodic surveys, state member banks help inform the Federal Reserve Board about key risks, trends, and insights happening at the local and regional levels that can ultimately influence policy. One such example is the national Community Depository Advisory Council (CDIAC). The CDIAC comprises representatives from banks, thrift institutions, and credit unions who serve as local advisory council members at the 12 Reserve Banks and provide input to the Board on the economy, lending conditions, and other areas of interest to community depository institutions.7
How to Become a State Member Bank
If your organization is considering a state bank charter or membership in the Federal Reserve System, you may contact individuals within the supervisory or applications functions of your local Reserve Bank to discuss the application process. Information on membership requirements can also be found in the Federal Reserve Board’s Regulation H, Membership of State Banking Institutions in the Federal Reserve System (12 CFR part 208).8 Further, you may access information on membership applications through your local Reserve Bank’s website or visit the Applications section of the Board of Governors of the Federal Reserve System’s public website.9
Concluding Thoughts
In determining if membership in the Federal Reserve System as a state-chartered bank is right for your organization, there are multiple factors and options to consider. State member banks are subject to tailored, risk-focused examinations and ongoing monitoring led by qualified and experienced Reserve Bank examination staff. Additionally, your organization will have access to outreach events and materials and Federal Reserve subject matter experts in multiple areas of focus.