Federal Reserve Bank
of San Francisco Federal Reserve Bank
of San Francisco

How does the Federal Reserve System keep our banking and financial industry safe?

May 1, 2000

Ensuring Banking Industry Safety

Maintaining the safety and soundness of the financial institutions it regulates is an important function of the Federal Reserve System. As stated in The Federal Reserve System Purposes & Functions:

The Federal Reserve has supervisory and regulatory authority over a wide range of financial institutions and activities. It works with other federal and state regulators to ensure safety and soundness in the operation of financial institutions, stability in the financial markets, and fair and equitable treatment of consumers in their financial transactions.

The Federal Reserve System plays a very important role in both bank supervision and bank regulation.

Bank supervision — Includes the following activities designed to evaluate the condition of a banking organization and ensure its compliance with banking laws and regulations:

  • Examining banking organizations
  • Monitoring banking organizations

    Several key components of the examination and monitoring of banks for safety and soundness purposes by bank regulators are:

    • Evaluating the banking organization’s capital adequacy
    • Reviewing the banking organization’s risk profile
    • Establishing regulatory ratings for capital, assets, management, earnings, and liquidity

Bank regulation — Federal legislation requires the Fed to set regulations that govern the conduct and competitive structure of the banking industry by:

  • Implementing regulations
  • Issuing guidelines

The Fed shares its banking safety and soundness responsibilities with several other federal and state regulatory agencies, including:

  • Office of the Comptroller of the Currency (OCC)
  • Federal Deposit Insurance Corporation (FDIC)
  • Office of Thrift Supervision (OTS)
  • State regulatory agencies

However, until implementation of the Gramm-Leach-Bliley Act of 1999, the Fed was the primary supervisor and regulator for several types of banking organizations, including (see 86th Annual Report 1999, Board of Governors of the Federal Reserve System):

  • Bank holding companies (5,941 as of December 31, 1999)
  • State-chartered member banks (1,009 as of December 31, 1999)
  • Edge Act and agreement corporations (83 as of December 31, 1999)
  • Foreign banking organizations in the U.S. (230 as of December 31, 1999)

Major Changes Arising from Passage of the Gramm-Leach-Bliley Act of 1999

The Federal Reserve’s role in maintaining financial services industry safety and soundness recently expanded with passage of the 1999 Gramm-Leach-Bliley Act (GLBA). GLBA, which went into effect in March 2000, breaks down many of the barriers that had long existed between banking, securities, and insurance. Still, as Furlong (2000) notes:

At the same time, the new road clearly has retained the traditional caution signs to address concerns over the potential risk exposure of banks.

Under GLBA, the Federal Reserve has received several new responsibilities in addition to the existing duties described above:

  • Serve as an ‘umbrella’ supervisor for financial holding companies (FHC), a new category of financial institution that may engage in expanded powers, including securities, insurance, merchant banking, as well as traditional banking activities.
  • Define other financial activities in which FHCs may engage (along with the Treasury)
  • Review FHC declarations and notices, as FHCs begin to exercise the new powers

Additional Reading

  • For more information, The Federal Reserve System Purposes & Functions, Chapter 4, describes in detail many of the Federal Reserve’s supervisory and regulatory activities related to safety and soundness:

    Supervision and Regulation (Chapter 4)
    Supervisory Functions

    Domestic Operations of U.S. Banking Organizations

    International Operations of U.S. Banking Organizations
    U.S. Activities of Foreign Banking Organizations

Regulatory Functions
Acquisitions and Mergers
Other Regulatory Responsibilities

  • Further information on the Gramm-Leach-Bliley Act of 1999 may be found at:
    Furlong, Fred. 2000. “The Gramm-Leach-Bliley Act and Financial Integration.” FRBSF Economic Letter 2000-10(March 31).

    Meyer, Laurence H. 2000. “Implementing the Gramm-Leach-Bliley Act.” Remarks by Governor Laurence H. Meyer before the American Law Institute and American Bar Association, Washington, D.C., February 3.

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

Board of Governors of the Federal Reserve System. 1994. The Federal Reserve System Purposes and Functions.
http://www.federalreserve.gov/pf/pf.htm

Furlong, Fred. 2000. “The Gramm-Leach-Bliley Act and Financial Integration.” FRBSF Economic Letter 2000-10 (March 31). /econrsrch/wklyltr/2000/el2000-10.html

Meyer, Laurence H. 2000. “Implementing the Gramm-Leach-Bliley Act.” Remarks by Governor Laurence H. Meyer before the American Law Institute and American Bar Association, Washington, D.C., February 3.
http://www.federalreserve.gov/boarddocs/speeches/2000/20000203.htm

Board of Governors of the Federal Reserve System. 1999. Annual Report, pp. 121, 127, and 374, and Banking Supervision and Regulation Chapter.
http://www.bog.frb.fed.us/boarddocs/RptCongress/annual99/ann99.pdf