Photo by David Fine
In addition to examining community, regional, and large banks and inspecting bank holding companies, the Atlanta Fed and the other Reserve Banks appoint a central point of contact, basically a team leader, and a dedicated team for each systemically important bank in their districts. The Dodd-Frank Act defines systemically important financial institutions as banking organizations with assets of $50 billion or more. The Atlanta Fed maintains teams for three large banking firms based in the Southeast: SunTrust Banks Inc., Regions Financial Corporation, and BBVA Compass Bancshares Inc.
Atlanta Fed supervisors also participate in coordinated system exercises, or horizontal reviews, that produce an overview of industry risk as well as insight into each firm’s strengths and weaknesses. This type of exercise originated from early stress testing of the largest firms’ capital strength and evolved into the now annual comprehensive capital analysis and review, or CCAR.
CCAR encompasses supervisory stress tests as well as a qualitative review of firms' capital planning processes. That is, part of the CCAR tests the quality of banks' capital planning procedures. The program has successfully reduced systemic risk and improved resilience. Since the Fed carried out its first round of stress tests in 2009, the combined common equity of CCAR institutions across the nation increased by more than $750 billion, to $1.25 trillion, in 2017. Common equity is a key measure of an institution’s ability to handle potential losses.
The results of the Federal Reserve System's 2017 stress test projections suggest that, all told, the 34 participating bank holding companies would suffer substantial losses under both the adverse (moderate U.S. recession) and severely adverse (severe U.S. recession with unemployment rising to 10 percent) scenarios. But they could continue lending to businesses and households, thanks to the capital the sector built up following the financial crisis, according to the Board of Governors.
Focusing regulation where it's needed most
In the past year, the Fed refined CCAR to more closely align with the systemic risk that each institution poses. Smaller institutions, which present less systemic risk, now face a reduced burden because part of the review has been folded into regular examinations. The new method allows the Fed to use its resources more efficiently while still offering a system-wide perspective on potential and emerging risks, Johnson pointed out.
For example, after the reviews, Atlanta Fed team leaders meet with counterparts from across the Fed System to consider results. Supervisory staff discuss each institution's capital strength in light of national findings, gaining a holistic view of the institutions' capital adequacy and capital planning processes.
The Fed has also broadened its method for assessing systemic risk. It began with capital stress testing. But Atlanta Fed banking supervisors and Fed System colleagues now also review other critical areas that signal a bank’s soundness, including liquidity and resolution plans.
On the local level, the Atlanta Fed's Supervision, Regulation, and Credit (SRC) Division established a high-level council that directs an internal process to identify, prioritize, monitor, and analyze risks, and to direct actions to control and limit those risks. One of the key conduits to the high-level division risk council is a risk and resilience group. It includes specialized teams focused on capital assessment, credit risk, information technology risk, market and liquidity risk, and operational risk. Embedded in these teams are experts in real estate, accounting, financial analysis, data analytics, and technology.
When the risk council believes a risk merits attention, it shares this information with the SRC staff. The staff then incorporates it in bank examination planning, allowing frontline examiners to know what to look out for.
At the Fed System level, the Board of Governors issues guidance in response to changes in risk. For example, in December 2016, in light of developments in the oil and gas industry, the Board sent a letter to banks—formally called guidance—updating them on what regulatory agencies expected them to do concerning risk management of energy lending.