The nation's banking system is only as safe and sound as the banks within the system. So the Federal Reserve examines banks regularly to identify and contain bank risks.
In the past, Reserve Bank examiners reviewed each bank in much the same way—looking over the bank's books on-site and evaluating the quality of its assets and its ability to cover loan losses. Today, Fed examinations are more customized for each bank. Examinations take into account that each bank differs markedly in its services and products and that a bank's own management should be held responsible for monitoring the institution's exposure to risks.
By studying the bank's risk-management procedures and internal controls, Reserve Bank examiners assess whether a bank lends money wisely and can manage the level of loans it makes to customers. Examiners also review a bank's performance in complying with its own internal policies, as well as with federal and state laws and regulations.
At the end of an on-site review, Fed examiners issue the bank a rating that reflects the institution's condition. The rating indicates whether the institution is sound enough to withstand fluctuations in the economy or whether it has weaknesses that require correction. Between examinations, Reserve Banks monitor financial institutions by examining bank reports filed with the Fed.
New responsibilities were assigned to the Federal Reserve by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. The Federal Reserve was given important authority to monitor large or complex financial organizations that could pose a threat to the stability of our nation's economy or financial system. To do this, the Chair of the Federal Reserve Board is a member of an oversight group established by the act, the Financial Stability Oversight Council (FSOC). The FSOC will identify those companies or practices that pose significant risk.
The Federal Reserve was also given authority to regulate and oversee companies that own savings and loan institutions. Previously, these financial institutions were supervised by the Office of Thrift Supervision, which was eliminated as part of the act.
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