Who Funds the Cost of Bank Supervision?

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By Julie Stackhouse, Executive Vice President

This post is part of a series titled “Supervising Our Nation’s Financial Institutions.” The series, written by Julie Stackhouse, executive vice president and officer-in-charge of supervision at the St. Louis Federal Reserve, is expected to appear at least once each month throughout 2017.

For the privilege of their charter and access to the federal safety net, all U.S. commercial banks pay at least some of the costs of their supervision. Banks with a national charter have one regulator, the Office of the Comptroller of the Currency (OCC). They pay an assessment to the OCC that is proportional to their size, subject to some modifications.

Supervision of State-Chartered Banks

State-chartered banks have both a state regulator and a federal regulator, either the Federal Deposit Insurance Corp. (FDIC) or the Federal Reserve. State-chartered banks pay an assessment to their state regulator. As with national banks, it is usually based on size with some modifications that vary across states.

Traditionally, neither the Fed nor the FDIC has directly assessed their supervised banks for the cost of supervisory oversight. Rather, the agencies have funded their supervision expenses through current revenue:

• The Fed’s supervision expenses come out of the revenue generated from monetary policy operations—that is, the buying and selling of Treasury securities.
• The FDIC allocates a portion of deposit insurance premiums for operations, including supervision.

Bank and Savings and Loan Holding Companies and Nonbank Financial Firms Designated for Supervision by the Fed

The Fed also supervises all bank and savings and loan companies and nonbank financial firms designated as for supervision by the Federal Reserve.

The smallest institutions—community and small regional holding companies—are not burdened with charges for the cost of their supervision. Rather, the costs are funded through current revenue of the Fed, as described above.

On the other hand, the nation’s largest bank and savings and loan holding companies—those with more than $50 billion in consolidated assets, as well as nonbank financial firms designated for supervision by the Federal Reserve are charged for the estimated cost of their supervision. This requirement was set out in the Dodd-Frank Act.

Each calendar year, the Fed’s Board of Governors tallies the cost of supervision and regulation and related operating expenses for the Board and the 12 Reserve banks and estimates the portion attributable to these institutions. The assessment rate in any given year is based on the average of the current year’s costs and the costs of the prior two years.¹

Cost of Supervising the Largest Institutions

In 2015, the most recent year for which full data are available, the amount assessed large firms was $472 million. Amounts for the past few years are below.

Each firm pays its assessments to the Fed, and those assessments are then transferred to the U.S. Treasury’s General Account. The Fed does not recognize the assessments as revenue, nor does it use the collections to fund its operations.

This system for assessing financial institutions for the cost of their supervision ensures that small institutions are not unduly burdened by regulatory costs. At the same time, the amount assessed large bank and financial holding companies serves to offset the necessary investment to employ a qualified staff.

Notes and References

¹ The methodology used to compute the SIFI share is available on the Board’s website.

Follow the Series

• Why Are Banks Regulated?
• Did the Dodd-Frank Act Make the Financial System Safer?
• Bank Supervision and the Central Bank: An Integrated Mission
• Why Are There So Many Bank Regulators?
• Why Didn’t Bank Regulators Prevent the Financial Crisis?

Additional Resources

• Bank Supervision
• On the Economy: Keeping a Watchful Eye