In a recent article titled How Is Banking Safer Following the Financial Crisis?, the Federal Reserve Bank of San Francisco examines 10 key initiatives the U.S. Federal Reserve Board of Governors have undertaken in response to widespread banking failures following the 2008 financial crisis.
While some of the efforts on the part of the Fed and other regulat0rs have been mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, some of the efforts have complemented Dodd-Frank.
Many of the regulators' efforts deal with what is probably the most significant component of strengthening the banking system in the United States, which is ensuring that banks have the resources to withstand even the most catastrophic economic downturns. The regulators have introduced macroeconomic supervisory stress tests for banks with total consolidated assets of more than $50 billion to ensure banks have adequate capital to continue operations in such an event; one of those, the Comprehensive Capital Analysis and Review (CCAR) is administered annually by the Fed. Banks with more than $50 billion in total consolidated assets are required to submit resolution plans to the Fed and the FDIC.
Another key effort is the Fed's launch of the Comprehensive Liquidity Assessment and Review (CLAR) in 2012 as an annual assessment to give supervisors of financial firms a regular opportunity to respond to evolving liquidity risks. The Fed also enhanced the rules creating enhanced risk management standards for larger U.S. banks in addition to the rules in place for capital planning, liquidity risk management, and stress testing.
Regulators implemented stronger capital requirements for financial institutions of all sizes to strengthen the safety and soundness of the institutions, ensuring they will be able to absorb the shock of an economic downturn. The sixth initiative undertaken by regulators to strengthen the banking system is enhancing large bank supervisory processes through the Large Institution Supervision Coordinating Committee, which is comprised of representatives from the Federal Reserve banks and the central bank. The Committee sets supervisory policies for the 16 largest, most systemically important financial institutions in the country.
The seventh initiative taken by the Fed is the supervision of systemically important nonbanks designated as such by the Financial Stability Oversight Council, as required by Section 113 of the Dodd-Frank Act. The Council has determined that financial stress at four institutions – American International Group, General Electric Capital Corporation, Prudential Financial, and MetLife – would pose a threat to U.S. financial stability and therefore require Fed supervision.
For the eighth initiative as part of the effort to strengthen the banking system, the Fed is increasing its reliance on forward-looking supervision and data analytics. The ninth effort is the Volcker Rule, which was approved by the Fed and four other federal agencies in December 2013 as a common final rule to implement Section 619 of Dodd-Frank. The Volcker Rule, named for former Fed chair Paul Volcker, was intended to help firms and regulators monitor and identify proprietary trading and high-risk trading strategies that are prohibited.
The 10th effort the Fed has taken to strengthen the banking system is distinguishing between risks posts by large, systemically important financial firms and risks posed by community banks.
"Of course, the Federal Reserve distinguishes big banks whose weakness can shake the entire economy from small banks," the San Francisco Fed said on its webpage. "Community banks, for example, would face an undue burden by having to meet many of the same regulatory requirements as large banks. So, regulators fashion more basic supervisory expectations for smaller, less complex banks, identifying which provisions of new regulations are relevant."
To view the entire list of 10 regulatory efforts to instill more resiliency in the nation's banks, read the full article How Is Banking Safer Following the Financial Crisis? To see how the Fed has stepped up supervision of the entire financial system, read What is the Federal Reserve doing to help decrease the likelihood of another financial crisis?