Supervision Program

Means & Strategies:   As noted above, the FDIC is the primary federal supervisor for all state non-member banks and state-chartered savings institutions.  For those institutions, the FDIC performs risk management (safety and soundness), trust, Bank Secrecy Act/Anti-Money Laundering, and information technology (IT) examinations in cooperation with state banking regulators.  Most state banking agencies participate in an examination program under which certain examinations are performed on an alternating basis by the state agency and the FDIC.  In addition, the FDIC, OCC, and FRB conduct IT examinations of third-party technology service providers that provide a range of services to IDIs.  As the threat of cyberattacks continues to be prominent, the FDIC engages with other regulators and the private sector to exercise and refine protocols for addressing cyber events.

Risk management examinations are conducted according to statutorily-established timeframes.  These examinations assess an institution’s overall financial condition, management practices and policies, compliance with applicable laws and regulations, and the adequacy of management and internal control systems to identify, measure, and control risks.  Examination procedures may also detect the presence of fraud or insider abuse.  In addition, the FDIC reviews the risk management capabilities of those FDIC-supervised institutions that apply for permission to engage in new or expanded business activities.

Communication and corrective action are important components of the FDIC’s strategy for ensuring the safety and soundness of the institutions it supervises.  Risks identified during an examination are discussed with the institution’s management and board of directors.  If an examination reveals serious weaknesses in the operations of the institution or indicates that the institution is operating in a weakened financial condition, the FDIC may issue formal or informal enforcement actions that remain in effect until corrective actions are taken and the identified weaknesses are addressed.  In the case of severe problems, the institution may be instructed to seek additional capital, merge with another institution, or liquidate.

The FDIC’s statutory authority also gives it a degree of supervisory responsibility in its role as insurer for insured depository institutions for which it is not the primary federal supervisor.  The agency has staff in each of its regional offices that regularly review examination reports and other available information from the primary federal regulators for those institutions.

The FDIC also performs off-site monitoring of those institutions on an ongoing basis, particularly for institutions with more than $10 billion in assets.  In addition, the FDIC has the authority to conduct special (backup) examination activities for institutions for which is not the primary federal regulator.  Under this authority, the FDIC participates in examinations of certain IDIs that present heightened risk to the DIF and designated large, complex IDIs.

Ensuring the safety and soundness of FDIC-insured institutions over the next four years will require an effective supervisory program that incorporates the lessons learned from past financial crises, identifies potential new risks that emerge, and responds quickly to such issues.  As the current economic expansion has progressed, more banks have been growing their loan portfolios and, in some cases, have been funding this growth with sources other than stable core deposits.  These trends have the potential to give rise to heightened credit risk and liquidity risk.  In addition, an extended period of historically low interest rates and tightening net interest margins has created incentives for IDIs to reach for yield in their lending and investment portfolios by extending portfolio durations, heightening their vulnerability to interest-rate risk.

Through regular on-site examinations and interim contacts with state non-member institutions, FDIC staff will actively engage in a constructive dialogue with banks to ensure that their policies to manage credit risk, liquidity risk, and interest-rate risk are effective, and, where appropriate, FDIC staff will work closely with institutions that have significant exposure to these risks and encourage them to take appropriate steps to mitigate risks.  The FDIC will use off-site monitoring to help identify institutions with outsized risk exposures and follow up with individual institutions to better understand their risk profiles.

Cybersecurity is a risk area that will continue to receive particular attention.  During this period, the FDIC will refine its IT examination program for insured institutions and major technology service providers, and increase its collaboration with other regulators, law enforcement, and security agencies.  In addition, in light of the risks posed to the DIF by large and complex banks and the FDIC’s new responsibilities for systemically important financial institutions (SIFIs), the agency will continue to enhance its supervisory monitoring program for large and complex banks.

The FDIC dedicates significant resources to the continuing identification of emerging issues.  It regularly reviews supervisory information from the thousands of examinations that are conducted annually as well as information from a variety of external data sources to identify and, where appropriate, initiate supervisory responses to newly identified areas of risk.  For example, the FDIC is currently monitoring trends, opportunities, and risks in financial technology (fintech); evaluating fintech’s impact on banking, deposit insurance, oversight, inclusion, and consumer protection; and formulating strategy to respond to opportunities and challenges presented by fintech to supervised institutions.

The FDIC has established and consults regularly with the Advisory Committee on Community Banking, which advises the FDIC on the impact of FDIC supervisory policies and practices on community banks.  Members of the Advisory Committee have a wide range of knowledge and experience related to community banks.

External Factors:  Several factors outside of the FDIC’s control could affect the successful achievement of this strategic objective.  In accordance with statutorily established time frames, most risk management examinations of well-capitalized and well-managed state non-member institutions are point-in-time examinations that occur at 18-month intervals.  Between examinations, institutions may enter new lines of business, extend their lending programs into riskier areas, or implement new technologies without the knowledge of the FDIC or state regulatory agencies.  Major changes in economic conditions could also affect institutions between examinations.  The FDIC will continue to improve off-site tools to monitor potential risks in institutions on a continuing basis between examinations.

Under the alternating examination program, certain examinations are conducted in alternating periods by the state supervisory authority.  Resource constraints outside of the FDIC’s control sometimes affect the timely completion of examinations by these state authorities.  In such cases, the FDIC will conduct the examination itself within a reasonable timeframe after the originally scheduled examination date if the state agency is unable to do so.

Means & Strategies:  The FDIC pursues this strategic objective primarily through compliance and CRA examinations of all FDIC-supervised institutions.  CRA examinations are subject to statutory timelines, while compliance examinations are conducted according to timeframes established by FDIC policy.  These examinations evaluate the compliance of institutions with consumer protection, privacy, CRA, and fair lending laws and regulations.  If an examination reveals serious violations, the FDIC may implement either formal or informal enforcement actions to correct the identified violations.  In unusual cases, non-compliance with consumer laws may subject the institution to significant legal risk, and could result in administrative enforcement actions or private litigation.  In addition, when the FDIC has reason to believe that a “pattern or practice” of violations of fair lending laws has occurred at an institution, the FDIC is required by statute to refer the matter to the Department of Justice.  An institution’s failure to comply with consumer protection, CRA, or fair lending laws and regulations might also affect the application of an FDIC-supervised institution seeking to engage in new or expanded business activities.

The FDIC sponsors or participates in numerous outreach and technical assistance activities designed to facilitate better understanding of and compliance with CRA, consumer protection, and fair lending laws and regulations by FDIC-supervised institutions.  In addition, it actively participates in interagency policy development efforts and issues policy guidance.  The FDIC focuses its examinations and other supervisory activities on those industry products, services, and practices that have the highest potential risk for violations of law that may result in potential harm to consumers.

External Factors:  Most compliance and CRA examinations are point-in-time examinations that occur at scheduled intervals in accordance with FDIC policy.  Between examinations, institutions may implement new products, services, or practices that hold significant potential risk for consumer harm without the knowledge of the FDIC.  In addition, major changes in economic conditions could also affect institutions between examinations.  During economic downturns, institutions sometimes elect to reduce costs by decreasing their internal resources dedicated to compliance.

Means & Strategies:   The FDIC provides information about consumer protection and fair lending laws and regulations to help consumers understand their rights.  This information is disseminated through brochures and other media, including the FDIC’s website (www.fdic.gov).  In addition, the FDIC frequently conducts or participates in educational seminars and conferences on consumer protection and fair lending issues to help both consumers and insured institutions better understand consumer protection, CRA, and fair lending laws and regulations.

The FDIC maintains a toll-free call center for consumer complaints and inquiries about FDIC-supervised institutions and has established target timeframes for investigating and responding to these complaints.  It is also a leader in promoting greater financial literacy, primarily through its award-winning Money Smart curriculum.  The agency will continue to enhance its outreach with this product over the next several years by updating the curriculum to address new consumer products and services and adapting the basic curriculum to additional target audiences.

External Factors:  Although the FDIC makes information available to a broad array of consumers, individual consumers may not always use it.  In addition, increasing complexity and aggressive and targeted marketing increase the challenges consumers face in evaluating alternatives in the marketplace.

Means & Strategies:  The FDIC has played a national leadership role in recent years in promoting broader economic inclusion of unbanked and underbanked households within the nation’s banking system through the availability of safe and affordable transaction and saving accounts as well as the opportunity to build credit profiles and borrow money to meet their needs.  The FDIC’s Money Smart financial literacy curriculum is a key tool for pursuing this objective by seeking to educate a wide variety of target populations about basic financial principles and how they can be harnessed to achieve financial goals.  The FDIC also sponsors or conducts research and demonstration projects, develops policy proposals, facilitates partnerships, and participates in targeted outreach and technical assistance activities with both the institutions it supervises and various community-based organizations to further this objective.

The FDIC established and supports the Advisory Committee on Economic Inclusion to inform and support its research, demonstrations, and pilot projects and to promote sound supervisory and public policies to help ensure that underserved households have access to mainstream financial products and services that are affordable, easy to understand, and not subject to unfair or unforeseen fees.  In addition, on a biennial basis, the FDIC conducts jointly with the U.S. Census Bureau the only comprehensive, nationwide research survey of unbanked and underbanked households in the United States to determine the extent to which these households are being served by the U.S. banking industry.  The FDIC also engages banks; other federal, state and local government agencies; and non-profit organizations serving a broad spectrum of consumers and small businesses in building locally based coalitions to participate in financial education and information sharing.  These coalitions promote local economic inclusion opportunities in communities where financial health has lagged the rest of the country.

Over the next several years, the FDIC will continue to pursue several multi-year initiatives to promote broader economic inclusion.  It will continue to promote adoption of its model transaction account product (SAFE accounts); pursue strategies to improve financial resilience; build savings and improve credit records; and evaluate whether mobile financial services and other new technologies can be responsibly used to expand banking services to the unbanked and underbanked population.  The FDIC also will continue to work with federal and local partners to facilitate community development through affordable housing, small business development, and related initiatives.

External Factors:  The access of underserved households to credit from mainstream financial institutions could be disproportionately affected during economic downturns or periods of economic stress.  Changing technological and market conditions could also positively or negatively affect opportunities to expand economic inclusion in the nation’s banking system.

Means & Strategies:  Certain large financial companies are required to prepare and submit annually to the FDIC and FRB resolution plans, or “living wills,” demonstrating that they could be resolved in a rapid and orderly manner under the Bankruptcy Code (or other applicable insolvency regime) in the event of material financial distress or failure.  Among other things, the resolution plans must identify each firm’s critical operations, core business lines, and the key obstacles to a rapid and orderly resolution.  The FDIC and FRB share responsibility for reviewing the plans, assessing informational completeness and resolvability under the Bankruptcy Code, identifying and requiring firms to address any shortcomings, and providing firms with guidance on the submission of future plans.   The FDIC has a complementary rule that requires certain IDIs to periodically submit resolution plans that would enable the FDIC, as receiver, to resolve their failure in an orderly, least-costly manner.

The FDIC’s review of resolution plans is intended to improve the resolvability of bank holding companies (and other designated financial companies) through the bankruptcy process and their subsidiary IDIs through the FDIC’s traditional resolution processes as deposit insurer.  These reviews enhance the FDIC’s ability to prepare for possible large resolutions and its understanding of how the FDIC’s resolution authorities could be best used.  The FDIC has established on- and off-site monitoring and risk assessment programs that support the FDIC’s review of the resolution plans submitted by these companies.  In addition, the FDIC employs multidisciplinary teams that include both supervisory and receivership management expertise in the review of these plans.  The FDIC also collaborates closely with the primary federal supervisors for the affected IDIs in the review of these plans.

External Factors:  The rapid and orderly resolution of a large and complex financial institution under either bankruptcy or Orderly Liquidation Authority may be complicated by legal and operational concerns that stem from the cross-border operations of many large, complex financial institutions. The FDIC actively works with foreign authorities to address these issues.

In addition, the sheer size and complexity of these firms pose legal and operational challenges to their resolution.  Preplanning and structural and operational reforms by these companies are essential to achieving a rapid and orderly resolution under any legal framework.