Financial Update (First Quarter 2010)

Board of Governors Issues Report on Fed's Role in Bank Supervision

In a report to Congress released mid-January, the Federal Reserve Board of Governors provided perspectives on why the Federal Reserve should continue to have a central role in bank supervision and regulation. supervision and regulation graphic

According to the report, the financial crisis made clear the need for a more macroprudential approach to supervision and regulation, a task that requires expertise in economic forecasting as well as deep knowledge about the workings of financial markets and payment and settlement systems. The Fed possesses these abilities, the report states, in part because of its experience as the nation's central bank.

Supervisory role informs other functions
The relationship between central banking and bank supervision is two-way. The information and expertise the Fed gains from its supervisory role enhance its performance of other central banking functions, such as crisis management, liquidity provision, and monetary policy. The Fed's in-depth knowledge of the banking and financial system proved especially important as it responded to a financial crisis and other situations that developed in the aftermath of the Sept. 11, 2001, terrorist attacks. Importantly, the report explained, removing the Fed from bank supervision would hamper its ability to access the timely information and in-house expertise crucial to its central banking functions.

Taking steps toward more effective supervision
The report acknowledged that banking supervision and regulation by the Fed and other financial regulators must be made more effective and then described how the Federal Reserve is already taking steps in that direction. One example of these efforts is the Fed's work with domestic and international supervisors to strengthen capital and liquidity regulation. The Fed is also changing the way it oversees large banks to include a more systemwide approach, much like the one taken during the Supervisory Capital Assessment Program, commonly referred to as banks' "stress tests," in spring 2009.

January 28, 2010