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posted on 29 July 2017

Why Does The Fed Supervise Small Banks?

from the St Louis Fed

-- this post authored by Julie Stackhouse

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.

In the aftermath of the 2008 financial crisis, the Federal Reserve was given substantially more authority to supervise the nation’s largest and systemically important financial institutions. Given that important responsibility, it’s fair to wonder why the Fed supervises smaller banks too.

The Fed has been supervising banks of all sizes since its founding in 1913. The table below shows the breakdown of Fed-supervised banks by asset size.

Fed Bank Supervision by Size
Bank SizeNumber of Fed Member Banks
Less than $100 Million in Assets151
$100 Million to $1 Billion505
$1 Billion to $10 Billion129
Greater than $10 Billion27
SOURCE: Consolidated Reports of Condition and Income (Call Report), First Quarter 2017
Federal Reserve Bank of St. Louis

When the Bank Holding Company Act of 1956 passed, the Fed was also given the task of supervising the nation’s bank holding companies - companies that own or control one or more commercial banks.

Today, about 80 percent of the nation’s 6,000 banks are part of a one- or multi-bank holding company, giving the Fed a window into the economic and financial conditions of much of the country.

Fed Bank Supervision by Holding Company Type
Holding Company TypeNumber Under Supervision
Bank Holding Companies3,913
Financial Holding Companies585
International Holding Companies19
Savings and Loan Holding Companies241
SOURCE: Consolidated Reports of Condition and Income (Call Report), First Quarter 2017
Federal Reserve Bank of St. Louis

The regulation of a wide variety of financial firms provides Reserve Bank presidents and the Federal Reserve Board of Governors a holistic view of the trends and issues affecting firms across the country. Issues facing small financial firms can have a material impact on regions of the country, or - in the case of commercial real estate (CRE) lending prior to the financial crisis - can contribute to the effects of larger systemic trends.

Supervision of financial firms of all sizes also assists the Fed in its lender of last resort responsibility. To provide liquidity to financial firms in times of stress, the Fed depends on information passed on by its bank supervisors and the continual monitoring of firms of all sizes.

Importance of Fed Supervision

The importance of the Fed’s role in supervision was seen in the financial crisis. Although an overheated housing market and accompanying issues in secondary markets are largely blamed for the 2008 financial crisis, problems in CRE markets were a contributing factor in the recession and decline in lending that followed.

Delinquent CRE loans were concentrated in the nation’s small banks, which had increasingly specialized in such lending. Fed supervisors constantly monitored these smaller institutions and kept monetary policy decision-makers apprised. Similarly, having a supervisory relationship with smaller institutions facilitated the underwriting of emergency loans through the Fed’s discount window.

There is no question that large banks are important as the “transmission belt" of monetary policy. But the belt runs both ways. Community banks are still the main source of credit for many communities. Interactions between Fed supervisors and these banks provide useful insight on lending and economic conditions.

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Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

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