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Financial Services Law Insights and Observations

Federal Reserve Board summarizes banking conditions and supervisory and regulatory activities

Federal Issues Federal Reserve Bank Supervision Bank Regulatory

Federal Issues

On November 9, the Federal Reserve Board (Board) released the inaugural issue of a new publication, Supervision and Regulation Report (Report), which summarizes banking system conditions, Board supervisory and regulatory activities, trends dating back to the financial crisis, and differing approaches for large financial institutions and regional/community banking organizations. The Report discusses the safety and soundness of the banking industry, and states that the “strong economy” has had a positive effect on the return on equity and return on average assets for banks, with figures showing that industry profitability ratios in the second quarter of 2018 are at a 10-year high.

However, the Board also discusses several areas of concern including, among other things, that firms assigned “less-than-satisfactory-ratings generally exhibit weaknesses in one or more areas such as compliance, internal controls, model risk management, operational risk management, and/or data and information technology [] infrastructure.” The Board also cites weaknesses in Bank Secrecy Act/anti-money laundering (BSA/AML) programs. The Report outlines future supervisory priorities, which continue to address risk management controls and cyber-related risks, and also include (i) a focus on four specific components: capital; liquidity; governance and controls; and recovery and resolution planning for the largest firms; and (ii) a focus on credit risk, operational risk, sales practices and incentive compensation, and BSA/AML compliance for regional and community banks. In addition, the report discusses plans to minimize regulatory burdens, tailor bank examinations to risk, and optimize supervision resources.