Federal Reserve - Bank Supervision
Federal Reserve > Monetary Policy • Bank Supervision • Financial Services
Federal Reserve System History • Federal Reserve Bank Structure
One of the primary reasons that Congress created the Federal Reserve
System in 1913 was to avoid banking crises like the one in 1907.
One way the Fed does that is by backing up banks' deposits, if need be
— through discount window loans. Another way the Fed works
to ensure a stable banking system is through regulation and supervision.
The Board of Governors is responsible for the regulation part — writing the rules that will keep the banking system stable and competitive. The 12 regional banks, along with the Board, are responsible for supervision — enforcing those rules.
The supervisory responsibility of the 12 Federal Reserve Banks has three components: 1) the establishment of safe, sound, and competitive banking practices; 2) the protection of consumers in financial transactions; and 3) the assurance of stable financial markets.
Safe, Sound, and Competitive Banking Practices
Together, the regional Federal Reserve Banks supervise approximately 900 state member banks and 5,000 bank holding companies. Banks that are not supervised by the Federal Reserve — such as national banks and state banks that are not members of the Federal Reserve System — are supervised by the Office of the Comptroller of the Currency or the Federal Deposit Insurance Corporation, respectively.The supervisory role of the Federal Reserve banks involves annual examinations of each bank's risk management and other performance measures. At each examination, the bank is given a performance rating from the Federal Reserve, which amounts to either a mark of approval or a warning to do better. Banks that do not get the mark of approval are monitored more closely throughout the year and can be mandated to make certain changes to come back within the bounds of the regulations.
Protection of Consumers in Financial Transactions
Congress has charged the Federal Reserve with making, interpreting, and enforcing laws that protect the rights of consumers — such as discrimination in lending and inaccurate disclosure of credit costs or interest rates.The Federal Reserve Banks also take a large educational role in helping consumers understand the rights they have in financial transactions, and helping consumers spot signs that those rights are being violated.
Assurance of Stable Financial Markets
One of the causes of the banking crisis in 1907 was that banks were unable to satisfy all of their customers' withdrawal requests — because they did not have enough money in the vaults. One of the roles of the Federal Reserve Banks, then, is to lend money to banks to cover short-term account deficits. These loans are conducted through the discount window at each of the regional Federal Reserve Banks.
At one time, the policy covering discount window transactions was that the Federal Reserve Bank should be a lender of last resort — banks should only turn to the discount window when unable to borrow money from other banks, for example. Today, the discount window is used often by banks to satisfy their short-term funds needs, as well as to fund longer-term loans (e.g. those needed to cover seasonal fluctuations in customer deposits and withdrawals). Loans made through the discount window are transacted at the prevailing discount rate.