Our Assessment of the Federal Reserve’s Latest Semiannual Supervision and Regulation Report and Some Recommendations for Future Reports

On Nov. 9, the Federal Reserve released its latest semi-annual report on supervision and regulation.[1] These reports are valuable for the insights they provide into trends and developments relating to U.S. bank holding company supervision, about which little other information is available to the public. In this post, we identify some key takeaways from the latest report. We also offer some suggestions for making the reports more informative and for promoting better practices in supervision.

Key Takeaways

  1. On a percentage basis, far more large banking organizations receive unsatisfactory ratings (about 50 percent of large banking organizations with at least $100 billion in assets) than community and regional banks (only about 10 percent). The report indicates that the divergence, which has persisted for many years, is largely driven not by ratings of capital planning and positions or liquidity risk management and positions, but rather by ratings of governance and controls, and that concerns articulated by supervisors about governance and controls at large banks mainly center on the management of risks related to operational resilience, cybersecurity and BSA/AML compliance. This disparity is likely due in part to the fact that a large bank holding company  is considered unsatisfactory overall if its lowest component rating (i.e., in most cases, “Governance and Controls”) is “deficient”, no matter how good the bank is at everything else.[2] Another likely explanation is more numerous and stringent standards imposed on large, complex financial institutions (such as a greater focus on an institution’s risk management and resiliency processes). Such institutions should be held to higher standards, but we believe that governance and controls ratings often suffer from a lack of clear and objective standards and instead rest on examiners’ subjective judgments on matters such as the capabilities of the board.[3]  As a bottom line matter, it seems counterintuitive to suggest that the nation’s largest banks as a group are run far less well than its smallest.
  2. The report indicates that two-thirds of outstanding supervisory findings (MRAs and MRIAs) at large banking organizations are based on governance and controls. We recall that at the time of its failure, SVB had 31 outstanding MRAs and MRIAs but only seven of those related to the management of interest rate risk or liquidity risk, the source of SVB’s demise; the rest addressed governance and controls.[4] While the report provides detailed information on the categories of outstanding supervisory findings for regional banking organizations (RBOs) and community banking organizations (CBOs), this information is lacking for large financial institutions. This detail would improve transparency in supervision, including whether supervisory activities are appropriately focused on the most salient financial risks. While the report’s list of supervisory priorities for large banking organizations includes three major categories of financial risks (interest rate risk, market and counterparty credit risk and consumer and commercial credit risk) in addition to risk management, a recent Federal Reserve OIG report notes that large bank supervision is excessively focused on non-financial risk management and associated processes rather than actual levels of risk or the financial condition of the bank, as was the case for the Fed’s supervision of SVB.[5] 
  3. For banks of all sizes, the report indicates that one supervisory priority is contingency funding plans, which is understandable in light of the failures of SVB and Signature Bank, where each bank had a required funding plan, but where neither plan was sufficiently actionable under stress. Aside from a brief summary of the July 28 interagency statement on liquidity risk management,[6] the report does not contain any statement that supervisors will encourage banks to be prepared to use the discount window. The July 28 interagency statement said that “the agencies encourage depository institutions to incorporate the discount window as part of their contingency funding arrangements.” However, this report (authored by the agency that operates the discount window) does not otherwise mention encouraging discount window preparedness among supervisory priorities for the coming months.
  4. The report indicates the Federal Reserve has increased focus on its supervision of interest rate and liquidity risk management, which seems quite appropriate. To date, the Fed has been using the examination process to assess these risks and related risk management practices. At large banks this included a horizontal review of interest rate risk management. At CBOs and RBOs the Fed initiated intensified monitoring of banks that appeared most vulnerable to funding pressures. Among other issues, examiners at CBOs and RBOs “have increased their focus on ensuring that banks understand the nature of their deposit concentrations and accurately assess the stability of each deposit segment.” Presumably examiners at large banks are focused on those issues too, among others. The sensitivity of deposit rates to changes in market rates and the rapidity of deposit outflows under stress are critical but still poorly understood issues. Better data and careful analysis of those data is needed before supervisory and regulatory policies can be formulated that appropriately target the deposit segments that pose the greatest risks.


  1. The information on supervisory ratings in these reports should be standardized and expanded to facilitate better understanding of trends and drivers. In the case of composite ratings, it would be useful to present systematically the drivers of levels and changes in unsatisfactory ratings. In particular, are concerns about governance, controls, and management the principal drivers of differences in ratings across banks of different sizes and over time? How frequently is a bank whose capital and liquidity is rated satisfactory nonetheless rated unsatisfactory overall?
  2. The report should include a breakdown of supervisory priorities on a supervisory program level – e.g., breaking out (large and foreign banking organizations) LFBO as compared to (Large Institution Supervision Coordinating Committee) LISCC priorities. This information would highlight the extent to which the Federal Reserve remains committed to implementing a tiered approach to supervision. Where possible, priorities should be described in greater detail – rather than only providing broad categories (such as “risk management practices in credit, market, and interest rate risk”) – to communicate more meaningful information (see the Annex below for the large financial institution supervisory priorities included in the report).
  3. The detailed breakdown of supervisory findings that this report provided for CBOs and RBOs should also be provided for the larger bank categories and should be provided in each semiannual report. It would also be useful to know the number and distribution of newly issued supervisory findings (i.e., MRIAs or MRAs issued since the “as of” date of the last report rather than only outstanding findings (as set out in figures 12 through 15 of the report) for each category of banking organization in each report.
  4. Relatedly, the report notes that certain information included therein speaks as of June 30, but it does not specify the report’s “as of” date as a general matter. The Federal Reserve should clarify the time frame covered by each report (including, e.g., the dates of supervisory findings, priorities and developments covered in the report).
  5. In the interest of supervisory transparency, the report should include greater disclosure on where and how the examiner workforce is being assigned. At a minimum, it should provide the total number of examiners broken down by supervisory portfolio (LISCC, LFBO, RBO, CBO) which is information that the OCC already includes in its Annual Reports with respect to OCC supervisory portfolios.[7]  In addition, future reports could provide examiner FTEs broken-down by risk-type examined (AML, interest rate, credit, liquidity, etc.). 
  6. The report – or a supplemental publication – should include more detailed supervisory observations and findings (“lessons learned”) gleaned from the most recent standing and ad hoc horizontal examinations. Observations included in a report would not refer to any specific institution but would rather share key findings and trends in order to enable independent review of important horizontal exam findings and to help industry limit key safety and soundness risks.


[1] Supervision and Regulation Report, November 2023 (federalreserve.gov)

[2] Federal Reserve SR Letter SR 19-3 / CA 19-2: Large Financial Institution (LFI) Rating System (Feb. 26, 2019) (“A firm is considered to be in satisfactory condition if all of its component ratings are either “Broadly Meets Expectations” or “Conditionally Meets Expectations.” Under the LFI rating system, a firm must be rated “Broadly Meets Expectations” or “Conditionally Meets Expectations” for each of the three components (Capital Planning and Positions, Liquidity Risk Management and Positions, and Governance and Controls) to be considered “well managed” in accordance with various statutes and regulations).

[3] See, e.g., BPI letter to the Federal Reserve and FDIC, dated Feb. 28, 2020, re: Application of the Uniform Financial Institution Rating System. Available at: Supplemental-BPI-Comment-Letter-re-UFIRS-RFI-Docket-No-OP-1681-RIN-3064-ZA08.pdf(amplifying industry viewpoints relating to governance and controls ratings).

[4] See Newell, Jeremy and Parkinson, Pat (2023, May, 8). A Failure of (Self-) Examination:  A Thorough Review of SVB’s Exam Reports Yields Conclusions Very Different From Those in the Fed’s Self Assessment. Available at:  A Failure of (Self-) Examination:  A Thorough Review of SVB’s Exam Reports Yields Conclusions Very Different From Those in the Fed’s Self Assessment – Bank Policy Institute (bpi.com).

[5] See, e.g., Office of the Inspector General:  Board of Governors of the Federal Reserve System. Sept 25, 2023. Material Loss Review of Silicon Valley Bank (Evaluation Report; 2023-SR-B-013)  (“We believe that LFBO Supervision did not sufficiently act to mitigate the risks from interest rate changes because it was focused on risk management and associated processes. Interviewees noted that while the LFBO Supervision team was focused on SVB’s risk management and associated processes, it did not pay close attention to changes in the financial condition of the institution. For example, interviewees shared that when evaluating components for LFI ratings, LFBO examiners tend to focus more on risk management than the institution’s financial condition. A Board official noted that LFBO Supervision was highlighting risk management deficiencies when more serious problems were emerging and that LFBO Supervision missed the deficiencies in the bank’s financial condition.”)

[6]The July 28 interagency statement is available at:  Federal Reserve Board – Agencies update guidance on liquidity risks and contingency planning.

[7] For example, see p. 6 of the 2022 OCC Annual Report.  Available at: 2022-annual-report (5).pdf