Notes from US Supervision and Regulation Report - Vermeg
Notes from US Supervision and Regulation Report

Notes from US Supervision and Regulation Report



The US Federal Reserve Supervision and Regulation Report (“Report”) has been issued for 2022, the purpose of which is to describe banking conditions, and the Federal Reserve’s supervisory and regulatory activities.

In this blog we explore some of the key points raised in the Report, particularly with respect to the findings in the Supervisory Activities which revealed the respondent institutions’ strengths and weaknesses observed by the supervisory efforts.

The Report indicates that the vast majority of firms maintained capital above regulatory minimums.  Loan delinquencies were historically low, and liquidity levels generally remained high.  However, it also explains the Federal Reserve’s concern over the increasing uncertainty about the economic outlook that could create new risks for firms to manage.

The Supervisory Activities in the Report are divided into two sections; first, Large Financial Institutions (“LFIs”), which are U.S.  firms with total assets of $100 billion or more and foreign banking organizations with combined U.S. assets of $100 billion or more; and second, Community (“CBOs”) and Regional Banks (“RBOs”), where CBOs are those organizations that have less than $10 billion in total assets, while RBOs, with total assets between $10 billion and $100 billion.


Large Financial Institution

Supervisory efforts have found that the LFIs have remained well capitalized:

  / Their aggregate Common Equity Tier 1 capital ratio in the second quarter of 2022 was 11.9 percent

  / While capital ratios have declined from the end of 2021, recent stress test results suggest that these firms remain sufficiently capitalized to continue lending to households and businesses in a simulated period of stress

In addition, the liquidity positions remain generally adequate, and these firms generally continued to maintain sufficient liquid assets to meet liquidity needs for a 30-day stress scenario.

At the same time though, the Report notes that many of these firms have multiple unresolved supervisory findings on governance and controls.  Governance and controls include:

  / Operational resilience, including cybersecurity and information technology risks

  / Third-party risk management

  / Bank Secrecy Act/anti-money-laundering Compliance, internal loan review, and audit

  / Firm’s remediation efforts on previously identified matters requiring attention, e.g., data quality programs, risk-weighted asset calculations, and liquidity management.


Community and Regional Banks (CBO’s and RBO’s)

Most CBOs and RBOs are in a stable financial condition, the Report concludes, and have addressed pandemic-related conditions.  Although capital ratios are slightly below pre-pandemic levels, more than 99 percent of CBOs and all RBOs report capital ratios above well-capitalized minimums as of the second quarter of 2022.  Liquidity levels are sufficient. Core deposits[1] as a share of total assets remain above pre-pandemic levels.

As credit risk remains a focus for the supervision of CBOs and RBOs, the supervisors highlight a unique characteristic of CBOs and RBOs with respect to the composition of their loan portfolios.  Namely, a number of CBOs and RBOs are highly concentrated in Commercial Real Estate (“CRE”) lending and have higher CRE concentrations than larger banks.  CREs are defined as the sum of:

  / Construction, land development, and other land loans;

  / Loans secured by multifamily residential properties; and

  / Loans secured by nonfarm nonresidential properties.

The values of these loans are taken from the Call reports, which are the source for the statistics in the Report.  Also, a bank is considered concentrated if its construction and land development loans to tier 1 capital plus reserves is greater than or equal to 100 percent or its total CRE loans (including owner-occupied loans) to tier 1 capital plus reserves is greater than or equal to 300 percent.

According to the Report, as of June 30, 2022, approximately 28 percent of insured depository institutions reported a concentration in CRE lending.  In the second quarter of 2022, most CRE-concentrated banks were primarily regional and community banks.  The supervisors’ concern is that banks with high CRE concentrations can be exposed to higher risk of credit deterioration.  In addition, the outlook for some CRE properties is being affected by changing economic conditions and greater reliance on remote work.  As a result, supervisors remain focused on monitoring banks with concentrations in CRE loans because these banks could be adversely affected by stress in the CRE sector.

In summary, the supervisors have found that large financial institutions have remained well capitalized; however, some firms continue to face challenges related to governance and controls.  Also, most community and regional banking organizations are in stable financial condition and have addressed pandemic-related conditions.  But credit risk remains a focus for the supervision of CBOs and RBOs.

The full report can be accessed here:

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[1] Sum of all transaction accounts plus nontransaction money market deposit accounts plus nontransaction other savings deposits, excluding MMDAs, plus nontransaction time deposits of less than $100,000 – fully insured brokered deposits $100,000 and less.


Paul Baik

Paul Baik 

Regulatory Enablement Manager – North America