Introduction

Banking in the US is highly regulated, given the critical role banks play in giving out credit and operating the payment system. The United States has a dual banking system meaning that banks in the U.S are either chartered at the federal level or by one of the 50 states. Either way, banks have one federal supervisor. Over the past few years, most regulatory activities in the US have emerged from the Dodd-Frank Wall Street Reform and the Consumer Protection Act. These activities were enforced in 2010, shortly after the 2007-2009 financial crisis. Most provisions of this Act pay more attention to regulating large financial institutions since they played a key role in causing the financial crisis.  While this paper will focus on one regulatory body: LSICC, there’s need to understand the banking regulation and supervision in the US and how the LSICC comes in to help in that role. It will further look into whether these commission has been effective since it was created.

Background information

Having been set up in 1913 as the central bank of the USA, the Federal Reserve system has three constituents: The Federal Open Market Committee, 12 Regional Federal Reserve Banks, and the Federal Reserve Board.

Since the Federal Reserve Board monitors the Federal Reserve System, it reports to the Congress. The board also guides the financial sector and all its activities. In addition, it oversees the 12 reserve banks and together, they monitor and regulate specific financial institutions and activities.

The Federal Reserve System conducts the monetary policy, ensures stability of the financial system, and reduces the systemic risks. Besides, it protects financial intermediaries and evaluates their impact on the system as a whole. The federal reserve fosters the payment and settlement system and efficiency and supports consumer protection and community development.

The 12 Reserve banks are made up of private institutions, owned by their member banks. They appoint boards independently which is composed of bankers and local leaders. Each reserve bank has a geographical area in which it operates and gathers information about the business and needs of local communities in that region. The data is then considered when monetary policy decisions are being made by the reserve board.

Reserve banks are in charge of supervising state member banks, as well as bank and thrift holding companies and non-bank financial intermediaries that are deemed systemically important. They also lend to depository intermediaries, hence make sure that there are enough levels of liquidity in the financial market. They provide financial services, examine financial institutions, so as to make sure that they stay compliant with federal consumer protection and lending rules as well as community development.

The Federal Open Market committee is made up of seven members of the Reserve board and five reserve bank presidents. The chairperson of the board also heads the Federal Open Market Committee. Among other duties, the committee opens market operations that allow US monetary policy to promote stable prices, maximum employment, and long-term interest rates in the US economy.

Regulation and supervision of banks in the USA is composed of two different yet complementary activities that lack a strict legal separation. Regulation of banks sets the rules that govern how financial institutions do business. With these rules in place, supervision comes in to make sure that banks are following them. Regulation of financial institutions protects investors and borrowers who are taking part in financial markets and prevent financial instability.

The Federal Reserve controls and monitors financial institutions through two approaches:  micro-prudential and macro-prudential regulations. Micro-prudential regulations and supervision on banks, holding companies and their affiliates and non-bank financial companies subjects them to prudential standards. Macro-prudential regulation and supervision of banks ensures the stability of the financial system as a whole.

The macro and micro prudential approaches complement each other, meaning that if both approaches are sound, the financial system will be stable. It is, however, still possible to identify different features in each approach. The micro-prudential approach aims to ensure the safety and soundness of each individual intermediary by thorough examination and inspection of the structure, operation and compliance of the institution that it is supervising. On the other hand, the macro-prudential approach is focused on the health and resilience of the financial system. It seeks to evaluate how the actions of a given institution will affect other institutions and their impact on the overall economic and financial system of the USA. This approach gained significant importance globally during and after the 2007-2009 financial crisis. It made it clear that financial regulators including the Federal Reserve must consider the risks that may emerge on the systemic level as well as those that involve individual intermediaries. A narrowed focus on the health of individual financial institutions makes it hard to identify and neutralize potential threats to financial stability that cuts across many firms and markets. The traditional approach that the Federal Reserve has followed is micro-prudential supervision which is achieved by evaluating the risk management system of a given financial intermediary, its financial condition and its compliance with the laws. The objective of these assessments is to allow an overall assessment of the stability of a single intermediary and how much risk it has been exposed to, the adequacy of its corporate governance, and quality of the board of directors and management. In addition, the such checks may allow areas where corrective action needs to be taken.

The Federal Reserve has also been using a risk-based approach to consolidated supervision with a goal to identify the biggest risks and emerging risks that could put a supervised institution in danger. In addition, the Federal Reserve’s approach wants to assess the intermediary’s ability to identify, measure, monitor, and manage such risks. The board of governors of the Federal Reserve system have been in charge of supervising large financial institutions such as bank holding companies, non-bank financial companies that have been assigned for supervision, and U.S operations of certain foreign banking organisations.

Large institutions whose size and complexity in operations has increased over the years, and the risk-based approach is conducted mainly through continuous processes of onsite supervision as opposed to a specific time supervision (Ferretti, 2018).

To ensure that large and complex financial institutions are supervised, the Federal reserve established the Large Institution Supervision and Coordinating Committee. The Large Institution Supervision Coordinating Committee is a supervisory program that monitors the activities of large and important financial institutions.

LISCC is made up of senior officers who represent different roles at the Board and Reserve banks, hence bring a cross firm and interdisciplinary view that helps monitor large financial institutions.

The Federal Reserve Act hooked up the Federal Reserve because it is

United States’ most important bank. The act installed the Federal Reserve as an

impartial, decentralized financial institution to higher ensure that monetary policy will be primarily based on an extensive monetary angle from all areas of the country. The Federal Reserve consists of: The Board of Governors, located in Washington, D.C., 12 Reserve Banks with 24 branches located all over the country, and the Federal Open Marketplace Committee, which consists of the Board of Governors and five Reserve bank presidents who serve on a rotating basis. The Board of Governors is an independent Federal agency which is in charge of ensuring that financial markets are stable, supervises financial and bank and savings and loan companies, state-chartered banks which might be members of the Federal Reserve, and the U.S. operations of overseas banking companies, and supervising the activities of Reserve Banks.

In contrast to the Board of Governors, the Reserve Banks are not federal

corporations. Each Reserve bank is a Federally Chartered enterprise, and

is guided by the Federal Reserve Act, meaning that they are supervised by the Board of Governors. The Board has delegated a number of  these responsibilities and certain aspects of supervision, to the Reserve Banks. Staff at the Federal Reserve supervise 13 financial institutions that are in the LISCC program. At the Reserve bank level, the LISCC program is made up of supervisory teams for each of those 13 firms, horizontal teams that cover problems across different firms and programs, and system-level committees that offer direction and oversight. Based on the geographical location of presently designated LISCC corporations, the Reserve Banks that take part in the LISCC application are those in Boston (FRB), New York (FRBNY), Richmond (FRB Richmond), and San Francisco (FRB San Francisco) When determining firms that are to be supervised by LISCC, the Federal Reserve takes into account a

several factors, which includes the size of the firm, their interconnectedness, a lack of conveniently available substitutes for their offerings, their complexity, and their international activities. In analysing those institutions, the Federal Reserve targets to offer consistency throughout its firm-specific and horizontal supervisory decisions. Staff from the Federal Reserve take part in supervising these large, systemically crucial firms.

The LISCC Operating Committee (OC) oversees the implementation of the

LISCC program. It is a multidisciplinary group composed of senior

officials from different divisions at the Board and Reserve Banks and is

chaired by a senior officer from the Division of Supervision and

Regulation who then reports to the Director of the division of Supervision and

regulation at the Board. The OC consults the LISCC to determine

priorities for and oversees the execution of the LISCC program, identifying

common risks facing companies within the portfolio, and makes decisions about what they need to do. The OC has numerous subcommittees that monitor specific components of large firms under supervision.

The subcommittees consist of members of the Oversight Committee and staff from the Federal Reserve. For instance, the OC’s Vetting Committee is a discussion board to study the outcomes of key elements of the supervisory program and provide feedback and guidance to various LISCC-dedicated supervisory groups. In line with policy documents, the Vetting Committee tries to promote quality and consistency in supervisory methods, key exam work

and associated communications, risk and danger control assessments,

and supervisory moves and messages sent to man or woman companies.

The OC also guides the LISCC corporations’ devoted supervisory

groups and horizontal teams. LISCC supervisory and horizontal teams are required to create detailed supervisory plans to establish an official record of supervisory activities that have been planned annually, then give it to the OC for vetting. Once the annual supervisory cycle ends, the supervisory teams bring together findings from firm-specific and horizontal checks and other supervisory assessment associated with the firm into an annual evaluation, which conveys supervisory ratings, messages, and key problems and dangers for each LISCC firm. These teams then propose ratings to the OC, and the OC is accountable for approving the final score.

Banks have organized their supervisory teams differently through creating more levels of management or assigning examiners to distinctive subgroups. All of the special supervisory groups include a key top management official but some opt for different titles for their staff. For instance, specific supervisory groups at FRB Boston, Richmond, and San Francisco are led by a critical point of contact (CPC), at the same time as FRBNY calls the leaders of its special supervisory groups Senior Supervisory officials (SSO). Reserve Banks and the Board also make contributions workforce to machine-extensive horizontal teams. All collaborating Reserve Banks have risk specialists—staff who know about a supervised entity’s exposure to risk and hazard control that may be assigned to supervisory or horizontal teams depending on the structure that the Reserve financial institution has chosen. According to FRBNY, risk specialists in the Reserve bank are aligned with each supervisory and horizontal teams to:

1 Ensure that there are enough resources committed to understand the complexities of any given LISCC company

2 allow experts who understand a particular company to be informed by their colleagues with comparable know-how on the same firms.

FRBNY has additionally formalized roles within distinct supervisory teams to focus supervision more on specific areas of a firm’s enterprise strategies may affect risk. These roles include:

Continuous tracking- This offers information to evaluate existing risks, stay ahead of risk management and internal management processes and help with the evaluation of control, corporate governance practices, and the specific firm’s

financial state. Continuous tracking also helps with identifying of rising risks. Examples of continuous monitoring activities encompass ongoing meetings with control, overview of firm management records program reports, and meetings with other supervisors.

More suitable non-stop tracking. greater non-stop monitoring is a planned event that requires a “deeper dive” than habitual? Continuous monitoring is a good way to examine more about a specific risk at a specific firm. Those activities have fewer documentation necessities, are normally less formal than a target evaluation, and are supposed to fill an expertise gap or determine if greater formal supervisory work is needed.

• Company-Specific complete scope and goal examinations: These are deliberate events that check safety and soundness and assign supervisory rankings to country member financial institution subsidiaries. Target reviews are limited in scope and investigate the satisfactory and effectiveness of a companies manipulate function (e.g., audit), line of commercial enterprise,

or commercial enterprise manner (e.g., credit score origination process).

in addition, horizontal examinations study precise problems, which includes the

adequacy of capital and the sufficiency and resiliency of liquidity, throughout

multiple corporations. The OC oversees the committees which are charged with the execution of horizontal examinations for LISCC firms: amongst others, the

complete Capital evaluation and overview (CCAR), the complete Liquidity analysis and assessment (CLAR), and the Supervisory evaluation of recuperation and backbone Preparedness (SRP). CCAR is the Federal Reserve’s annual method for comparing capital adequacy of LISCC firms (and different firm’s situation to the Federal Reserve’s capital plan rule) below every day and harassed situations, as well as assessing their capital planning tactics. CLAR is the Federal Reserve’s annual, forward-looking software to evaluate the liquidity position and liquidity danger control practices of LISCC firms. SRP is the Federal Reserve’s annual assessment of the LISCC firms’ options to aid recuperation and progress in disposing of impediments to orderly resolution.12 The OC also oversees advert hoc horizontal examinations that are evolved in assist of LISCC priorities—as an example, horizontal examinations have reviewed such problems as cyber-safety and model threat control throughout a couple of LISCC companies. advert hoc horizontal examinations are achieved through team of workers drawn from horizontal groups produced from staff from a couple of Reserve Banks and workforce at the Board of Governors who have unique technical information.

Conclusion

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