• Fed's Role Under GLB Act
• Bank Examinations
• Applications for Mergers and Acquisitions and for New Branches
• Consumer and Community Protections

The Fed is one of the several Government agencies that share responsibility for ensuring the safety and soundness of our banking system. The Fed has primary responsibility for supervising bank holding companies, financial holding companies, state-chartered banks that are members of the Federal Reserve System, and the Edge Act and agreement corporations, through which U.S. banking organizations operate abroad.

The Fed and other agencies share the responsibility of overseeing the operation of foreign banking organizations in the United States. To insure that the banking system remains competitive and operates in the public interest, the Fed considers applications by banks for mergers or to open new branches.

The passage of the Gramm-Leach-Bliley (GLB) Act in November 1999, was the culmination of a multi-decade effort to eliminate many of the restrictions on the activities of banking organizations.

Some of the main provisions of the GLB are:

• Repeals the existing limitations on the ability of banks to affiliate with securities and insurance firms

• Creates a new organizational form that allows banking organizations to carry new powers. This new entity called a "financial holding company," (FHC) and its non-banking subsidiaries are allowed to engage in financial activities such as insurance and securities underwriting

The Fed’s enlarged role as an umbrella supervisor of FHCs is similar to its role in supervising bank holding companies. The Federal Reserve Banks will supervise and regulate the FHCs while each affiliate is still overseen by its traditional functional regulator.

The Fed has to delineate the financial relationship between a bank and other FHC affiliates. Its primary goal is to establish barriers protecting depository institutions from the problems of a failing affiliate. To do this efficiently the Fed has to ensure increased communication, cooperation, and coordination with the many supervisors of the more diversified FHCs.

The Fed has access to data on risks across the entire organization, as well as information on the firm's management of those risks. Regulators will be in a position to evaluate and presumably act on risks that threaten the safety and soundness of the insured banks.

For more information on the GLB Act.

In supervising banks for safety and soundness, the Fed relies on both on-site examinations and off-site inspection of financial and other information. The examinations focus on:

• The quality of loans that the bank has extended (that is, how likely are they to be repaid)
• The liquidity of the bank's assets (that is, how quickly can the bank turn them into cash without losing any of their value)
• The amount of capital and other assets that the bank has in relation to the level of risk in the bank's portfolio
• Sensitivity of the bank's financial structure to risks
• The quality of the bank's management

When the Fed detects a problem at a bank, it brings it to the attention of the bank's management, which usually remedies the matter. In more serious matters the Fed can instruct the bank or someone associated with it to take actions to correct the problem.

The Fed also has the power to assess fines agains banks and individuals, and even to bar someone from working in the banking industry.

The Fed is assigned primary responsibility for supervising and regulating the activities of bank holding companies. An existing bank holding company must obtain the approval of the Fed before acquiring more than 5 percent of the shares of an additional bank and must file certain reports with them.

The Federal Reserve is mandated to act on proposed bank mergers when the resulting institution is a state member bank. During the 1950s, bank mergers, especially those in the same metropolitan area, rose sharply. Fearing that a continuation of this trend could seriously impair competition in the banking industry and lead to an excessive concentration of financial power, Congress passed the Bank Merger Act.

The Bank Merger Act sets forth the factors to be considered in evaluating merger applications including:

• Financial and managerial resources
• Prospects of the existing and proposed institutions
• Convenience and needs of the community to be served

The Fed may not approve a merger that could substantially lessen competition or tend to create a monopoly. However, if it finds that the anti-competitive effects of the transaction are outweighed by the probable beneficial effects on the convenience and needs of the community to be served, it may allow the merger.

When a member bank wants to open a new branch or close an existing one, it has to get approval from the local Reserve Bank. The Fed reviews the application and supporting materials in light of factors such as location, level of competition in the area and so on. After a complete examination it may grant approval.

The Fed enforces a variety of consumer protection laws. Among these are:

• Community Reinvestment Act: which encourages the banks to meet the credit needs of the community, particularly in low- and moderate-income neighborhoods
• Truth in Lending Act: which requires lenders to provide detailed information about mortgages, auto loans, and credit card loans, so that when you borrow you can compare annual percentage rates and know the true cost of borrowing
• Equal Credit Opportunity Act: which says that you cannot be discriminated against in credit transactions on the basis of race, sex, marital status, and some other factors
• Fair Credit Reporting Act: which says that credit-reporting agencies must allow individuals to correct any erroneous information on their files that these agencies maintain

September 2007