Financial Institution Supervision

Sarah J. Dahlgren (bio)
Executive Vice President
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Our Supervisory Approach | Examination Process | Supervisory Teams
The Board of Governors of the Federal Reserve System has supervisory and regulatory authority over a wide range of financial institutions, including state-chartered banks that are members of the Federal Reserve System (state member banks), bank holding companies, thrift holding companies and foreign banking organizations that have a branch, agency, a commercial lending company subsidiary or a bank subsidiary in the United States. While the Board establishes supervisory policies, the Board delegates day-to-day supervision to the Reserve Banks.

Acting on delegated authority from the Board, the Financial Institution Supervision Group (FISG) of the Federal Reserve Bank of New York supervises the financial institutions that are subject to the Board's supervision and are located in the Second Federal Reserve District, which includes New York state, the 12 northern counties of New Jersey, Fairfield County in Connecticut, Puerto Rico and the U.S. Virgin Islands.

The objectives of supervision are to evaluate, and to promote, the overall safety and soundness of the supervised institutions (micro-prudential supervision), the stability of the financial system of the United States (macro-prudential supervision), and compliance with relevant laws and regulations. The supervision mandate is carried out through a combination of methods, including the conduct of both on-site and off-site examinations and inspections; continuous supervision performed by supervisory teams dedicated to a specific supervised institution; review of reports and data; and coordination with other supervisory agencies.

Our Supervisory Approach
FISG takes a risk-focused approach based on a supervisory plan that is customized to a firm’s risk profile and organizational structure. Examiners look at key aspects of a supervised firm’s businesses and risk management functions to assess the adequacy of the firm’s systems and processes for identifying, measuring, monitoring and controlling the risks the firm is taking.

Under this risk-focused approach, activities identified as those likely to pose the highest risk to the firm receive the most scrutiny and FISG examiners employ the assistance of specialists with skills tailored to these specific activities.

In addition, FISG evaluates the adequacy of a firm’s capital and liquidity. The presence of strong capital and liquidity buffers promotes the objective of enhancing a firm’s ability to absorb losses and withstand financial stress. Especially in the case of a large bank holding company, it can contribute to the stability of the financial system as a whole.

FISG coordinates its supervisory activities with those of other federal and state authorities, including the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Commodities Futures Exchange Commission, the FDIC and state banking and insurance regulators, who have primary supervisory responsibility over certain types of entities.

The Examination Process
Examination of a firm may be conducted either on-site or off-site, and may be full scope or target, depending on the risks and complexity of the firm, as well as the current rating. A full scope examination involves the collection and analysis of a wide array of information and data from across the firm. The frequency of full-scope examination is determined by asset size and complexity of the firm. A target examination is performed on a particular area or risk within the firm and usually entails determining or validating that controls and processes for the targeted area or risk are effective. Full scope and target examination findings are reported back to the firm.

Examiners also continuously monitor, review and analyze financial, managerial, and organizational data as well as periodic reports filed by firms. Continuous monitoring is designed to develop and maintain an understanding of strategic business developments, changes in the firm’s risk profile, and associated policies and practices. The scope of continuous monitoring is adjusted, as appropriate, based on specific events, such as (i) significant changes in inherent risk, control processes or key personnel; (ii) concerns regarding the adequacy of controls; (iii) the absence of sufficiently recent exams; or (iv) market events.

Findings from examinations or continuous monitoring can lead to further engagement with the firm in an effort to improve the firm’s processes, financial condition or the safety of the financial market. In some cases, findings may also lead to an enforcement action against the firm.

The Supervisory Teams
Supervisory teams can be responsible for one specific firm, in the case of large complex financial firms, or be responsible for a portfolio of firms, in the case of community and regional banks and many foreign financial firms. In both cases, supervisory teams are led by a senior staff member and include a number of specialists.

For large complex institutions, the team is led by a senior supervisory officer, who, in addition to leading the development and execution of the supervisory program for the firm, is responsible for interactions with the board of directors and executive management.

The team's specialists interact directly with members of the firm’s management across various business lines and control functions, including the control functions responsible for managing credit risk, market risk, liquidity risk, operational risk, and legal and compliance risk.

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