Use of Regulatory Report Data in Banking Supervision
Statistical Reporting Update - March 2016
Published March 14, 2016 | March 2016 issue
Banking organizations submit a lot of data to the Federal Reserve System and other bank regulatory agencies. It is costly to do so. But the benefits of doing so are large even if often unnoticed. This article outlines some of the ways the Federal Reserve uses the data bankers provide and the benefits of this activity, which might otherwise just seem burdensome.
Off-Site Data Review: We monitor the condition of Ninth District financial institutions during periods between on-site examinations or inspections. Reserve Bank staff use this outlier information to investigate the causes of unanticipated performance changes and help determine an appropriate supervisory response. This involves reviewing financial screens that identify institutions with elevated or changing risk profiles. For instance, we use quarterly Call Report and Y-9 data to derive ratios that identify banks or holding companies that report a negative year-to-date return on average assets or a high nonperforming loans to total loans ratio relative to other banks. We also look for changes in asset or liability mix.
We also run these data through models to derive other measures of bank and holding company condition. For example, we model the chance that a bank or holding company’s rating would deteriorate if an examination or inspection had occurred as of the most recent quarter-end period. This model also estimates the probability that a bank may become critically undercapitalized (fail) within the next two years. A distinct model evaluates the potential interest rate risk exposure of a bank, based on Call Report data and standardized assumptions.
This off-site analysis allows a more effective response to bank and holding company risk-taking, and also allows lower-risk organizations to receive an appropriately light touch between exams. Supervisory staff also use models to identify changes in financial condition between examinations and determine whether an accelerated supervisory response is needed.
Discount Window Lending: The Reserve Bank serves as a lender to Ninth District banking organizations in support of financial and economic stability. Reserve Bank condition monitoring staff review bank capital and other related reports and financial models derived from Call Report information to determine credit eligibility, including eligibility for the seasonal lending program.
Compliance with Supervisory Enforcement Actions: The regulatory reports submitted by banking organizations also assist Reserve Bank staff in assessing compliance with certain provisions of supervisory enforcement actions, such as a cease and desist order or a memorandum of understanding. For instance, we monitor a provision requiring certain minimum capital ratios for a bank by reviewing capital ratios on the Uniform Bank Performance Report (UBPR), which is derived from Call Report information.
Compliance with Banking Laws and Regulations: We also use financial reports to identify potential violations of certain banking laws and regulations. One example is the monitoring of transactions among affiliated entities. Holding companies are required to file the Bank Holding Company Report of Insured Depository Institutions’ Section 23A Transactions with Affiliates—FR Y-8 on a quarterly basis. A review of this report can reveal potential violations of the quantitative limitations on covered transactions by a bank with its affiliates for supervisory follow-up.
Aggregate Banking Condition and Trends Analysis: In addition to off-site monitoring of individual financial institutions, Reserve Bank staff use data provided by banking organizations to assess overall condition and trends. For instance, during the first three quarters of 2015, this financial data showed improvement in earnings and a continued decline in the level of problem loans at Ninth District banking organizations. Further details regarding overall performance of these banks is available on the Minneapolis Fed’s public website.
Efforts to Reduce Reporting Burden: The Federal Financial Institutions Examination Council announced an initiative to streamline the reporting burden on community banks on September 8, 2015. An ongoing part of this effort requires agency users of data reported on the Reports of Condition and Income to identify the need for and frequency for each line item on these reports. This initiative began in July 2015 and is ongoing. While there may certainly be room to improve our collection of data and reports, organizations should know that we put the data they provide to good use.