Community Banking Connections

Print Article

View from the District: Driving Change Through Strategy
by Mike Johnson, Executive Vice President, Supervision, Regulation, and Credit, Federal Reserve Bank of Atlanta

The COVID-19 pandemic, which continues to affect the world’s economy and our nation’s financial system, poses unprecedented levels of uncertainty. Adapting to today’s new normal has been further challenged by a financial industry already experiencing rapid technological changes. All of this is happening in a world of business closures, social distancing, and supply chain disruptions, amid an uneven recovery. At the Federal Reserve, we are adapting to these changes, including playing our part as supervisors to reduce financial uncertainty to the furthest extent possible. Adapting to change is core to fulfilling our supervisory mission, which is to promote a safe, sound, and efficient banking and financial system and a fair and transparent consumer financial services market that supports the growth and stability of the U.S. economy.

The steps that the Federal Reserve takes to do this are key and are continuing to evolve. Vice Chair for Supervision Randal Quarles and Governor Michelle Bowman, along with the other Governors, are working with staff members at the Federal Reserve Board (Board) and across the Reserve Banks to ensure transparency, efficiency, and simplicity in our regulations and supervisory processes — most particularly to meet today’s challenges and tomorrow’s unknowns.

In 2019, the Federal Reserve’s Supervision function adopted four strategic themes that are critical to driving change in support of our mission and objectives. These themes — transparent, agile, innovative, and optimal — guide our work. The Federal Reserve established these themes well in advance of the pandemic and adopted them, as they are applicable and timely in any environment.

Transparency and agility are front and center this year. As it has many of you, the pandemic has caused us to move to a remote working environment, which requires all of us to be agile, and has amplified the importance of clear, transparent communications. Consistently communicating and applying supervisory expectations lead to greater certainty of outcomes, resulting in fewer supervisory issues and less burden for the financial system in general. In short, greater transparency about the Federal Reserve’s supervisory processes leads to more effective supervision and a more resilient banking industry.

Enhancing Transparency and Optimizing the Supervision Function

How is the Federal Reserve enhancing transparency? One way is that we regularly communicate to bankers what we are seeing and discovering through the supervisory process. Throughout the pandemic, we enhanced monitoring to identify and share industry challenges. We also used this time to answer bankers’ questions and share our perspective on overall market conditions. The enhanced monitoring helped target policy and shape our supervisory posture. As our supervisory posture changed from initially pausing examinations to minimize operational burden on banks to now resuming exams, we enhanced our monitoring activities and increased monitoring frequency accordingly. Ultimately, our optimal strategic theme is to contribute to simple, efficient supervisory functions while we reduce the operating burden on institutions and adjust our supervisory activities in response to changes in the economy and the banking industry.

Across the Federal Reserve System, in addition to maintaining traditional communication channels during this pandemic, such as Community Banking Connections and the Supervision and Regulation Report,¹ the Federal Reserve held numerous Ask the Fed and Ask the Regulators sessions to provide even more in-depth details and answer industry questions. In the Sixth District, we led calls with our state member banks, banking associations, and state regulatory partners to clarify our supervisory posture and answer questions. On the Atlanta Reserve Bank’s website, we published articles and information under the ViewPoint banner.² The Sixth District also conducts ViewPoint Live webinars to cover pressing topics of interest to bankers. I know many of the other Reserve Banks engage in similar outreach activities.

Unprecedented times call for swift action and agility on all fronts as discussed in the November 2020 and May 2020 Supervision and Regulation Reports.³ These reports provide an excellent overview of the actions taken by the Federal Reserve to support the flow of credit and liquidity and ease operational burden going into the current crisis. Examples include encouraging the use of capital and liquidity buffers, delaying the impact of the current expected credit losses accounting standard in capital rules, temporarily adjusting supplementary leverage ratio requirements for holding companies and reducing the community bank leverage ratio requirement, encouraging firms to participate in Federal Reserve liquidity facilities, and removing transfer limits on savings deposits.

Also, the Board issued Supervision and Regulation (SR) letter 20-15, “Interagency Examiner Guidance for Assessing Safety and Soundness Considering the Effect of the COVID-19 Pandemic on Institutions,” to lay the framework that examiners from the Federal Reserve and other agencies will follow in resuming examinations.⁴

Being more open about supervisory expectations, particularly in today’s dynamic environment, is a key element in our transparency efforts. We’re seeking to simplify messaging and clarify expectations for supervised institutions. Although the various issues can be complex, we’ve worked hard to be more explicit in terms of whom guidance applies to and how an issue relates to a bank’s overall financial condition and safety and soundness.

Creating Conversation Around Innovation

We are continuously striving to engage in conversation with bankers, seeking their input on how innovation is affecting their operations and services. For example, just prior to the onset of the pandemic, the Federal Reserve launched Innovation Office Hours, which provide state member banks and fintech companies with an opportunity to engage in direct conversation with the Federal Reserve.⁵ The Sixth District hosted the first of these sessions in February and received an overwhelming, positive response from participants.

The relationships created at Innovation Office Hours among bankers, fintech firms, and regulators are a key example of our effort to execute our innovative strategic theme and have been beneficial throughout this year, as technology has been vital to our remote work environment.

Because of COVID-19, consumers are making more purchases online or through contactless payments. As consumers become more comfortable with these contactless forms of payment, usage will continue to surge. Therefore, we need to understand the role fintech companies are playing in providing banking services and the ways that these companies are working with banks to support the economy. There are important considerations when implementing these banking services so that payment infrastructures remain safe, accessible, and inclusive for all.⁶ To stay abreast of services outsourced by banks to fintech companies, we meet with significant service providers on a routine basis, as well as participate on panels with new and existing fintech companies.

Board members often reach out to local bankers and other constituencies for feedback. In turn, Board members establish supervisory priorities and communicate supervisory policies and priorities through their speeches, public statements, and congressional testimony. Governor Bowman is the Board's first designated governor with experience in community banking and is focused on the community bank perspective in the establishment of policy. One of her speeches covered the impact of payment system innovation on community banks and the direction of supervision.⁷ More recently, she began her commitment to reach out directly to all state member community banks in the country to further conversations at the grassroots level.

This direct engagement and dialogue with Governor Bowman, the Reserve Bank and Board staff, and bankers are vital to understanding both the local and national issues. The Federal Reserve System, through its regional Reserve Bank structure, strives to ensure that the voices of local communities are heard when policies are developed and implemented. Our community bank supervisory approach in particular allows almost all supervisory decisions and determinations to be made locally by the Reserve Bank, which makes it more effective and more responsive to the unique challenges and needs of each bank. Local Reserve Bank relationships are key to supporting the ongoing dialogue that is necessary for clear two-way communication. Effective communication is also key to reduce the potential for surprises — for both bankers and examiners — during the course of an examination.

To recap, our strategic themes — transparent, agile, innovative, and optimal — are core to achieving a safe, sound, and efficient banking and financial system. However, there is always room for us to improve the efficiency and effectiveness of the supervisory process, and we need your help to identify ways to improve the process. Ask us questions, give us frank feedback, and let us know where there are gaps. If there are banking topics that concern you, reach out to us at editor@communitybankingconnections.org. We are in this together.