Supervising and regulating Financial Institurions and activities.pdf

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Function Supervising and Regulating Financial Institutions and Activities The Federal Reserve promotes the safety and soundness of individual financial institutions and monitors their impact on the financial system as a whole. 5 Regulation versus Supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Entities the Federal Reserve Oversees . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Oversight Councils . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 How the Federal Reserve Supervises Financial Institutions . . . . . . . 82 Overseeing the Structure of the Banking System . . . . . . . . . . . . . . . . 100 Regulation: Keeping Pace with Innovation and Evolution . . . . . . . . 108 Promoting Market Discipline: Public Disclosure and Accounting Policy Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
The Federal Reserve System Purposes & Functions 73 he Federal Reserve Act of 1913 established the Federal Reserve Sys- tem to provide the nation with a safer, more flexible, and more stable monetary and financial system. One of the principal functions of the Federal Reserve in achieving this goal is to regulate and supervise vari- ous financial entities. It performs this function, in part, through micro- prudential regulation and supervision of banks; holding companies and their affiliates; and other entities, including nonbank financial companies that the Financial Stability Oversight Council (FSOC) has determined should be supervised by the Board and subject to prudential standards. In addition, the Federal Reserve engages in “macroprudential” supervision and regulation that looks beyond the safety and soundness of individual institutions to promote the stability of the financial system as a whole. T Figure 5.1. How the regulation and supervision process works When Congress passes a law that impacts the financial industry, the Federal Reserve—sometimes in cooperation with other federal agencies—often drafts regulations that determine how the law will be implemented. REGULATION CONGRESS votes to approve legislation; President signs into law FEDERAL RESERVE drafts, proposes, and invites public comment on regulations that specify how laws are implemented AMERICAN PUBLIC institutions, individuals, and others review proposed regulations and respond with comments and suggestions FEDERAL RESERVE considers public input, finalizes regulations, and issues and disseminates final regulations publicly, including rationale for actions SUPERVISION FEDERAL RESERVE issues and disseminates publicly the procedures Reserve Bank examiners will use to evaluate institutions’ compliance with laws and regulations REGULATED INSTITUTIONS implement internal practices to ensure that they are in compliance with regulations FEDERAL RESERVE EXAMINERS conduct on- and off-site examinations/inspections of regulated institutions to determine their compliance with regulations FEDERAL RESERVE BANKS train examiners to evaluate institutions’ compliance with regulations
74 Supervising and Regulating Financial Institutions and Activities Regulation versus Supervision Regulation and supervision are distinct, but complementary, activities (see figure 5.1 ). Regulation entails establishing the rules within which

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