In the inaugural issue of Supervision and Regulation Report, the Federal Reserve Board ("FRB") summarized current banking conditions and the FRB's supervisory and regulatory activities. The FRB examined trends going back to the financial crises.

The FRB found that the "strong economy" had a positive effect on the return of equity and average assets for banks. The second quarter of 2018 marked a 10-year high in the profitability of the banking sector. The FRB also noted several areas of concern including, among other things, that approximately half of bank holding companies are not meeting the FRB's supervisory expectations (see Figure 14, Holding company ratings for firms > $50 billion). In addition, the FRB found that over half of the supervisory findings issued in the last five years were for governance and risk management issues, while about 28 percent of findings centered on capital-related issues.

Commentary

The FRB's report is a worthy read, offering transparency on several fronts. Interestingly, the report revealed that approximately 40% of the largest holding companies (firms with more than $50 billion in assets) have less than satisfactory supervisory ratings (that is, composite CAMELS ratings of 3, 4, or 5). The picture is much better for smaller banking organizations (firms with less than $50 billion in assets): less than 6% of these firms are rated less than satisfactory.

Risk management controls remain a key supervisory priority, and the FRB recognized that continued weaknesses in the BSA/AML area sometimes have longer remediation timelines. Cyber-related risks were also cited as a supervisory priority. If cyber attacks on our banking infrastructure become more sophisticated and widespread, there is little doubt that cybersecurity will be identified more frequently and elaborated upon with greater precision in future reports.

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