Pending Bank Supervision and Regulation Department Act

[Stoppers]

A
BILL
To

Establish the Supervision and Regulation Department within the Federal Reserve Bank of Redmont​

Submitted by: Stoppers
Date: 13 December 2024
Classification: Internal FRB Governance (IFRG)

1 - Purpose
To establish the Supervision and Regulation Department (SRD) within the Federal Reserve Bank of Redmont to oversee the safety, soundness, and compliance of depository institutions and insurance companies under the FRB’s jurisdiction, ensuring financial stability and public trust.

2 - Justifications

1. Prevent Financial Instability: Weak oversight of depository institutions and insurers poses systemic risks to the economy.
2. Protect Consumers: Depositors and policyholders require safeguards against institutional failures.
3. Enhance Resilience: Strengthen the financial sector’s ability to withstand economic shocks.
4. Deposit Insurance Management: Establish a formal mechanism to protect depositors’ funds.

3 - Responsibilities of the Supervision and Regulation Department (SRD)
The SRD shall:

1. Regulate Financial Institutions:
   • Enforce prudential standards, including capital adequacy, liquidity coverage, and asset quality requirements.
   • Establish limits on risky activities, such as speculative trading and high-leverage lending.
2. Supervise Financial Institutions:
   • Conduct regular examinations of depository institutions and insurance companies.
   • Perform stress tests to ensure resilience to economic downturns.
3. Deposit Insurance Scheme (FDIS):
   • Administer the Federal Deposit Insurance Scheme.
   • Maintain a fund sourced from quarterly premiums paid by member institutions.
4. Systemic Risk Oversight:
   • Monitor and identify systemically important financial institutions (SIFs).
   • Develop contingency plans for the resolution of distressed institutions.
5. Promote Transparency:
   • Require detailed disclosures of institutional risk exposures and solvency metrics.
   • Publish a Quarterly Financial Stability Report to enhance public confidence.

4 - Organizational Structure
The SRD will be led by the Director of Supervision and Regulation, appointed by the FRB Board, who will provide overall leadership and strategic direction. The department will include three key divisions to ensure comprehensive oversight and management. These divisions are:

1. The Banking Supervision and Compliance Division will monitor depository institutions and insurance companies for solvency, compliance, and liquidity risks, while also identifying and mitigating risks posed by systemically important financial institutions (SIFs). Additionally, it will ensure that all supervised institutions adhere to regulations and standards through regular audits and reviews.
2. The Deposit Insurance Fund Management Division will manage the Federal Deposit Insurance Scheme (FDIS) fund and process depositor claims in the event of institutional failures.

5 - Reporting and Accountability
The SRD shall uphold a comprehensive framework for transparency and oversight. Monthly reports shall be submitted to the Federal Reserve Board detailing audit findings, including compliance and supervisory reviews, evaluations of institutional solvency and liquidity, and assessments of risks posed by SIFs. These reports will also provide updates on the status of the Deposit Insurance Fund (FDIS), including its current balance, claims processed, and premiums collected from insured institutions.

In addition to these monthly updates, the SRD will publish a Quarterly Public Report summarizing its activities for the quarter. This report will include a Financial Stability Report outlining macroeconomic risks, trends in financial markets, and an overview of enforcement actions taken against institutions failing to meet regulatory standards. It will also provide detailed information on the health of the FDIS fund, highlighting payouts made and premiums collected.

To ensure the integrity of its operations, the SRD will undergo quarterly independent audits conducted by the Federal Reserve Bank's Internal Affairs Unit. These audits will focus on compliance with internal policies, effectiveness in risk management, and operational efficiency. Findings from the audits will be reviewed by the FRB Board, and any identified deficiencies will be promptly addressed to maintain the department's reliability and effectiveness.

6 - Funding and Resources
The SRD will be funded primarily through a combination of supervision fees collected from regulated institutions and premiums paid into the FDIS.

Supervision Fees:

1. Establishment and Structure:
   • Quarterly supervision fees shall be applied to supervised institutions based on their size and complexity. The fee schedule shall be proportional and tiered as follows:
     • Institutions with total assets under $10 million will pay a quarterly supervision fee of 0.05% of total assets.
     • Institutions with total assets of $10 million or over will pay a quarterly supervision fee of 0.025% of total assets.
   • These fees will cover ongoing monitoring, compliance assessments, and risk evaluations. The Federal Reserve Board will review and adjust the fee structure every quarter to ensure alignment with evolving regulatory requirements, institutional risk profiles, and broader financial stability objectives.

FDIS Premiums:

1. Establishment and Structure:
   • Premiums will be collected from all depository institutions participating in the FDIS. The premium rates will be based on the leverage ratio as follows:
     • Institutions with a leverage ratio under 8% will pay a monthly premium of 0.20% of insured deposits.
     • Institutions with a leverage ratio between 8% and 12% will pay a monthly premium of 0.15% of insured deposits.
     • Institutions with a leverage ratio over 12% will pay a monthly premium of 0.10% of insured deposits.
   • These premiums will be adjusted quarterly based on changes in risk profiles and market conditions. The FDIS premium structure will be reviewed by the Federal Reserve Board every quarter to maintain the stability and adequacy of the fund.

Initial Funding:
An initial allocation of $1,000,000 will be sourced from the FRB’s reserves to establish the SRD, ensuring it has sufficient resources to carry out its regulatory functions from the outset.
This funding will cover administrative costs, the recruitment of staff, the development of necessary systems, and initial operational expenses.

Additional Funding Requests:
Proposals for additional funding may be submitted to the FRB Board for approval if unforeseen circumstances arise, such as increased oversight requirements, expanded risk assessments, or institutional failures requiring significant FDIS pay-outs.
The FRB Board will evaluate such proposals based on cost-benefit analysis and the projected impact on financial stability.

7 - Implementation Timeline
Within 7 days of Board approval, the FRB shall appoint a Director of Supervision and Regulation.
The SRD shall become fully operational within 2 weeks, including the establishment of all divisions and initial staffing.
The first Quarterly Financial Stability Report shall be published no later than 3 months after the SRD’s formation.

8 - Approval
Upon approval, the Federal Reserve Bank shall immediately implement the provisions of this proposal.

9 - Amendments and Revisions
Any amendments to the SRD’s structure or responsibilities must be approved by the FRB Board.
Quarterly reviews shall assess the effectiveness of the SRD and recommend changes as necessary.