There are all kinds of businesses in our economy.
They all have one thing in common:
They want to earn money
so they can run their operations,
provide service for their customers,
and get a reasonable return for their owners.
A bank is no different.
So, how does a bank earn money?
It lends money to members of the community
who can pay back what they borrow.
These borrowers are charged interest.
This is the main way banks make money and stay healthy.
The Fed wants to keep the economy growing
so that's why they want to make sure all banks stay healthy.
The healthier the bank,
the healthier the economy and the communities that it serves.
The way the Fed supervises and regulates banks keeps evolving.
Since the financial crisis of 2008,
the Fed, along with other bank supervisors,
conducts stress tests on the nation's largest financial institutions
making sure they have the capital they need to stay healthy
in case of an economic downturn.
These days the Fed and other regulators are looking at risk across multiple banks,
not just at individual institutions,
watching out for the stability of the entire financial system.
This broader review model is called macro-prudential regulation,
and it makes the financial system more resilient to systemic shocks.
That's why the Fed, along with other federal and state authorities,
keeps an eye on banks.
These agencies make sure banks do business safely
and provide fair and equitable services to their communities.
How? First, the Fed makes sure all deposits are safe
by requiring all banks to keep a percentage of deposits in reserve
as cash in their vaults or in accounts at a federal reserve bank.
Then, to make sure banks stay safe and sound,
the Fed sends out examiners to inspect banks, both big and small.
They check on how well a bank is run by asking basic questions.
For example, Does a bank make good investments?
Does it take care of people's money?
Does it follow safe banking rules?
The Fed gets all this information from the banks
in the form of Bank Call Reports.
Fed examiners review these reports first off site,
and then go on site to inspect bank records and facilities.
Then the Fed examiners combine all this information to measure the health of the bank.
Once the information is collected,
the examiners study the bank's condition by applying the Camels Rating.
Each letter stands for one of the 6 components of a bank's health.
Capital adequacy: Do they have enough capital to do business?
Capital acts like a cushion to absorb losses that could otherwise cause a bank to fail.
Asset quality: Are their loans and other investments safe and sound?
Management: Do their managers know what they're doing?
Earnings: Are they making a profit?
Liquidity: Do they have enough funds on hand to pay back their depositors?
And Sensitivity to market risk:
Do they make wise decisions based on their understanding of risk?
This Camels Rating gives banks a confidential assessment from 1 to 5,
with 1 being the top rating and 5 being the lowest.
What happens if a bank gets a poor rating?
The Fed goes back, does more examinations and offers guidance to the bank in question.
Sometimes the Fed and the bank have written agreements on how to rectify the situation.
If banks continue to perform badly,
they can become insolvent and be shut down, but the depositors are protected.
The FDIC ensures depositors' money from loss up to $250,000.
Another part of ensuring that banks are serving their communities?
Making sure banks are lending fairly.
That's where the Fed's Consumer Compliance comes in.
They make sure loan applications are judged on the consumer's ability to repay the loan,
not on their race, religion or neighborhood.
The Fed also makes sure banks are complying with consumer protection laws
by disclosing the correct interest rate on loans.
This is to make sure customers don't get charged any hidden fees when they borrow money.
The Fed is committed to safe and sound banking,
so if consumers have a complaint about a financial institution,
they can contact the Federal Reserve.
The Fed will look into banking practices and investigate those complaints
keeping our banking system safe and sound
and the economy and all communities growing.
For more information, visit the Atlanta Fed online at frbatlanta.org.