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Supervising large, complex financial institutions: what do supervisors do?

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Abstract

The supervision of large, complex financial institutions is one of the most important, but least understood, activities of the Federal Reserve. Supervision entails monitoring and oversight to assess whether firms are engaged in unsafe or unsound practices, and to ensure that firms take appropriate action to correct such practices. It is distinct from regulation, which involves the development and promulgation of the rules under which firms operate. This article brings greater transparency to the Federal Reserve?s supervisory activities by considering how they are structured, staffed, and implemented on a day-to-day basis at the Federal Reserve Bank of New York as part of the broader Systemwide supervisory program. The goal of the article is to generate insight into what supervisors do and how they do it. While the authors do not undertake to evaluate the effectiveness of the activities they describe, they note that understanding how supervision works is a critical precursor to determining how to measure its impact.

Suggested Citation

  • Thomas M. Eisenbach & Andrew F. Haughwout & Beverly Hirtle & Anna Kovner & David O. Lucca & Matthew Plosser, 2017. "Supervising large, complex financial institutions: what do supervisors do?," Economic Policy Review, Federal Reserve Bank of New York, issue 23-1, pages 57-77.
    • Handle: RePEc:fip:fednep:00041
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    1. Donato Masciandaro & Marc Quintyn, 2013. "The Evolution of Financial Supervision: the Continuing Search for the Holy Grail," SUERF 50th Anniversary Volume Chapters, in: Morten Balling & Ernest Gnan (ed.), 50 Years of Money and Finance: Lessons and Challenges, chapter 8, pages 263-318, SUERF - The European Money and Finance Forum.
    2. William Dudley, 2014. "Testimony on improving financial institution supervision: examining and addressing regulatory capture," Speech 152, Federal Reserve Bank of New York.
    3. Frederic S. Mishkin, 2001. "Prudential Supervision: Why Is It Important and What Are the Issues?," NBER Chapters, in: Prudential Supervision: What Works and What Doesn't, pages 1-30, National Bureau of Economic Research, Inc.
    4. Daniel K. Tarullo, 2014. "Liquidity Regulation : a speech at the Clearing House 2014 Annual Conference, New York, New York, November 20, 2014," Speech 829, Board of Governors of the Federal Reserve System (U.S.).
    5. John Krainer & Jose A. Lopez, 2009. "Do supervisory rating standards change over time?," Economic Review, Federal Reserve Bank of San Francisco, pages 13-24.
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    Cited by:

    1. Beverly Hirtle & Anna Kovner & Matthew Plosser, 2020. "The Impact of Supervision on Bank Performance," Journal of Finance, American Finance Association, vol. 75(5), pages 2765-2808, October.
    2. Carlos Altavilla & Miguel Boucinha & José-Luis Peydró & Frank Smets, 2019. "Banking supervision, monetary policy and risk-taking: Big data evidence from 15 credit registers," Economics Working Papers 1684, Department of Economics and Business, Universitat Pompeu Fabra, revised Dec 2020.
    3. Wei, Jianxing & Xu, Tong, 2024. "Banking supervision with loopholes," European Economic Review, Elsevier, vol. 161(C).
    4. Jianxing Wei & Tong Xu, 2018. "A Model of Bank Credit Cycles," 2018 Meeting Papers 610, Society for Economic Dynamics.
    5. Lskavyan, Vahe, 2020. "Banking crisis and bank supervisory accountability," Journal of Economics and Business, Elsevier, vol. 107(C).
    6. Balakrishnan, Karthik & De George, Emmanuel T. & Ertan, Aytekin & Scobie, Hannah, 2021. "Economic consequences of mandatory auditor reporting to bank regulators," Journal of Accounting and Economics, Elsevier, vol. 72(2).
    7. Karel Janda & Oleg Kravtsov, 2020. "Banking Supervision and Risk-Adjusted Performance inthe Host Country Environment," FFA Working Papers 3.001, Prague University of Economics and Business, revised 19 Nov 2020.
    8. Elena Carletti & Giovanni Dell’Ariccia & Robert Marquez, 2021. "Supervisory Incentives in a Banking Union," Management Science, INFORMS, vol. 67(1), pages 455-470, January.
    9. Yue, Heng & Zhang, Liandong & Zhong, Qinlin, 2022. "The politics of bank opacity," Journal of Accounting and Economics, Elsevier, vol. 73(2).
    10. Luis Dumlao, 2024. "The Principle of Cost-Based Supervision in Practice," International Journal of Economic Sciences, European Research Center, vol. 13(2), pages 1-19, December.
    11. Anna M. Costello & João Granja & Joseph Weber, 2019. "Do Strict Regulators Increase the Transparency of Banks?," Journal of Accounting Research, Wiley Blackwell, vol. 57(3), pages 603-637, June.

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