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What is Bank Supervision?
Several government agencies monitor banks' balance sheets to make sure they have positive net worth and are not taking too high a level of risk. Within the U.S. Department of the Treasury, the Office of the Comptroller of the Currency has a national staff of bank examiners who conduct on-site reviews of the 1,500 or so of the largest national banks. The bank examiners also review any foreign banks that have branches in the United States. The Office of the Comptroller of the Currency also monitors and regulates about 800 savings and loan institutions.
The National Credit Union Administration (NCUA) supervises credit unions, which are nonprofit banks that their members run and own. There are over 6,000 credit unions in the U.S. economy, although the typical credit union is small compared to most banks.
The Federal Reserve also has some responsibility for supervising financial institutions. For example, we call conglomerate firms that own banks and other businesses “bank holding companies.” While other regulators like the Office of the Comptroller of the Currency supervises the banks, the Federal Reserve supervises the holding companies.
When bank supervision (and bank-like institutions such as savings and loans and credit unions) works well, most banks will remain financially healthy most of the time. If the bank supervisors find that a bank has low or negative net worth, or is making too high a proportion of risky loans, they can require that the bank change its behavior—or, in extreme cases, even force the bank to close or be sold to a financially healthy bank.
Bank supervision can run into both practical and political questions. The practical question is that measuring the value of a bank’s assets is not always straightforward. As we discussed in Money and Banking, a bank’s assets are its loans, and the value of these assets depends on estimates about the risk that customers will not repay these loans. These issues can become even more complex when a bank makes loans to banks or firms in other countries, or arranges financial deals that are much more complex than a basic loan.
The political question arises because a bank supervisor's decision to require a bank to close or to change its financial investments is often controversial, and the bank supervisor often comes under political pressure from the bank's owners and the local politicians to keep quiet and back off.
Related Topics
- Legal Tender
- Numismatics
- Gresham's Law
- Barter
- Double Coincidence of Wants
- Parity
- Functions of Money
- Medium of Exchange
- Unit of Account
- Store of Value
- Time Value of Money
- Standard of Deferred Payment
- Liquidity Preference Theory
- National Savings and Investment Identity
- Circular Flow of Money
- Commodity Money
- Gold Exchange Standard
- Bretton Woods System
- Fiat Money
- Money Supply
- M1 and M2 Money Supply
- Monetary Base
- Savings, Demand, and Time Deposits
- Banks
- How Do Banks Create Money?
- Financial Intermediary
- Bank Balance Sheet
- Money Multiplier Formula
- Velocity of Money
- Multiplier Effect
- Quantity Equation of Money
- McCallum Rule
- Neutrality of Money
- Real Bills Theory
- Banking System?
- Central Bank
- Federal Reserve System
- Federal Open Market Committee (FOMC)
- Fed Balance Sheet
- Term Auction Facility
- Taylor Rule
- How is the Federal Reserve Bank Organized?
- What is Bank Regulation?
- CAMELS Rating
- FDIC
- CFPB
- Bank Supervision
- Bank Runs
- What is Deposit Insurance?
- Federal Deposit Insurance Corporation
- Lender of Last Resort
- Central Banks Carry Out Monetary Policy
- Open Market Operations
- Bank Reserve
- Discount Rate
- Federal Funds Rate
- Monetary Policy
- Contractionary and Expansionary Monetary Policy
- Loose vs Tight Monetary Policy
- Easy Monetary Policy
- Accommodative Monetary Policy
- Dove & Hawk (Monetary Policy) - Explained
- Tight Monetary Policy - Explained
- Stabilization Policy
- Pushing on a String
- The Effect of Monetary Policy on Interest Rates
- Federal Funds Rate
- Gibson Paradox
- Vasicek Interest Rate Model
- Equation of Exchange (Economics)
- The Effect of Monetary Policy on Aggregate Demand
- Quantitative Easing
- Reserve Currency
- What are Excess Reserves?
- Unpredictable Movements of Velocity
- Central Banks - Unemployment and Inflation
- Inflation Targeting
- Fisher Effect
- Asset Bubbles and Leverage Cycles
- Countercyclical
- Money Capital Market
- Quantity Theory of Money
- Aggregate Expenditure Model
- IS-LM Model
- European Capital Market Institute