The State Member Bank Charter: Its Current Supervision

End-of-year performance reviews bring both dread and useful reflection. The latter motivates this note. I decided to consider the state of the state member bank charter and its supervision, both because of the time of the year and because of an anniversary of sorts; I have had the honor of leading the Minneapolis Fed’s Supervision, Regulation and Credit (SRC) department for about five years.

I conclude that the charter is strong and that the supervision of state member banks (SMBs) is effective and efficient. The keys to this positive assessment are:

1. Our local perspective.
2. A robust “relationship” program with state member banks.
3. A professional staff who work with banks to prevent problems from growing.
4. The strong commitment to improve our efforts.
5. A charter with structural benefits.

I discuss these points in more detail below. As always, please contact me at Ron.Feldman@mpls.frb.org if you have any questions or comments on this article.

1. Our local approach

   The Federal Reserve System has regional Reserve Banks to ensure that the voices of “Main Street” are important inputs into our work. Our supervision rests on local focus, which makes the supervision effective. It all starts with the state charter, allowing us to partner with state banking departments. Both supervisors look to local economic and banking conditions when making assessments rather than following a one-size-fits-all implementation. Facilitating that approach are our local offices in Minnesota and Montana, which house the leadership of our supervisory efforts, and staff who come from virtually all corners of the Ninth Federal Reserve District.

2. Robust Relationship Manager and Consumer Affairs Contact programs

   Our relationship program is a key to our effective supervision. We described these programs in our “Role of Relationship Staff in Banking Supervision” article so I will be brief in summarizing the benefits of these programs. In short, they allow us to

   1. Make staff who are knowledgeable about individual institutions available to assist and support SMBs and bank holding companies (BHCs).
   2. Coordinate Fed communication to the banks—reducing multiple contacts from multiple people where possible.
   3. Provide continuity in supervision.
   4. Offer the regional focus discussed above.
   5. Support our proactive and supportive approach to our supervised institutions.

3. Professional staff focused on preventing problems

   The effectiveness of bank supervision comes down to the quality of the individuals conducting it. Our supervision staff are highly trained and skilled, and they make it their priority to provide effective feedback to state member banks. And what is the focus of that feedback? SRC staff members focus on risk management in an effort to prevent problems from becoming serious, rather than waiting for problems to develop and then coming down hard.

4. Commitment to improvement

   All of my performance reviews identify, to use the phrase, “opportunities for improvement.” I hope what counts more in the long run is my commitment to take those opportunities seriously and try to improve, even if I do not always succeed. The same holds true for our supervision in general. We do not always get it right. To compensate, we seek out feedback and change based on that input. We are improving our new risk-focused consumer compliance examination program based on SMB feedback, to give one example.

5. Structural benefits of the state member bank charter

   The various bank charters have strengths that work well for different banks. Some SMBs have noted the benefits of having a single supervisor for the BHC and its bank, for example. Even the fact that Federal Reserve capital stock pays a dividend, which typically received little notice previously, has been commented upon favorably given the rate environment!

2014 has been a challenging year but thanks to our staff, I think it was a year in which our supervision and the charter we supervise came out well. That said, I noted that commitment to improvement is one of our strengths. In that vein, I will discuss some recent steps we are taking to improve supervision in our next issue.