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.

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