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BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF BANKING

SUPERVISION AND REGULATION

DIVISION OF CONSUMER AND 

COMMUNITY AFFAIRS

SR 12-17

CA 12-14

December 17, 2012

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH RESERVE BANK AND 

TO DOMESTIC AND FOREIGN LARGE FINANCIAL INSTITUTIONS

SUBJECT: Consolidated Supervision Framework for Large Financial Institutions

Applicability to Community Banking Organizations: This guidance does not apply to 

community banking organizations, defined as institutions supervised by the Federal Reserve with 

total consolidated assets of $10 billion or less.

Building upon lessons learned from the recent financial crisis, the Federal Reserve has 

taken a number of important steps to improve its supervisory program for large financial 

institutions. Keeping these institutions strong and resilient to adverse market developments

through effective supervision should contribute to a more robust U.S. financial system and 

economy. 

This letter sets forth a new framework for the consolidated supervision of large financial

institutions.1

 The framework strengthens traditional microprudential supervision and regulation 

to enhance the safety and soundness of individual firms. It also incorporates macroprudential 

considerations to reduce potential threats to the stability of the financial system and to provide

insights into financial market trends. The consolidated supervision framework has two primary 

objectives:

 1 With the implementation of this new framework, SR letter 99-15, “Risk-Focused Supervision of Large Complex 

Banking Organizations,” is superseded. In addition, for the firms described below under “Applicability,” the 

framework for consolidated supervision set forth in SR letter 08-9/CA letter 08-12, “Consolidated Supervision of 

Bank Holding Companies and the Combined U.S. Operations of Foreign Banking Organizations,” is no longer 

applicable.
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• Enhancing resiliency of a firm to lower the probability of its failure or inability to serve 

as a financial intermediary.

Each firm is expected to ensure that the consolidated organization (or the combined U.S. 

operations in the case of foreign banking organizations) and its core business lines2can 

survive under a broad range of internal or external stresses. This requires financial 

resilience by maintaining sufficient capital and liquidity, and operational resilience by

maintaining effective corporate governance, risk management, and recovery planning.

• Reducing the impact on the financial system and the broader economy in the event of a 

firm’s failure or material weakness. 

Each firm is expected to ensure the sustainability of its critical operations3 and banking 

offices4 under a broad range of internal or external stresses. This requires, among other 

things, effective resolution planning that addresses the complexity and the 

interconnectivity of the firm’s operations.

These objectives are consistent with key provisions of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (Dodd-Frank Act). These provisions include enhanced 

prudential standards, which provide the Federal Reserve with the flexibility to tailor the 

application of these standards to individual firms or groups of firms.

5

 

Applicability

The framework set forth in this letter is designed to support a tailored supervisory 

approach that accounts for the unique risk characteristics of each firm, including the nature and 

degree of potential systemic risks inherent in a firm’s activities and operations, as well as broader 

trends across firms. This framework applies to the following institutions:

• Large Institution Supervision Coordinating Committee (LISCC) firms: the largest, 

most complex U.S. and foreign financial organizations subject to consolidated 

supervision by the Federal Reserve. Nonbank financial companies designated by the 

Financial Stability Oversight Council (FSOC) for supervision by the Federal Reserve are 

included in the LISCC portfolio. LISCC firms are considered to pose the greatest 

systemic risk to the U.S. economy. 

The LISCC is a multidisciplinary body that oversees supervision and evaluates conditions 

of supervised firms. The committee also develops cross-firm perspectives and monitors 

interconnectedness and common practices that could lead to greater systemic risk. 

 2 “Core business lines” are those business lines (including associated operations, services, functions, and support)

that, in the firm’s view, upon failure would result in a material loss of revenue, profit, or franchise value.

3 “Critical operations” are those operations (including associated services, functions and support) that if they were to 

fail or be discontinued could pose a threat to the financial stability of the United States. 

4 “Banking offices” are defined as U.S. depository institution subsidiaries, as well as the U.S. branches and agencies 

of foreign banking organizations.

5 12 USC 5365 and 12 USC 5365(a)(2).
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• Large Banking Organizations (LBOs): domestic bank and savings and loan holding 

companies with consolidated assets of $50 billion or more that are not included in the 

LISCC portfolio. 

• Large Foreign Banking Organizations (Large FBOs): foreign banking organizations

with combined assets of U.S. operations of $50 billion or more that are not included in 

the LISCC portfolio. 

In certain instances, the framework applies to the intermediate holding company that is 

the primary focus of regulations and supervisory activities for the consolidated entity. 

Overview of Framework

The supervisory framework is presented below in sections A and B, which specify the 

Federal Reserve’s expectations across the following core areas of supervisory focus:

A. Enhancing Resiliency of a Firm

• Capital and Liquidity Planning and Positions

• Corporate Governance

• Recovery Planning

• Management of Core Business Lines 

B. Reducing the Impact of a Firm’s Failure

• Management of Critical Operations

• Support for Banking Offices

• Resolution Planning

• Additional Macroprudential Supervisory Approaches to Address Risks to 

Financial Stability

The Federal Reserve may periodically identify additional supervisory priorities beyond 

these core areas of focus as necessary to enhance firm-specific supervision and develop crossfirm perspectives. 

Section C outlines the conduct of supervisory activities used to maintain a comprehensive 

understanding and assessment of each firm. Effective consolidated supervision requires strong, 

cooperative relationships between the Federal Reserve and other bank supervisors and functional 

regulators. The Federal Reserve generally relies to the fullest extent possible on the information 

and assessments provided by other supervisors and regulators to support effective supervision.

Supervisory agencies engaged in the supervision of large financial institutions continue to 

enhance formal and informal discussions to jointly identify and address key vulnerabilities, and 

to coordinate supervisory strategies for these firms. 

As a general matter, this framework is applicable in circumstances when the consolidated 

organization and its banking offices are in at least satisfactory condition and there are no material 
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weaknesses or risks across these core areas of supervisory focus. The Federal Reserve applies 

additional supervisory expectations, and undertakes related activities, to address identified 

concerns including areas subject to formal or informal enforcement action. 

A. Enhancing Resiliency of a Firm

1. Capital and Liquidity Planning and Positions

The financial crisis demonstrated the need for stronger regulatory and supervisory 

assessments of firms’ financial resiliency.

6

 The Federal Reserve noted significant weaknesses 

in the adequacy of firms’ point-in-time regulatory capital to cover accumulated and prospective 

risks, as well as in firms’ liquidity buffers and risk management practices.

7 These weaknesses

contributed to the failure or near failure of many financial firms and exacerbated the crisis. To 

support effective capital and liquidity planning, and the adequacy of capital and liquidity 

positions, each firm should:

a) Maintain strong capital and liquidity positions that not only comply with regulatory 

requirements, but also support the firm’s ongoing ability to meet its obligations to 

creditors and other counterparties, as well as continue to serve as a financial intermediary

through periods of stress.

b) Have in place robust internal processes that enable the firm to maintain capital and 

liquidity commensurate with its unique risks under normal and stressful conditions, and 

to provide timely restoration of financial buffers in the event of drawdown. 

c) Maintain processes that enable the identification and measurement of potential risks to

asset quality, earnings, cash flows, and other primary determinants of capital and 

liquidity positions.

d) Utilize comprehensive projections of the level and composition of capital and liquidity 

resources, supported by rigorous and regular stress testing to assess the potential impact 

of a broad range of expected and potentially adverse scenarios.

e) Maintain sound risk measurement and modeling capabilities, supported by 

comprehensive data collection and analysis, independent validation, and effective 

governance, policies, and controls.

8

f) Establish goals for capital and liquidity positions that are approved by the firm’s board of 

directors and reflect the potential impact of legal or regulatory restrictions on the transfer 

of capital or liquidity between legal entities.

g) Maintain independent internal audit and other review functions with appropriate staff 

expertise, experience, and stature in the organization to monitor the adequacy of capital 

and liquidity risk measurement and management processes.

 6 See the Board’s final rule on capital plan requirements for large bank holding companies (76 Federal Register

74631, December 1, 2011) and SR letter 10-6, “Interagency Policy Statement on Funding and Liquidity Risk 

Management” (75 Federal Register 13656, March 22, 2010).

7 The capital components of this framework, including those related to stress testing, will apply to savings and loan 

holding companies after they become subject to minimum regulatory capital requirements. 

8 See SR letter 11-7 “Guidance on Model Risk Management.”
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2. Corporate Governance 

In order for a firm to be sustainable under a broad range of economic, operational, legal 

or other stresses, its board of directors (or equivalent for the U.S. operations of FBOs) should 

provide effective corporate governance with the support of senior management. The board is 

expected to establish and maintain the firm’s culture, incentives, structure, and processes that 

promote its compliance with laws, regulations, and supervisory guidance. Each firm’s board of 

directors and committees, with support from senior management, should:

a) Maintain a clearly articulated corporate strategy and institutional risk appetite. The board

should set direction and oversight for revenue and profit generation, risk management 

and control functions, and other areas essential to sustaining the consolidated 

organization.

b) Ensure that the firm’s senior management has the expertise and level of involvement 

required to manage the firm’s core business lines, critical operations, banking offices, and 

other material entities.

9 These areas should receive sufficient operational support to 

remain in a safe and sound condition under a broad range of stressed conditions.

c) Maintain a corporate culture that emphasizes the importance of compliance with laws and 

regulations and consumer protection, as well as the avoidance of conflicts of interest and 

the management of reputational and legal risks.

d) Ensure the organization’s internal audit, corporate compliance, and risk management and 

internal control functions are effective and independent, with demonstrated influence 

over business-line decision making that is not marginalized by a focus on short-term 

revenue generation over longer-term sustainability.

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e) Assign senior managers with the responsibility for ensuring that investments across

business lines and operations align with corporate strategies, and that compensation 

arrangements and other incentives are consistent with the corporate culture and 

institutional risk appetite.

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f) Ensure that management information systems (MIS) support the responsibilities of the 

board of directors to oversee the firm’s core business lines, critical operations, and other 

core areas of supervisory focus.

3. Recovery Planning 

Robust recovery planning is central to ensuring the ongoing resiliency of a firm’s 

consolidated operations as well as its core business lines, critical operations, banking offices, and 

other material entities. Each firm should plan for potential financial or operational weaknesses

and identify actions to correct those weaknesses. Therefore, each firm should:

 9 “Material entities” are subsidiaries or foreign offices of the firm that are significant to the activities of a core 

business line or critical operation.

10 See SR letter 08-8/CA letter 08-11, “Compliance Risk Management Programs and Oversight at Large Banking

Organizations with Complex Compliance Profiles.”

11 Refer to “Guidance on Sound Incentive Compensation Policies” (75 Federal Register 36395, June 25, 2010).
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a) Maintain clearly documented quantitative and qualitative criteria that would trigger 

timely implementation of specific elements of the firm’s recovery plan and provide for

more rigorous remediation activities if initial actions prove insufficient.

b) Ensure that trigger events reflect a sufficiently broad range of market- and firm-specific 

stresses across financial, operational, reputational, legal, and compliance risks. 

c) Ensure that recovery planning reflects a holistic view of sustainability and resiliency. 

Recovery planning should be closely integrated with resolution planning, capital and 

liquidity planning, and other aspects of financial contingency, crisis management, and 

business continuity planning.

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d) Undertake recovery testing and training exercises that consider a broad range of internal 

and external risk scenarios and account for interconnectivities across operations and legal 

entities.

e) Ensure that the recovery plan is updated as needed, and reflects lessons learned from 

reviews of trigger events, testing, and training exercises.

f) Ensure that recovery planning is sufficiently integrated into corporate governance 

structures and processes, subject to independent validation, and effectively supported by 

related MIS reporting to the board and its committees.

4. Management of Core Business Lines 

Effective management of core business lines is essential to ensuring the resilience of the 

consolidated organization, as these activities are the primary drivers of the firm’s revenue

generation, profitability, and franchise value. For this reason, a firm’s corporate governance (as 

discussed in Section A.2) should extend to the management of each core business line. Each

core business line should have:

• Business-line senior management with qualifications and experience commensurate 

with the size and complexity of related activities and operations;

• A strategic planning process that ensures areas of growth and innovation are 

effectively managed;

• Appropriate compensation and other incentives that are consistent with the 

institutional risk appetite and in compliance with laws and regulations;

• An independent and strong risk-management framework that supports identification, 

measurement, assessment, and control of the full spectrum of risks; and

• Timely identification and resolution of audit, compliance, and regulatory issues.

 12 Business continuity expectations include adherence with expectations set forth in SR letter 03-9, “Interagency 

Paper on Sound Practices to Strengthen the Resilience of the U.S. Financial System,” including the geographic 

diversity and resiliency of data centers and operations, and testing of recovery and resumption arrangements.
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B. Reducing the Impact of a Firm’s Failure

1. Management of Critical Operations

The failure or discontinuance of any of a firm’s critical operations could weaken the U.S. 

economy or pose a threat to the financial stability of the United States. Each of the supervisory 

expectations outlined around management of core business lines (Section A.4) applies equally to 

management of critical operations to ensure their financial and operational resilience. 

Additionally, each firm should ensure that critical operations are sufficiently resilient to be 

maintained, continued, and funded even in the event of failure or material financial or 

operational distress. These expectations should be fully reflected in recovery and resolution 

planning.

2. Support for Banking Offices

The Federal Reserve’s consolidated supervision program has historically focused on 

protecting the safety and soundness of U.S. depository institution subsidiaries of bank holding 

companies and the U.S. branches and agencies of foreign banking organizations (collectively 

defined as banking offices). This is due to the risks posed by banking offices’ access to the 

federal safety net. Specifically, these offices pose risks to the payment system, the Federal 

Reserve’s discount window, and – in the case of most U.S. depository institutions – federal

deposit insurance funds. 

A consolidated organization should serve as a source of financial and managerial strength 

to its banking offices. The activities of the parent company and affiliated nondepository 

subsidiaries should not present material risks to affiliated banking offices, the consolidated 

organization itself, or to the consolidated organization’s ability to support its banking offices.13 

Each firm should:

a) Provide for the strength and resiliency of its banking offices, ensuring prompt financial 

and operational support so that each office remains in a safe and sound condition under a 

broad range of stressed conditions.

b) Ensure that the activities of the parent company and nondepository institution 

subsidiaries do not present undue direct or indirect risks to the safety and soundness of 

banking offices. This includes the transmission of financial, operational, legal, 

compliance, or reputational risks that may undermine public confidence in the financial 

strength of its banking offices.

c) Maintain sufficient liquidity, cash flow, and capital strength at the parent company and 

nondepository institution subsidiaries to service debt obligations and cover fixed charges. 

 13 Due to structural differences, there are important distinctions in the forms of support provided to U.S. depository 

institution subsidiaries versus those provided to the U.S. branches and agencies of foreign banks. For example, 

branches/agencies do not hold capital and have differing business and liquidity profiles, governance mechanisms, 

and regulatory requirements than depository institutions. Therefore, the Federal Reserve will consider these 

differences in its implementation of this supervisory framework for the U.S. branches and agencies of FBOs, and 

expects parent FBOs and their U.S. branches and agencies to do the same. The extent of supervisory activity 

undertaken to assess the adequacy of parent company support for U.S branches and agencies of FBOs is scaled to 

the condition, size, and interconnectedness of these offices.
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The parent company needs to consider whether there are any legal or regulatory 

restrictions on financial transfers between legal entities within the organization.

d) Implement and maintain effective policies, procedures, and systems to ensure compliance 

with applicable laws and regulations. This includes compliance with respect to covered 

transactions subject to the Board’s Regulation W, which implements Sections 23A and 

23B of the Federal Reserve Act and limits a bank’s transactions with its affiliates.

14

3. Resolution Planning

To promote financial stability, the Dodd-Frank Act requires each bank holding company

with consolidated assets of $50 billion or more, as well as nonbank financial companies 

designated by the FSOC, to develop and maintain plans for rapid and orderly resolution in the 

event of material financial distress or failure. These plans should be utilized as an element of the 

firm’s strategic planning and address the complexity and interconnectivity of the firm’s 

operations.

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The Federal Reserve and the FDIC jointly review a firm’s resolution plan relative to

supervisory requirements, including:

a) The firm’s strategic analysis describing its plans for rapid and orderly resolution under 

the U.S. Bankruptcy Code (or other relevant insolvency regimes). This strategy must not 

pose systemic risk and must exclude reliance on extraordinary support from the United 

States or any other government to prevent failure of the firm.

b) The firm’s strategy for maintaining and funding material entities, critical operations, and 

core business lines in the event of material financial distress.

c) Analysis of potential impediments to resolution, and actions to make the firm more 

resolvable or otherwise reduce its complexity and interconnectivity.

d) Analysis of whether the failure of a major counterparty would likely result in the material 

financial distress or failure of the firm.

e) The manner and extent to which an insured depository subsidiary is adequately protected 

from risks arising from the activities of non-depository subsidiaries.

f) For a U.S. firm with foreign operations, its strategy for addressing the risks arising from 

these foreign operations to its U.S. operations, and its ability to maintain core business 

lines and critical operations in foreign jurisdictions. 

g) Analysis of whether resolution planning is sufficiently integrated into corporate 

governance structures and processes, subject to independent validation, and effectively 

supported by related MIS reporting to the board of directors and its committees.

 14 See SR letter 03-2, “Adoption of Regulation W Implementing Sections 23A and 23B of the Federal Reserve Act.”

15 Refer to 12 CFR 243 (Federal Reserve) and 12 CFR 381 (FDIC) for the “Resolution Plans Required” regulations. 

See also, 76 Federal Register 67323, November 1, 2011. 
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4. Additional Macroprudential Supervisory Approaches to Address Risks to Financial 

Stability

The financial crisis demonstrated that too narrow a focus on the safety and soundness of 

individual firms can result in a failure to detect and address emerging threats to financial stability 

that arise across many firms. The Dodd-Frank Act requires the Federal Reserve to consider the 

broader risks to financial stability posed by individual companies and through the 

interconnectedness among these companies. 

The Federal Reserve aims to reduce systemic risks by increasing the capacity of firms 

and markets to absorb shocks when problems occur, and by reducing potential costs in the event 

of financial distress or failure of a systemically important institution. Supervision carried out 

under this framework will support a variety of macroprudential supervisory approaches beyond 

those already discussed, including:

a) Using insights developed through microprudential supervision and related data collection 

and analysis to identify, understand, and assess potential systemic risks. Areas of review 

could include, for example, emerging trends in critical operations, interconnectedness, 

rapidly expanding markets, cyclical industries, and financial products lacking substitutes

or effecting large market segments.

b) Identifying potential risks to financial stability indicated by the information in

supervisory stress tests and through trends in scenarios employed by firms in their 

internal stress tests.

c) Using comparative and aggregate analysis to monitor industry practices, common 

investment or funding strategies, changes in degree or form of financial 

interconnectedness, or other developments with implications for financial stability.

d) Coordinating with the Federal Reserve’s supervision of systemically important financial 

market utilities to identify and address risks related to payment, clearing, and settlement 

activities, as well as to identify potential structural vulnerabilities.

e) Working closely with the FSOC and other regulators and supervisors to support the 

designation and supervision of systemically important nonbank firms, and to enhance the

monitoring of systemic risk.

f) Enhancing international coordination with foreign counterparts, including national 

supervisors and international bodies such as the Basel Committee on Bank Supervision, 

the Financial Stability Board, and the Senior Supervisors Group. These activities focus 

on enhancing oversight of internationally active financial firms and markets and on

minimizing the opportunities for firms to take advantage of weaker or inconsistent 

regulations.

C. Conduct of Supervisory Activities

The Federal Reserve uses a range of supervisory activities to maintain a comprehensive 

understanding and assessment of each firm, including:

a) Coordinated horizontal reviews involve examination of several institutions 

simultaneously, encompassing firm-specific supervision and the development of cross-
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firm perspectives. The Federal Reserve recognizes the priority of these reviews through 

the dedication of multidisciplinary skills and experienced staff. Examples include 

analysis of capital adequacy and planning via the Comprehensive Capital Analysis and 

Review (CCAR), as well as horizontal evaluations of resolution plans and incentive 

compensation practices. 

b) Firm-specific examination and continuous monitoring activities16 are undertaken to 

maintain an understanding and assessment across the core areas of supervisory focus for 

each firm. These activities include review and assessment of changes in strategy, 

inherent risks, control processes, and key personnel, and follow-up on previously 

identified concerns (for example, areas subject to enforcement actions or other 

supervisory issues17), or emerging vulnerabilities.

c) In developing and executing a detailed supervisory plan for each firm, the Federal 

Reserve generally relies to the fullest extent possible on the information and assessments 

provided by other relevant supervisors and functional regulators. The Federal Reserve 

actively participates in interagency information sharing and coordination, consistent with 

applicable laws, to promote comprehensive and effective supervision and limit 

unnecessary duplication of information requests. Supervisory agencies continue to 

enhance formal and informal discussions to jointly identify and address key 

vulnerabilities, and to coordinate supervisory strategies for large financial institutions.

d) In certain instances, supervisors may be able to rely on a firm’s internal audit or internal 

control functions in developing a comprehensive understanding and assessment. 

Implementation

This consolidated supervision framework is being implemented in a multi-stage 

approach. Additional supervisory and operational guidance will be developed to support 

implementation of the framework and to assess the progress of firms in meeting these 

expectations. Reserve Banks are asked to distribute this letter to large financial institutions 

supervised by the Federal Reserve in their districts, as well as to their own supervisory and 

examination staff.

 16 “Continuous monitoring activities” include meetings with a banking organization’s management; analysis of 

internal MIS reports, market indicators, and other internal and external information; review of internal and external 

audit findings; and coordination with other relevant supervisors and functional regulators and utilization of their

work as appropriate.

17 See SR letter 08-1/CA letter 08-1, “Communication of Examination/Inspection Findings.”
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Questions regarding the framework should be directed to Richard Naylor, Deputy 

Associate Director, at (202) 728-5854; or Bill Charwat, Senior Project Manager, at 

(202) 452-3006. Questions pertaining to consumer compliance should be addressed to Phyllis L. 

Harwell, Assistant Director, at (202) 452-3658; or Mayank M. Patel, Senior Supervisory 

Consumer Financial Services Analyst, at (202) 452-2316. In addition, questions may be sent via 

the Board’s public website.18

Michael S. Gibson

Director

Division of Banking Supervision

and Regulation

Sandra F. Braunstein

Director

Division of Consumer

and Community Affairs

Supersedes:

• SR letter 99-15, “Risk-Focused Supervision of Large Complex Banking Organizations”

Cross-References:

• SR letter 11-7, “Guidance on Model Risk Management”

• SR letter 10-6, “Interagency Policy Statement on Funding and Liquidity Risk 

Management”

• SR letter 08-9/CA letter 08-12, “Consolidated Supervision of Bank Holding Companies 

and the Combined U.S. Operations of Foreign Banking Organizations”

• SR letter 08-8/CA letter 08-11, “Compliance Risk Management Programs and Oversight 

at Large Banking Organizations with Complex Compliance Profiles”

• SR letter 08-1/CA letter 08-1, “Communication of Examination/Inspection Findings”

• SR letter 03-22/CA letter 03-15, “Framework for Assessing Consumer Compliance Risk 

at Bank Holding Companies”

• SR letter 03-9, “Interagency Paper on Sound Practices to Strengthen the Resilience of the 

U.S. Financial System”

• SR letter 03-2, “Adoption of Regulation W Implementing Sections 23A and 23B of the 

Federal Reserve Act”

 18 See http://www.federalreserve.gov/apps/contactus/feedback.aspx.