ABSTRACT
Chapter 5’s topic is the prudential supervision of individual banks. By design, Congress left the safety and soundness standard that underpins prudential regulation undefined, providing only the bare outlines of agencies’ authority in the Banking Act of 1933. The agencies fill in the interstices through rulemaking, guidance, examinations, and enforcement actions in varying degrees of prescriptive detail. Bank examinations, an intensive, ongoing process focused on business fundamentals and management, are the agencies’ key means of staying on top of rapidly changing conditions in banks that can quickly threaten a firm’s solvency and expose taxpayers to loss. Regulators’ broad authority under the statute allows the government to intrude to an extraordinary degree into a bank’s operations, question the logic of its business strategy, and mandate changes in its system of corporate governance. The chapter describes the two key components of prudential supervision: the CAMELS bank rating system, which grades a bank’s financial health, and the Prompt Corrective Action program, which requires progressively harsher supervisory actions as a bank’s financial condition deteriorates. Despite the agencies’ broad discretion, banks can still gauge compliance risk and design effective internal governance systems to meet regulatory expectations. Examiners follow a transparent grid of predetermined trigger points for enforcement actions.
