SR 21-3: Supervisory Guidance on Board of Directors' Effectiveness

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SR 21-3 / CA 21-1 : Supervisory Guidance on Board of Directors' Effectiveness

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D.C. 20551

DIVISION OF SUPERVISION AND REGULATION

DIVISION OF CONSUMER AND COMMUNITY AFFAIRS

SR 21-3 / CA 21-1

February 26, 2021

TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK AND TO LARGE FINANCIAL INSTITUTIONS

SUBJECT:

Supervisory Guidance on Board of Directors' Effectiveness

Applicability: This guidance applies to all domestic bank holding companies and savings and loan holding companies with total consolidated assets of $100 billion or more (excluding U.S. intermediate holding companies of foreign banking organizations established pursuant to the Federal Reserve's Regulation YY), and systemically important nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve.

Introduction

The Federal Reserve expects the board of directors (board) of a large financial institution to be effective in its oversight of the firm because the board serves a critical role in maintaining the firm's safety and soundness and continued financial and operational resilience of its consolidated operations. The attached guidance describes the key attributes of effective boards at large domestic bank holding companies and savings and loan holding companies to: 1) set clear, aligned and consistent direction regarding the firm's strategy and risk appetite; 2) direct senior management regarding the board's information needs; 3) oversee and hold senior management accountable; 4) support the independence and stature of independent risk management and internal audit; and 5) maintain a capable board composition and governance structure. The guidance also includes illustrative examples of effective board practices.

Overview of Board of Directors Guidance

This guidance focuses on a board's performance of its core responsibilities in describing five key attributes of an effective board. The guidance notes that an effective board:

Oversees the development of, reviews, approves, and periodically monitors the firm's strategy and risk appetite.

Directs senior management to provide directors with information that is sufficient in scope, detail, and analysis to enable the board to make sound, well-informed decisions and consider potential risks.

Oversees and holds senior management accountable for effectively implementing the firm's strategy, consistent with its risk appetite, while maintaining an effective risk management framework and system of internal controls.

Through its risk and audit committees, assesses and supports the stature and independence of the firm's independent risk management and internal audit functions.

Considers whether the board's composition, governance structure, and practices support the firm's safety and soundness and promotes compliance with laws and regulations, based on factors such as the firm's asset size, complexity, scope of operations, risk profile, and other changes that occur over time.

Implementation

Firms subject to the large financial institution rating system are assigned three component ratings: Capital Planning and Positions, Liquidity Risk Management and Positions, and Governance and Controls. 1 The supervisory assessment of board effectiveness is one of the elements within the Governance and Controls component rating. As the board effectiveness guidance builds on the principles set forth in the large financial institution ratings framework, the Federal Reserve intends to use the board effectiveness guidance in informing its assessment of the governance and controls at all firms subject to the large financial institution rating system. Federal Reserve supervision staff will work closely with firms to help them understand the board effectiveness guidance. In assessing board effectiveness, the Federal Reserve supervisory staff will continue to review other sources of information, including but not limited to publicly available information, examinations from other regulators, and firm-provided materials.

Federal Reserve Banks are asked to distribute this letter to large financial institutions in their districts and to appropriate supervisory staff. In addition, supervised organizations may send questions via the Board's public website. 2

signed by Michael S. Gibson Director Division of Supervision and Regulation

signed by Eric Belsky Director Division of Consumer and Community Affairs

Attachments:

Supervisory Guidance for Boards of Directors of Domestic Bank and Savings and Loan Holding Companies with Total Consolidated Assets of $100 Billion or More (Excluding Intermediate Holding Companies of Foreign Banking Organizations Established Pursuant to the Federal Reserve's Regulation YY) and Systemically Important Nonbank Financial Companies Designated by the Financial Stability Oversight Council for Supervision by the Federal Reserve

Cross References:

SR Letter 19-3 / CA Letter 19-2, “Large Financial Institution (LFI) Rating System”

Notes:

See SR Letter 19-3 / CA Letter 19-2, "Large Financial Institution (LFI) Rating System."" Return to text.

See https://www.federalreserve.gov/apps/contactus/feedback.aspx . Return to text.

Overview of Comments on and Revisions to Proposed Guidance on Supervisory Expectations for Boards of Directors

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Last Update: February 26, 2021