New Director Education Series: Overview of the FDIC Examination Process
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New Director Education Series: Overview of the FDIC Examination Process


– HELLO, EVA. I’D LIKE YOU TO MEET OUR NEW
BOARD MEMBER, CHRIS JANSSEN. EVA RIOS IS AN EXAMINER
FROM THE FDIC. – HELLO, EVA,
IT’S NICE TO MEET YOU. – THE PLEASURE’S MINE.
– THANK YOU. – DO YOU HAVE A FEW MINUTES
TO SPEND WITH US? – YES, ABSOLUTELY. PLEASE, HAVE A SEAT.
– GREAT. – I THOUGHT IT WOULD BE HELPFUL FOR CHRIS TO LEARN ABOUT THE EXAM PROCESS AND,
SINCE YOU’RE IN THE BANK, I DIDN’T WANT THIS OPPORTUNITY TO PASS BY. – OF COURSE. AS EXAMINERS,
WE APPRECIATE THE OPPORTUNITY TO MEET WITH BOARD MEMBERS
ANY TIME, NOT JUST AT THE END
OF AN EXAMINATION WHEN WE DISCUSS OUR FINDINGS
AND RECOMMENDATIONS. THESE INFORMAL MEETINGS
GIVE US A CHANCE TO FIND OUT
WHAT’S ON YOUR MIND, AND ANSWER ANY QUESTIONS
YOU MAY HAVE ABOUT THE EXAMINATION PROCESS
OR POTENTIAL RISKS WE’RE SEEING
IN THE INDUSTRY AS A WHOLE. – EVA, MAYBE YOU COULD START
BY PROVIDING CHRIS SOME BACKGROUND ON THE FDIC. – THAT’S A GOOD PLACE TO BEGIN. THE FDIC IS AN INDEPENDENT
FEDERAL AGENCY CREATED BY THE CONGRESS. OUR MISSION IS TO MAINTAIN
STABILITY AND PUBLIC CONFIDENCE IN THE NATION’S
FINANCIAL SYSTEM. WE DO THIS PRIMARILY
IN THREE WAYS. FIRST, BY INSURING
CUSTOMER DEPOSITS; SECOND, BY EXAMINING
AND SUPERVISING FINANCIAL INSTITUTIONS
FOR RISK MANAGEMENT AND CONSUMER PROTECTION
ISSUES; AND THIRD, BY MANAGING
RECEIVERSHIPS OF FAILED BANKS. THE FDIC IS HEADQUARTERED
IN WASHINGTON, D.C. AND CONDUCTS BUSINESS
FROM SIX REGIONAL OFFICES ACROSS THE COUNTRY. A NUMBER OF SMALLER
FIELD OFFICES SUPPORT THE REGIONAL OFFICES. – SO EVA, WHAT’S YOUR ROLE? HOW DO YOU FIT IN? – WELL, I AM THE EXAMINER IN CHARGE OF YOUR RISK MANAGEMENT EXAMINATION. IN THAT CAPACITY, I’M LEADING
A TEAM OF EXAMINERS WHO ARE HERE TO EVALUATE THE
FINANCIAL CONDITION OF YOUR BANK AND ALSO ASSESS THE ADEQUACY
OF ITS POLICIES, PRACTICES AND PROCEDURES,
AND ADHERENCE TO THEM. AND JUST SO YOU KNOW,
THE FDIC ALSO EMPLOYS EXAMINERS WHO ASSESS YOUR BANK’S COMPLIANCE WITH CONSUMER PROTECTION
AND FAIR LENDING LAWS, AND YOUR PERFORMANCE UNDER THE COMMUNITY
REINVESTMENT ACT OR CRA. – HMM, I SEE. SO WHAT TRIGGERS
AN EXAMINATION? – WELL, IT ALL DEPENDS ON THE
TYPE OF EXAM BEING CONDUCTED, ON THE ASSET SIZE
OF THE INSTITUTION, AND THE INSTITUTION’S
LAST EXAM RATING. FOR EXAMPLE, YOUR INSTITUTION
IS BELOW 500 MILLION DOLLARS IN TOTAL ASSETS, AND WAS WELL RATED
AT THE LAST EXAMINATION. THEREFORE, THE RISK MANAGEMENT
EXAM CYCLE FOR YOUR BANK IS EVERY 18 MONTHS. WE HAVE SHORTER EXAMINATION
CYCLES FOR LARGER BANKS OR BANKS THAT HAVE BECOME
A REGULATORY CONCERN. SO THE TIMING OF COMPLIANCE
AND CRA EXAMINATIONS ARE ALSO BASED ON
THE ASSET SIZE AND FINDINGS
OF THE PRIOR EXAMINATION. – EVA, CAN YOU TELL CHRIS
ABOUT THE EXAM PROCESS? Eva:
SURE. WE BEGIN THE PROCESS WELL BEFORE
WE ARRIVE AT THE BANK. WE ANALYZE FINANCIAL REPORTS
AND OTHER KEY INFORMATION PROVIDED TO US
BY BANK MANAGEMENT BEFORE THE START
OF AN EXAMINATION. WE ALSO REVIEW OFF-SITE
MONITORING TOOLS, SUCH AS A BANK’S
QUARTERLY CALL REPORT, TO HELP US DETERMINE
THE PRELIMINARY FOCAL POINTS FOR THE EXAM
BASED ON THE LEVEL OF RISK WE PERCEIVE
DURING THAT ANALYSIS. – WHAT DO YOU REVIEW ON-SITE? – WELL, THE FOCUS
OF THE EXAMINATION DEPENDS IN PART ON THE BANK’S
SPECIFIC EXPOSURES AND RISK. FOR EXAMPLE, INSTITUTIONS
WITH NEW PRODUCT LINES OR CREDIT CONCENTRATIONS
SHOULD EXPECT A CERTAIN LEVEL OF EXAMINER REVIEW IN THOSE AREAS. WHEN ON-SITE, WE FOLLOW UP
ON POSSIBLE AREAS OF CONCERN IDENTIFIED DURING
OUR PRE-EXAM ANALYSIS. WE TYPICALLY ANALYZE
THE DOCUMENTATION RELATED TO THOSE AREAS, AND SPEAK WITH STAFF
WHO ARE INVOLVED WITH THE AREAS. AND WE ALSO FOLLOW UP ON ANY
COMMENTS AND RECOMMENDATIONS MADE AT THE PRIOR EXAMINATION TO ENSURE THAT PROPER
CORRECTIVE ACTION WAS TAKEN BY BANK MANAGEMENT. IN ADDITION, WE ROUTINELY VERIFY
THAT BANK PERSONNEL ACTUALLY FOLLOW THE POLICIES,
PROCEDURES, AND PRACTICES APPROVED BY THE BOARD, AND WE’LL FOLLOW UP
IF WE SEE ANY DISCREPANCIES. WE ALSO MEET WITH MANAGEMENT
TO LEARN ABOUT ANY RECENT OR PLANNED CHANGES
TO CURRENT BUSINESS PRACTICES THAT MAY HAVE AN IMPACT
ON THE INSTITUTION. – AS EVA SAID, THE FDIC
ALSO CONDUCTS COMPLIANCE AND COMMUNITY
REINVESTMENT ACT EXAMS. CAN YOU ADDRESS THOSE
FOR CHRIS? – ABSOLUTELY. I WAS A COMPLIANCE AND CRA
EXAMINER FOR MANY YEARS BEFORE SWITCHING OVER
TO RISK MANAGEMENT, SO I’D BE HAPPY TO TELL YOU
MORE ABOUT THOSE AREAS. THE FDIC HAS A SEPARATE TEAM
OF EXAMINERS THAT CONDUCT COMPLIANCE
AND CRA EXAMINATIONS. NOW, ALTHOUGH THEY ARE
CLOSELY COORDINATED WITH RISK MANAGEMENT EXAMS, COMPLETE FINDINGS ARE PRESENTED IN A SEPARATE REPORT. OUR COMPLIANCE EXAMINERS
EVALUATE THE QUALITY OF YOUR BANK’S
COMPLIANCE MANAGEMENT SYSTEM, OR CMS FOR SHORT. THEY EVALUATE ANY IDENTIFIED
WEAKNESSES IN THE SYSTEM AND DOCUMENT ANY VIOLATIONS
OF FEDERAL CONSUMER PROTECTION LAWS AND REGULATIONS
THAT MAY BE FOUND. THE CMS REVIEW INCLUDES
AN ASSESSMENT OF COMMITMENT OF THE BOARD OF DIRECTORS,
MANAGEMENT, AND STAFF DEDICATED TO COMPLIANCE; THE SCOPE AND EFFECTIVENESS OF COMPLIANCE POLICIES
AND PROCEDURES; AND THE THOROUGHNESS
OF MONITORING THE AUDITS. THE EXAMINERS
WILL DISCUSS FINDINGS AND RECOMMENDATIONS
WITH BANK MANAGEMENT AND OBTAIN A COMMITMENT FOR
ANY CORRECTIVE ACTIONS NEEDED. THE RESULTS OF THE EXAMINATION
WILL ALSO BE COMMUNICATED TO THE BOARD OF DIRECTORS
AND MANAGEMENT THROUGH OUR REPORT
OF EXAMINATION. – PAT ALSO MENTIONED THE COMMUNITY REINVESTMENT ACT EXAMINATION. WHAT CAN YOU TELL ME ABOUT THAT? – WELL, THE PURPOSE
OF A CRA EXAMINATION IS TO EVALUATE
A BANK’S PERFORMANCE IN MEETING THE CREDIT NEEDS
OF THE COMMUNITY IT SERVES, CONSISTENT WITH SAFE AND SOUND BANKING OPERATIONS. THE RESULTING PRODUCT,
A CRA EVALUATION, IS A PUBLIC DOCUMENT. THE GENERAL PUBLIC,
INCLUDING CUSTOMERS, CAN ACTUALLY
REVIEW THE EVALUATION TO SEE HOW YOUR BANK
WAS RATED. ALL OTHER FDIC EXAM REPORTS
ARE STRICTLY CONFIDENTIAL AND THEIR CONTENT MAY NOT BE
EITHER DISCUSSED OR REVEALED TO ANYONE OUTSIDE THE BANK. ANOTHER DIFFERENCE BETWEEN
A CRA EXAMINATION AND A RISK MANAGEMENT
OR A COMPLIANCE EXAM IS THE RATING SYSTEM
THAT IS USED. HAVE YOU SEEN ANY OF
OUR EXAMINATION REPORTS OR THE MOST RECENT
CRA PUBLIC EVALUATION? – YES, I HAVE. – OKAY. WELL THEN,
YOU PROBABLY NOTICED THAT WE USE A NUMERICAL SYSTEM FOR RISK MANAGEMENT
AND COMPLIANCE EXAM RATINGS, BUT FOR THE CRA EVALUATION, WE USE DESCRIPTIVE WORDS
FOR RATINGS. – YEAH, I SAW THAT. – WELL, WITH REGARD TO
A RISK MANAGEMENT AND A COMPLIANCE EXAM, WE ASSIGN A RATING
FROM ONE TO FIVE FOR EACH AREA REVIEWED
AND FOR THE OVERALL RATING, WHICH IS KNOWN AS
THE COMPOSITE RATING. A ONE RATING
INDICATES THE HIGHEST RATING AND THE LEAST DEGREE
OF SUPERVISORY CONCERN, WHILE A FIVE RATING
INDICATES THE LOWEST RATING AND IS THE HIGHEST DEGREE
OF CONCERN. NOW, FOR THE CRA EVALUATION,
THE RATINGS ARE OUTSTANDING, SATISFACTORY,
NEEDS TO IMPROVE, OR SUBSTANTIAL
NON-COMPLIANCE. – AT WHAT POINT
IN THE RATING SYSTEM DO REGULATORS
START TO BECOME CONCERNED? – WHEN THE EXAM FINDINGS
REFLECT A THREE RATING, OUR SUPERVISORY CONCERN
INCREASES. THAT CONCERN
SIGNIFICANTLY INCREASES WHEN THE BANK FALLS TO A FOUR
AND THEN TO A FIVE RATING. FOR A CRA EVALUATION,
ANYTHING BELOW SATISFACTORY IS CAUSE FOR CONCERN. WHEN THE BANK STARTS TO SHOW
SIGNS OF TROUBLE, SUPERVISORY ACTION
TYPICALLY BEGINS. NOW THE EXACT TYPE OF ACTION
IS DEPENDENT UPON THE BANK’S ACTUAL CONDITION AND THE SPECIFIC TYPES OF ISSUES THAT NEED CORRECTION. – YES,
AND ALL OF US ON THE BOARD WORK VERY HARD TO MAKE SURE
THAT DOESN’T HAPPEN. – THANKS, EVA,
FOR YOUR OVERVIEW. I APPRECIATE YOU TAKING TIME
TO EXPLAIN THINGS TO ME. – OH, YOU’RE WELCOME. WE ARE MORE THAN HAPPY
TO HAVE DIRECTORS STOP BY DURING AN EXAM. OUR ONLY CONTACT
WITH BOARD MEMBERS IS USUALLY
AT THE CONCLUSION OF OUR EXAM WHEN WE MEET TO DISCUSS EXAMINATION FINDINGS. OH, THAT REMINDS ME. ONE OF YOUR QUESTIONS WAS ABOUT
THE EXAMINATION PROCESS? – MM-HMM. – AT THE CONCLUSION OF AN EXAM,
WE MEET WITH SENIOR MANAGEMENT AND WE MAY MEET WITH THE BOARD
DEPENDING UPON OUR FINDINGS, THE LENGTH OF TIME SINCE
WE LAST MET WITH THE BOARD, AND THE TYPE OF EXAMINATION CONDUCTED. THE PURPOSE OF THE MEETING IS TO DISCUSS
THE EXAMINATION FINDINGS AND GET MANAGEMENT
AND BOARD CONCURRENCE TO ADDRESS ANY ISSUES. AS FOR COMPLIANCE EXAMINATIONS, WE ARE REQUIRED TO MEET WITH
THE BOARD OF DIRECTORS WHENEVER SERIOUS COMPLIANCE ISSUES ARE NOTED THAT COULD RESULT IN AN
UNFAVORABLE COMPLIANCE RATING OR ENFORCEMENT ACTION RECOMMENDATIONS. AND THE LAST STEP
IN THE EXAM PROCESS IS TO FINALIZE
THE EXAMINATION REPORT. IT GOES THROUGH A THOROUGH
REVIEW PROCESS EITHER AT A FIELD OFFICE
OR REGIONAL OFFICE LEVEL, AND THEN IS SENT
TO THE INSTITUTION FOR EACH BOARD MEMBER
TO REVIEW. – IT SEEMS LIKE COMMUNICATION
IS VERY IMPORTANT. – OH, COMMUNICATION
IS VERY IMPORTANT TO US. WE’LL INTERACT
WITH THE MANAGEMENT THROUGHOUT THE ENTIRE EXAM AND DISCUSS ALL EXAMINATION
CONCLUSIONS AND RECOMMENDATIONS AT THE MANAGEMENT MEETING, AND WE ALSO COMMUNICATE WITH
BANK MANAGEMENT BY PHONE BETWEEN RISK MANAGEMENT EXAMS TO SEE IF THERE ARE ANY ISSUES MANAGEMENT WANTS TO DISCUSS. – INTERESTING,
I REALLY HADN’T THOUGHT ABOUT COMMUNICATIONS WITH US
BETWEEN YOUR EXAMS.

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