Bank exams will regain human touch when pandemic recedes

Federal regulators have performed remote banking reviews during the pandemic, but both sides are keen to restore the human element of oversight in the post-Covid world.

The agencies that supervise the banks – the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency – had sought to incorporate technology to examine lending and banking data even before the pandemic.

These tools proved essential when Covid-19 forced everyone to go into hiding, cut back on travel and practice social distancing.

But the pandemic has also shown limits to what examiners and the banks they oversee can do without being in the same room, said Christopher Cole, senior regulatory advisor at the Independent Community Bankers of America. Post-pandemic banking reviews will likely follow a hybrid model that values ​​personal interactions while keeping technologies at bay.

“There will always be a time when they have to come in, meet individually with management and senior management and maybe even the board of directors,” he said. “I don’t think there is a substitute for this.”

Smoother than expected

Reviews are a key tool for regulators to ensure that financial institutions operate in a safe and healthy manner. Banking supervisors can also use reviews to point out potential violations and correct them or refer them to enforcement attorneys.

Before the pandemic, community bank reviews required teams of regulators to travel to small towns to review loan documents and records. For the largest banks, examiners were permanently present inside the buildings.

Given the long history of on-site supervision – the OCC has reviewed banks since its inception during the Civil War – regulators were somewhat skeptical that fully remote reviews could replace face-to-face reviews, said Julie A. Hill, professor at the University of Alabama Law School and former banker.

“We all had to change, and it wasn’t as bad as we thought or worried,” Hill said.

Federal banking regulators have been looking for ways to reduce the time and travel associated with face-to-face reviews for some time, FDIC President Jelena McWilliams said at a news briefing on Nov. 30.

This allowed the FDIC, Fed, and OCC to already have data security and other protocols in place for remote reviews when the pandemic struck, without compromising the safety and soundness of banks and the market. broader financial system, said Doreen Eberley, director of the FDIC. risk management control.

“Thank goodness we started early,” Eberley said.

Numeric fraction

In August, the FDIC sent out an information request seeking comments from banks on pandemic surveillance.

Overall, the response has been positive, although there have been issues with the size of the banks and even their location, Cole said.

Rural banks in particular have encountered problems due to a lack of high-speed internet access, which has made it difficult to transfer loan files to examiners, he said.

In some cases, banks had to convert these files to PDF, an arduous process that created huge files, added Cole.

The American Bankers Association said in an October comment letter to the FDIC that its members would like to have the option of choosing between onsite, remote, or hybrid reviews. Members would prefer “the right balance of offsite and onsite work dictated by the needs and preferences of bankers and examiners,” he said.

Hybrid style

Such an approach may be the future of banking reviews.

McWilliams told reporters the FDIC was moving towards a mixed approach. The Fed also said in a November report that it “intends to take” a hybrid surveillance approach.

The OCC said in a Dec. 3 statement that it “better understands the benefits and limitations of off-site review activities” and will plan reviews based on that knowledge.

“While the location of our review activities may be more flexible in the future, the OCC will continue to have dedicated teams of reviewers assigned to oversee the largest and most complex institutions and will implement effective and risk-based oversight strategies in all institutions overseen by the OCC. “the agency said in a statement to Bloomberg Law.

Much of the supervisory process can be done without meeting face to face, said Todd Phillips, director of financial regulation and corporate governance at the Center for American Progress, a progressive think tank.

“I imagine it will be a lot to browse documents offsite. And if they were there, they would go through those documents without talking to people, ”Phillips said.

Even though more oversight work is done offsite, reviewers still need to visit banks to learn about the context of a community and how a bank is responding to its particular needs, Cole said.

Supervisors are often concerned when a bank’s loan portfolio is heavily focused on a particular type of credit, such as commercial real estate or agricultural loans. Having a reviewer showing up in person can prove that a bank is meeting a real community need for credit rather than operating in an unsafe manner, Cole said.

“Particularly in some of these small communities, it’s good that the reviewer is going,” he said.

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