New OCC Small-Bank Exam Focuses on Performance; Gets Thumbs-Up from

The Office of the Comptroller of the Currency unveiled its risk-based exam for small national banks last week to rave reviews from industry officials.

The new guidelines, which will take effect Sept. 30, implement the agency's "supervision by risk" program for banks with less than $1 billion in assets.

Karen Thomas, director of regulatory affairs for the Independent Bankers Association of America, said community banks had worried that the agency's new focus on risk would force them to put in place the same risk management systems required of larger institutions. But the OCC kept it simple, she said.

"We've had a general concern that it would be burdensome if examiners expected small banks to have very detailed risk management policies and procedures," Ms. Thomas said. "But this looks very promising."

Since April 1, examiners have been evaluating nine sorts of risk at all banks with more than $1 billion in assets. They also are judging how each bank handles each of the nine risks.

But Ms. Thomas said small banks needn't worry that their risks and how they manage them will be reviewed separately. She said these two elements will be combined into a single criterion, "aggregate risk."

This change permits examiners to focus on a community bank's performance, rather than the bank's risk management policies, Ms. Thomas said.

"This shows the OCC is not trying to make these exams overly complicated," added James McLaughlin, director of regulatory and trust affairs at the American Bankers Association.

Like they do for large institutions, OCC examiners will create a custom- tailored profile of all the risks each community bank faces. This so-called "risk profile" will provide examiners with a blueprint for future exams. This is expected to reduce the burden on bankers by focusing supervision only where it is needed.

Supervision by risk doesn't mean the widely popular "noncomplex" community bank exam procedures are gone. Rather, examiners will modify each exam under those 1994 procedures to focus on risky, nontraditional activities in community banks.

"The risk assessment system will flag bank activities that increase a noncomplex bank's risk exposure in a particular area of activity," said Comptroller of the Currency Eugene A. Ludwig in a statement Monday. These risks will be noted in the bank's risk profile.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER