ABA-Backed Report Proposes Improvements to Exam Process

WASHINGTON — Amid concerns about the level of regulators' toughness toward banks following the crisis, a report due to be released Monday by the American Bankers Association recommends steps for a more balanced approach to bank examinations.

The report, drafted by former Comptroller of the Currency John D. Hawke Jr. and current Brookings Institution fellow Robert Litan, includes survey responses from nearly 70 bankers. Among the recommendations are a more "customized supervision" program for banks of different stripes, a more "risk-based" approach that avoids "technicalities and minor issues," and clearer minimum capital standards.

"The American concept of bank examination and supervision is fundamentally sound, but we believe it could be improved through several adjustments in the bank examination process outlined in this report," Hawke and Litan wrote in the report entitled "Value-Added Bank Supervision: A Framework for Safely Fostering Economic Growth."

The report, which was given to reporters at a briefing Friday at the ABA's headquarters, and submitted to the agencies a day earlier, is another example of what essentially has become relationship counseling between the industry and federal regulators. Some bankers have raised several objections to the aggressiveness of exams following the crisis, arguing that the agencies — not wanting a repeat of 2008 and 2009 — are being too tough on even healthy banks, and have strayed from valuing the judgment of examiners and senior executives.

Hawke and Litan's survey developed questions based on interviews with 15 bankers. Executives from about 90 institutions were contacted to participate. Of that, 68 institutions responded.

Among the questions, the survey asked whether the bank's examiner "adequately" takes "into account the particular profile and characteristics" of the institution being evaluated. Of the 68 respondents, 25 said, "Yes, to a significant degree," while 28 said only "mildly so." Fifteen respondents said there was "no change."

In response to another query, 18 participants said their exams before the crisis "to a significant degree" added value to their bank, 32 said value was added "only mildly so," 16 said the exam "did not add value," and two said it "was counterproductive or excessively costly in relation to benefits." But asked the same question for exams following the crisis, respondents found less value (eight "to a significant degree," 22 "only mildly so," 15 "did not add value," and 23 found the exam "counterproductive or excessively costly in relation to benefits.")

The ABA report is not the first effort to collect data about the exam experience. The Alliance of Bankers Associations, started by the Utah Bankers Association, allows bankers to report about their recent exam on a confidential electronic survey known as the Regulatory Feedback Initiative.

"Bankers and examiners naturally come from two different planets. You expect a difference of perspectives. Clearly, before the crisis one can certainly make the argument that there was not enough distance between bankers and supervisors," said Litan, who is also vice president for research and policy at the Ewing Marion Kauffman Foundation in Kansas City.

"But what's happened since the crisis is now we have a huge chasm between the way the bankers view the world and the way the regulators view the world. We are sympathetic with regulators when they have a crisis they obviously want to change the way they've done business, and they have. But if the chasm stays the way it is, and doesn't come back to a healthy medium, what we argue in our report is that we will have deleterious impacts on bank lending going forward and also economic growth."

He added that the intent of the report was to be "constructive", not overly critical. "This is not throwing stones at regulators. This is trying to narrow the chasm and getting the Mars-Venus balance back into place," Litan said.

The authors acknowledged the regulators have a difficult job finding the right balance.

"There is a tension in the process. To instruct a bank examiner to convey the message that banks ought to ease up can be viewed as being in conflict with the examiner's primary mission of ensuring safety and soundness," said Hawke, who was comptroller from 1998 to 2004 and is now a partner at Arnold & Porter LLP.

Spokespersons for the Office of the Comptroller of the Currency and the Federal Reserve Board declined to comment, saying the regulators were still reviewing the results.