Preparing for bank exams can mean the difference between furthering or hindering a foreign bank's U.S. strategy. That's a simple, yet daunting task, given the heavy reliance on "clean" exam ratings by the Federal Reserve, state banking departments, Office of the Comptroller of the Currency, and Federal Deposit Insurance Corp.
Obviously, banks should always demonstrate that they have an effective risk management, internal control, and compliance infrastructure. They also should apply some common sense before, during, and after an exam to get the results needed to demonstrate compliance and further expand in the United States.
This is especially so at the U.S. offices of foreign banks because of differences - some major, some minor - in how the compliance function is addressed here relative to the home country.
Those responsible for a bank's safety-and-soundness exam cannot wing it with regulators and hope for the best. A bank must prepare for the exam well in advance. The critical pre-exam work includes involving senior management; designating an exam coordinator; conducting self-assessments; and executing a plan of action.
Exam preparation has to start at the top because that is where strategy is shaped and leadership provided. Senior management's involvement makes it easier to get others involved, and it fosters better answers when regulators evaluate the roles of senior management in promoting and maintaining an effective internal control environment.
Senior management also should designate an exam coordinator, usually the senior compliance officer, to be the primary contact with examiners, to control the flow of information, and to quickly address any issues requiring management's attention.
There are two advantages to self-assessments. First, it is better if the bank, rather than the examiners, spots weaknesses. Second, if done in advance of the exam, these weaknesses can be corrected before the regulators arrive. At a minimum, self-assessments can demonstrate that diligent efforts are under way to address weaknesses.
Organizing a plan of action that identifies next steps, time frames, and responsibilities will help correct weaknesses and prepare for the actual exam.
The following tips can be helpful in preparing for and managing a bank's safety-and-soundness examination:
*Do treat exams as an opportunity, rather than a burden. The potential opportunities include furthering a bank's U.S. strategy and strengthening relationships with an important audience, the regulators. It can also cost money in terms of fines and required corrective action.
*Do form an exam team and designate key contacts throughout the bank - compliance risk management, legal, audit, finance, operations, and key businesses - to complete the self-assessments. The team should be headed by someone from senior management, and the exam coordinator should direct the completion of its objectives.
When conducting a self-assessment do avoid subjective responses like, "I looked in the mirror and liked what I saw." Instead, benchmark the assessment against market practices and regulatory expectations. For example, use internal control questionnaires that ask the following: Are policies and procedures current? Are staff trained in technical and compliance skills? Are policies and procedures self-audited to ensure that they reflect current practice?
Most importantly, ask candidly whether the benchmarks are met, and if not, determine who must achieve those targets within specified time frames.
*Do meet regularly to keep senior management and each team member informed before, during, and after the exam if follow-up is required. Maintaining a consistent and timely information flow to and from the examiners will help prevent misunderstandings or misinterpretations.
*Do give an orientation to the examiners on the bank's strategy, management organization, and control environment.
*Do offer positive and consistent themes during the orientation and throughout the exam, but don't be afraid to acknowledge weaknesses, especially since the bank will already have a plan of action to correct weaknesses through the self-assessments.
*Do let people throughout the organization know when examiners will be on-site. This will help prepare employees for questions from examiners, eliminate delays, and minimize the risk of careless or misleading comments in public areas.
*Do respond to all examiner requests on a timely basis, but don't blindly deliver materials or documents until they are first reviewed for reasonableness, consistency, and responsiveness.
*Do treat examiners like clients. Court their good will, understand their scope and objectives, identify and meet their needs, solicit their views, and remember that integrity is a cornerstone of a mutually beneficial working relationship.
*Don't, however, be afraid to respectfully disagree with an examiner if the bank feels he or she is wrong. Examinations are learning processes for all the participants. Examiners will respect bankers who can courteously correct misunderstandings and misinterpretations.
Achieving a positive exam rating does not end when the examiners leave. Exam readiness is synonymous with good business practice, which is a 24- hour, 365-days-a-year task.
Mastering these rules shouldn't be difficult. And the consequences of a poor exam - bad ratings, cessation or restriction of U.S. expansion activities, monetary penalties, costly corrective actions, and poor publicity - should serve as appropriate incentive to take all the precautionary steps.
Be prepared, coordinate all information, and follow up. That's the bottom line. Viewed positively, an exam not only will be less stressful, but indeed, can be an opportunity for banks to rise to the challenge in a doable and rewarding manner.
Mr. Young is managing director of compliance for the Canadian Imperial Bank of Commerce.
