Seeking to extend risk management to compliance exams, the Federal Reserve Board has adopted a new program that focuses more resources on banks that violate consumer protection laws.

The system, to be phased in next year, identifies two primary compliance risks, alters the examination schedule for small and large banks, and merges the compliance, Community Reinvestment Act, and fair-lending reviews into a single exam.

"This reflects an effort to use our resources and the resources of the private sector more efficiently," Fed Governor Laurence H. Meyer said Friday. "This better identifies high-risk elements and then focuses attention on those elements."

Industry officials applauded the move. "This is a welcome announcement," said Karen M. Thomas, director of regulatory affairs at the Independent Bankers Association of America. "An extended exam cycle is something community bankers have urged for some time. This is a good example of using the carrot rather than the stick."

Under the program, examiners will evaluate a bank's regulation risk and product risk before a review. Regulation risk covers the potential impact to customers or the bank from noncompliance with consumer protection rules, while product risk addresses the dangers posed by different services offered.

The agency then will tailor the exam to concentrate on the areas that pose the most risk. Previously, the Fed reviewed a bank's compliance with all of the consumer protection rules, regardless of whether the institution had a problem with a particular regulation.

The Fed also said it would review banks with "exemplary" compliance records less frequently. It defines these banks as having at least a satisfactory CRA and consumer compliance rating for two consecutive exams.

Banks with less than $250 million in assets that meet this criterion will be reviewed once every three years while larger banks will be examined once every two years. Banks with performance problems will continue to be reviewed annually.

Finally, the Fed said it would conduct its CRA, fair-lending, and consumer compliance exams at once, rather than spreading them out over the year.

The Office of the Comptroller of the Currency adopted a risk-focused compliance program in late 1996.

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