WASHINGTON — The Office of the Comptroller of the Currency said Wednesday it will begin rotating out resident examiners in the largest banks as part of a slew of internal changes it plans to make later this year based upon suggestions made by foreign supervisors.

The resident examiner program has been criticized in the wake of the financial crisis, with some arguing it allows examiners to become too close to a bank's management team, ignoring signs that the institution is engaging in unsafe behavior.

The OCC said Wednesday it will reduce the number of resident examiners at large banks while also establishing a five-year rotation schedule across institutions for supervisors that need to work on-site.

"The changes announced today will enhance the agency's expert supervision of the nation's largest and most complex financial institutions," Comptroller of the Currency Thomas Curry said in a press release. "Facilitating the sharing of information and knowledge among examiners across institutions and rotating examiner assignments will allow us to provide a fresh and broader perspective to the examination of each large institution."

The changes come in response to a peer review performed last year in which a group of international regulators made recommendations to the OCC for how it can improve supervision of mid- and large-sized banks.

The OCC accepted several suggestions, saying it would rotate resident examiners every five years in cities where there are multiple large banks, while also changing the assignments or portfolios of assistant deputy comptrollers in similar locations.

The OCC said that while this will lower the number of on-site examiners at individual banks, the overall number of examiners assigned to an institution will not be affected. Among 580 examiners in large bank supervision, about 130 are in shared common OCC space, the agency said.

Part of the changes are meant to reduce the perception that resident examiners are becoming captured by bank management.

"Regulatory capture is a real threat to our agencies and the banking system we oversee. As regulators, we need to take great care to avoid doing anything that even creates that perception," said Curry before the Conference of State Bank Supervisors in Chicago on May 14. "We have seen examples of banking and deposit insurance agencies that suffered significant reputational damage, and in some cases were ultimately abolished, because the public saw them as serving their private, rather than public, interests."

The OCC said it would also look into making limited changes to how it grades banks on a 1 to 5 scale known as Camels. The peer review recommended that the ratings could be more forward-looking or offer alternatives so banks have clearer guidance, such as splitting the "2" rating into a "2" and "2+."

In response, the OCC said its working groups assigned to review the recommendations determined that the existing Camels rating process was flexible enough to be forward-looking.

However, the agency said it "would strengthen its internal processes" to identify "2" rated banks that are deteriorating and to make supervisory expectations clear to the boards and management at those banks early on. The OCC added that it also plans to "update" its Risk Assessment System and ramp up regular examiner training about both the risk system and Camels ratings.

Additionally, the OCC agreed to expand the responsibilities of the lead experts in the large bank supervision group so that there are more "horizontal" reviews and sharing of information amongst examiners, supervisors and policy staff. The OCC said it plans to expand this group from 21 to 100 experts in the program.

As part of this plan, the OCC will also form a large bank risk and steering committee to guide supervisory strategies and help improve the consistency of responses to significant risks. This is part of the OCC's broader effort to enhance its own risk management — an issue Curry has repeatedly raised with banks.

The peer review, performed by financial supervisors from Australia, Canada and Singapore, was released in December 2013. Since then, two OCC internal working groups and all employees were asked to provide feedback on which recommendations to institute. The two working groups now have 60 days to provide implementation plans, the OCC said. Implementation is expected to start in the next several months based on the complexity of each change.

"I join the senior management of the agency in pledging our 100% commitment to these actions," Curry said in the release. "We will invest the time and resources necessary to fully implement even those initiatives that will require longer-term execution. Our ongoing process for self-assessment and review will be important in ensuring the success of these new initiatives."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.