Here is an explanation of the new procedures for community bank exams, provided in question-and-answer format by the Office of the Comptroller of the Currency.
Q.: Does the use of these procedures change the OCC's approach to supervision?
A.: No, it does not. It only changes the way the OCC performs on-site examinations of noncomplex community banks. The OCC will still monitor these banks regularly so that it can quickly address emerging issues or problems.
Q.: Why does the OCC need specific examination procedures for noncomplex banks rather than using the procedures in the Comptroller's Handbook?
A.: Noncomplex banks tend to have similar risk profiles, so the OCC wants to standardize the way it examines these banks.
Using standard procedures promotes consistent regulatory treatment of similar banks. Consistent treatment will help reduce the regulatory burden. The use of standardized procedures should also improve OCC efficiency by eliminating the need for examiners to outline the scope of eaCh individual exam of a noncomplex bank.
Q.: Why can't all banks be examined based on these core procedures?
A.: The simple answer is that not all banks have similar risk profiles. In many cases, a bank may be facing difficult current conditions or may offer more sophisticated products.
In such banks, examinations must place more emphasis on bank processes to control and monitor risk. In such cases, the examiner-in-charge must tailor the scope and focus of the examination to match the individual risk profile of the banks.
Q.: This program is designed to cover banks up to $1 billion in assets. Will there be a lot of banks that are $1 billion in size that are examined this way?
A.: It is unlikely that there will be a large number of banks with assets close to $1 billion that are designated noncomplex. The OCC estimates that the large majority of banks designated as noncomplex will be under $100 million.
However, there may be some banks in the $100 million to $250 million range and a small percentage of banks over $250 million that will qualify as noncomplex.
In general, the larger the bank, the more diverse the products offered and market served by the bank. Diversities of this nature generally indicate greater complexity and the need for more sophisticated processes.
Q.: The procedures emphasize "results." What does this mean?
A.: The term results is meant to be more than financial performance. The amount of capital, the quality of assets, the sufficiency of liquidity, and the consistency and level of earnings are all included in the measurement of results.
Results of effective management and sound processes, for example, can be seen in the bank's loan portfolio. If the loans reviewed are in line with generally sound underwriting practices, (e.g., no significant outliers), it is likely that management is achieving sound results.
Whether the bank has a written policy that tells them how to underwrite a loan will not be the focus of the exam. The "result" of the policy, written or unwritten, will be the key determinant in assessing the bank's condition.
Q.: Will these new procedures relieve regulatory burden?
A.: Yes. By standardizing and limiting the work done in community banks with similar risk profiles, these procedures are likely to reduce burden focusing on a bank's results and not the degree of sophistication of its systems and policies will highlight the most relevant issues in judging a bank's condition.
Q.: Will the use of these procedures reduce the OCC's cost of examining these banks? If so, will the cost savings be passed back to these institutions?
A.: The OCC probably will not see significant cost savings with the implementation of these procedures. The reason is fairly simple.
First, the OCC currently performs on-site examinations of these institutions, and the majority of these examinations are completed in two to three weeks. The noncomplex procedures are likely to require about the same amount of time to complete.
The OCC should, however, receive efficiency benefits from this approach. In particular, these procedures set the scope and strategy for the examination and provide a standard request letter.
By using these core procedures, the examiner saves a great deal of time in the planning phase. That frees more examiner time for use in other assignments, thereby improving the efficiencies of the OCC.
Q.: What happens if problems are found in one or more areas of a bank during a noncomplex examination?
A.: The examiner in charge and supervisory office will first need to make sure they have identified the root cause of the problem. If so, they will communicate the findings to management and require appropriate corrective action. If the root cause is not yet identified, they will expand the scope of the examination sufficiently to determine the root cause of the problem.