Leave it to bankers and regulators to dicker over six months.

The Independent Community Bankers of America wants the exam cycle for small banks extended to 24 months. A panel of regulators appearing at the trade group’s annual convention in San Antonio made it clear Friday that they are reluctant to budge beyond the current 18-month interval.

The point was made after Chris Cole, the ICBA’s senior regulatory counsel, asked if regulators could tolerate adding another six months between exams, noting that longer cycles for “well-rated” banks with assets of less than $5 billion are part of the Plan for Prosperity the association unveiled last month.

“I really don’t think so,” responded Doreen Eberley, director of the division of risk management supervision at the Federal Deposit Insurance Corp., adding that 18 months was as much as her agency could stomach. She noted that regulators once allowed for longer intervals, but that was before the financial crisis.

Doreen Eberley, director of the division of risk management supervision at the FDIC.
Regulators, including Doreen Eberley, director of the division of risk management supervision at the FDIC, are reluctant to lengthen the intervals for bank exams beyond 18 months. "It didn’t end well” the last time the span was two years," she said. "We lost over 440 community banks in the last downturn."

“It didn’t end well,” Eberley said. “That’s the concern. And when it doesn’t end well it means we go into an economic downturn and community banks are not able to withstand it and they fail. We lost over 440 community banks in the last downturn.”

More than 120 bankers attended the 90-minute panel discussion, which included Toney Bland, senior deputy comptroller for midsize and community bank supervision, and Kevin Bertsch, associate director at the Federal Reserve.

Several bankers questioned the need for frequent exams, including an executive who said regulators typically bring up to 13 examiners to review his 28-employee bank. Another questioned why regulatory agencies expend so many resources examining small banks when their assets account for less than 10% of the industry’s total.

The current 18-month interval for well-performing banks with assets of less than $1 billion was enacted by Congress in December 2015.

Bankers also pressed panelists about remote exams.

Bertsch said that Fed examiners are looking at ways to shift more work off-site.

“We did issue guidance last year to bankers and examiners telling them that if [banks] want us to do the loan review off-site, we will work” to do that, Bertsch said, adding that a working group is studying the exam process to identify which components could be done off-site.

“We’re basically looking at the idea of doing [as much as possible] off-site and, in some instances, we can do 60% of the exam off-site and keep from sending 14 examiners to a small bank,” Bertsch said.

The Office of the Comptroller of the Currency is pursuing similar efforts, Bland said.

The FDIC is engaged in a pilot program that involves building a secure network to transmit loan files, Eberley said. The agency is working with technology service providers to receipt alert downloads of banks’ loans to help determine what to look for during exams.

Still, panelists made it clear that they were not in favor of doing entire exams remotely.

“We learned a lesson in the 1980s that there’s no substitute for an on-site exam,” Eberley said. “Off-site monitoring, call report data, all the other information we have can supplement our examination program but the supervision program in totality needs to have a strong examination component.”

The FDIC gives examiners flexibility to use electronically transmitted data in conducting their exams, but safety concerns have limited the scope of the practice.

“In a cybersecurity world, it’s a lot more difficult and that’s kind of been the roadblock for us,” Eberley said. “You may have software; we can’t load it onto our laptops to look at your loan files off-site. We can’t hook into your system. There are things that just aren’t safe from a cybersecurity standpoint.”

At least one banker raised concerns about instances of increased miscommunication between banks and examiners as more work is handled remotely. Eberley said several bankers have told her they welcome examiners in their banks.

“I hear from bankers that they like seeing us,” Eberley said. “They like bouncing things off the examiners and talking about what they’ve seen in other institutions.”

Eberley, however, was quick to add that regulators understand many bankers find examinations arduous and disruptive.

“We get that operating in a regulated environment is a burden,” Eberley said. “They benefit of that burden is that you get deposit insurance, which promotes public confidence, but it is a burden.”

The National Credit Union Administration may be further ahead than any of the banking regulators in pursuing off-site examinations. It launched a pilot program last year that involved conducting large parts of the exams of 39 credit unions remotely. According to the agency, examiners used NCUA-approved secure devices to send and receive data.

The NCUA’s pilot program, known as FLEX, is being extended this year.

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