It's good to see that we have learned something in the turbulent years since the financial crisis spread from Wall Street across the nation, consuming our financial system and stunting our economy.
Federal Deposit Insurance Corp. Vice Chairman Thomas Hoenig's plan to expand bank examinations at the largest financial institutions is another critical step in getting a handle on the systemic risks now present in our banking system. It demonstrates where the regulatory focus should be – on the handful of systemically risky institutions. Meticulously reviewing the operations of large financial firms for signs of trouble will help avoid future systemic risks and better align regulatory resources to the true sources of those risks.
Community banks do not pose systemic risk, but are no strangers to strict examinations. While their technology and cutting-edge products and services bear little resemblance to the old-fashioned bank you saw in "It's a Wonderful Life," our nation's nearly 7,000 community banks still experience comprehensive on-site bank examinations every year.
A team of regulators set up shop in the corner office or the board room of the bank to personally thumb through loan files until they are assured they can once again give the bank their seal of approval. For a small community bank, the process is stressful and consumes nearly the entire staff's time for weeks. Still, community bankers understand these examinations are a necessary part of doing business and that their customers and communities expect no less than a safe and sound financial institution.
On the other hand, on-site regulators at the largest financial institutions can get lost in the shuffle. Facing institutions whose size and complexity are off the charts relative to community banks, examiners are left with theoretical data models—and the good word of the institutions they are inspecting. Hoenig's plan of supplementing these embedded examiners with systematic reviews to better direct their analysis will help provide a closer look at the kinds of risks that fueled the latest Wall Street crisis.
Reasonable regulation is important, but our regulatory system is in desperate need for more tiered regulation. Bank regulators devote disproportionate resources to the examination and supervision of community banks, which do not pose systemic risks. Focusing regulatory oversight of the Wall Street firms that triggered the financial collapse and moving these reviews “in the direction of a community bank exam" will better allocate examiner resources to the riskiest financial firms and help reduce unnecessary burdens on community banks.
Additionally, important questions could be raised if examiners find the community bank–style reviews of these institutions too big to manage. What if these institutions are so large and complex that supplemental examinations cannot get a grip on their risk profile? What if, after completing or attempting to complete a comprehensive review of these institutions, we find that our financial regulators are incapable of adequately overseeing them? What does that tell us?
Camden R. Fine is president and CEO of the Independent Community Bankers of America.