It has been our experience over the decades that the typical bank exam is about 3 weeks long and involves about 15 to 20 examiners. Regulation is part of the fabric of the banking system and bankers often tell us quietly that exams can be a burden, but most also readily agree it is just part of the whole process of being a bank. For community banks at least, the Fed is now looking to reduce some of that burden for state member community banks under new guidelines for bank examiners.
The Fed issued a regulatory letter in June that advised its examiners to use new Bank Exams Tailored to Risk (BETR) metrics in determining how deep to probe a community or regional bank. These surveillance metrics are a subset of the "outlier metrics" introduced in a previous regulatory letter issued in 2015. The process applies to banks with <$100B in assets, but community banks could be some of the biggest beneficiaries.
The metrics will guide examiners in evaluating which activities at a given bank are low-risk, which are moderate, and which are high risk. A more streamlined approach will then be applied to low-risk activities, while the most intense examination efforts will focus on high-risk activities.
Community banks, which tend to be less complicated institutions and involved in less complex and risky activities, could see real benefits from this approach.
Of course, this shouldn't be viewed by anyone as getting a pass on rigorous risk management. Rather, the change is more of a reward for banks that demonstrate sound and effective risk controls. If all goes as planned, a bank that does not take undue risks and does good work controlling its risk profile, should spend less time, effort and expense responding to examiners. That, in fact, is what bank deregulation should be about: removing unduly burdensome regulation for banks that are already doing a good job managing their operations.
BETR represents an enhanced way of determining a bank's risk profile using a series of surveillance metrics to analyze data on credit, capital, earnings, liquidity, market, and securities risks. Over time, additional surveillance metrics are expected to be added. The surveillance metrics are then combined with the examiner's judgement to determine which level of risk is in play for each topic at a given bank - high, moderate or low. The coveted low risk category is the prize for good work.
The risk levels are intended to be regularly reviewed and updated by examiners. A bank with low-risk activities can find itself suddenly moved up to high risk if it lets its guard down or makes certain mistakes, or conditions shift perhaps.
Of course, the whole system depends on the skill and experience of the examiners who make the ultimate determination of risk levels. But the surveillance metrics should provide plenty of data points to help examiners make good calls.
If it works out as planned, banks that spend enough time and effort on risk management should be rewarded with less time and effort spent responding to exams and more time serving customers.
