Similar to my previous post on Risk Assessments, I believe Uncertainty is also a 2-part trend:
– Uncertainty about future regulatory changes, and
– Uncertainty about the interpretation of existing regulations
Uncertainty about future regulatory changes:
I see two big influencing factors for this trend. First, according to the latest Davis Polk Dodd-Frank Progress Report, we are only at the half-way point in terms of rule making from Dodd-Frank…there are still 200 more rules to be made. And of those that have been made, only about half have been finalized. Looking at only those rules that deal with bank regulations reveals an even more uncertain environment; only 22 out of 141 potential regulations have been finalized. Granted, not many will likely affect community banks, but there is no question that it creates an overall environment of uncertainty across the entire financial industry.
Secondly regarding regulatory changes, the existing FFIEC IT Examination Handbook series is getting old. Of the 12 existing Handbooks, 9 have not been updated since 2004. To put it in perspective, even though we’ve seen significant changes in the IT environment in the past 5 years, we’ve only seen three Handbook updates; BCP, Information Security, and Retail Payment Systems. I think it is reasonable to expect Handbook updates in the near future.
Uncertainty about the interpretation of existing regulations:
I see this manifest itself in a generally more difficult examination experience, and have already seen several confirmatory events for this trend. By all accounts, the FDIC has added commissioned compliance examiners at a faster pace in 2011 than at any other time in it’s history. Some of these have come from the OTS, and some have been recalled from retirement, but some are completely new hires coming from both inside and outside the banking industry. And although all have to adhere to the same set of commissioning standards, the diverse backgrounds are already adding different perspectives, and by some accounts, a more unpredictable examination experience. This means more findings, and often in areas not previously scrutinized. A common criticism of recent examinations is that institutions feel they have been increasingly difficult, and indeed a recent FIL seems to confirm this. FDIC FIL-13-2011, Reminder on FDIC Examination Findings stated:
“Recently, the FDIC has received some criticism that its examination findings have been overly harsh.”
And, in a report issued late last year by the State of Georgia Subcommittee on Financial Institutions and Consumer Credit titled “POTENTIAL MIXED MESSAGES: IS GUIDANCE FROM WASHINGTON BEING IMPLEMENTED BY FEDERAL BANK EXAMINERS?”, the FDIC stated:
“We conduct more than 2,500 on-site examinations annually, and recognize that questions about and even disagreements with our findings may sometimes arise, especially in difficult economic times.”
Another indication that examinations are becoming generally more difficult is found in a report summarizing a survey conducted by the American Bankers Association last May titled “Banker Reports on Recent FDIC Examination Experiences”. There were 730 respondents to the survey, and three things stood out to me:
- Examiners are now spending an average of 18 days on-site conducting Safety & Soundness examinations. More time on-site = more findings.
- 30% of the respondents reported that they were either “Dissatisfied” or “Very Dissatisfied” with their examination.
- Almost one-third of respondents were under some form of written regulatory agreement.
So how can you adjust to, and prepare for, uncertainty? First of all, utilize the assistance of outside advisers whenever possible. It is almost impossible to use the experience of your single financial institution to determine what is, and what isn’t, a legitimate trend. Only by looking at dozens of recent examinations can real trends be distinguished from aberrations. As our own survey last year made clear, institutions that utilized advisers scored as well or better than those that didn’t, but more importantly they felt more confident going into the examination, and had a better overall examination experience.
Finally, don’t hesitate to challenge examination findings if you feel they are incorrect and you have the documentation to back you up. Here again, the adviser can be of tremendous assistance to you. They can tell you what has worked and what hasn’t worked in previous challenges. They can also help identify the root cause of the finding (which may not always be apparent in the exit letter, or even in conversations with the examiner in charge) and how best to phrase your response and document your position. Indeed our survey indicated that 41% of respondents challenged examination findings in their last exam cycle, but more significantly, of those that did almost 70% were successful in getting the finding removed from the final report! So let’s add this as a trend I’d like to see in 2012…
More Successful Challenges to Examination Findings!
P.S. This is the final post in a 5-part series. Here is a quick link to all 5.
P.P.S. This is my 100th blog post since we started this help-site almost 2 years ago! Thanks to all of you for following me, and I wish you all the best for 2012! Please let us know if there is anything we can do to assist you!!